Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN
Tuesday, May 31, 2005
Q. Don, people have just spent a long weekend with their families. Mightthis be a good time to talk about retirement investing?A. An excellent time! I wish people would focus more on that subject atany time of the year.
Q. And of course here in Colorado we've recently had the bad news about theUnited Airlines employees' pensions.
A. That's true. The tide is running out for old-fashioned "pension" ordefined-benefit plans, and defined-contribution is the new way. People allneed to learn to become part-time portfolio managers!
Q. A lot of numbers are thrown around, regarding retirement investing.401(k), 403(b), 457 plans and so on. Can you clarify?
A. Sure. These are all different sections of the tax code that created (atvarious times) tax-deferred investment vehicles for various groups ofpeople: employees of for-profit companies, educators, public-sectoremployees, charitable-organizations, and so on. Basically, the key rulesare all the same.
Q. So how do these 401(k) and similar plans work?
A. Employees whose organization has such a plan are allowed to set asidesome of their pay regularly, up to some percentage and dollar limits,before the income is taxed, and invest it for retirement. In many cases theemployer will match some or all of your contributions, and sometimescompany stock is an option. But most often mutual funds are the main or theonly choices. You make the investment choices, not your employer!
Q. If the employer provides some kind of match, like 50% or 100%, isn'tthat like "free money?
A. Absolutely. If you stay with the employer long enough so the companycontributions "vest," it is like getting an immediate 50% or 100% return(or some part of that) on your contributions!
Q. What do surveys show about the percentage of eligible people whoparticipate in their company programs?
A. Currently about 70%-- which has pretty much leveled off in recent yearsafter rising-- so about three in ten people are passing up a great and easychance to prepare for their later years with fairly minimal effort.
Q. And if their employer does a match, they are leaving free money on thetable!
A. Exactly. I have a hard time fathoming that, but we are investments andbusiness/market people and of course many people are not.
Q. What do you suppose makes people choose not to contribute to 401(k) andsimilar plans?
A. -Procrastination. -Believing they can't afford to live on a dollar less than they nowtake home. -Fear of losing money on their investments. -A feeling that they are not experts in investing and a belief theycan't get the help they need. -Inability or unwillingness to make choices, under uncertainty, amongthe funds offered.
Q. That's quite a line-up of forces working against starting to put moneyinto a plan. What can be, or is being, done to help?
A. Sadly, a lot of employers are afraid of possible legal liability, sothey don't give any advice or help. That is starting to change, as someplan administrators are offering guidance and educational materials. A lotof that is on websites, however, and I believe a lot of people who are notyet investors want to be able to get specific answers from a live person.And that is expensive, so it is not often offered. But you can call the800-number and ask!
Q. Sounds like people really need to take some initiative to get up thecurve.
A. Right. There are lots of books on library and store shelves. But peopleneed to go get them. Not a lot of tapes or videos on basic investing,though.
Q. Other sources?
A. There are some good websites, as from major no-load mutual fundcompanies and discount brokerages. And www.ICI.org for the funds industry.And Wall Street University.com. And my favorite non-sales organizations arethe American Association of Individual Investors (www.AAII.com) and theinvestment clubs folks, now called BetterInvesting.org. We hold educationalmeetings with speakers where people can come to learn (and to askquestions).
Q. Are there some basic approaches that an employee can take to start,while they learn more, that probably will not hurt them?
A. Definitely. If you have a "Balanced" fund you could well start there.It is probably 60-70% quality stocks and 30-40% bonds, so you won't gethurt too badly even in a tough market. If you have Life-Cycle fundschoices, choose the one nearest to your intended retirement year. Thosefunds do the allocation work for you. If you were to lose even 20% of yourearly money, you still will have 80% of what you put aside, but you willhave nothing if you don't start!!
Q. What if people have a company match but just are afraid to lose money?
A. I hesitate to say it, but they could start in the money market fund andtake the big "return" from the company match. But then they should learn,and choose other funds, because money funds usually lose money afterinflation and eventual taxes. So you should not forget ... and not juststay there!
Q. How can people judge the funds being offered in their plan?
A. Our favorite site of course is www.LipperLeaders.com, which is free.Lipper rates every fund against comparable ones, on five differentdimensions.
Q. How much should people contribute?
A. That depends on how old you are and what you already have put asideotherwise, single vs married, etc. But I would definitely try to dowhatever gets you the maximum matching money! And if there is no match,start with a few percent of salary and up that percent every time you get araise or promotion.
Q. You mentioned that these contributions are before taxes?
A. Right. Which means that if you are in the 27% bracket, and if you figureabout 5% for state tax too, your tax withholdings will drop by almost onethird of the contribution you elect. So to save $60 a paycheck might reduceyour take-home by only about $40, and so on.
Q. Quick advice?
A. Start small if you need to, but start!!! The later you begin, the moreexpensive it will be to catch up. And don't watch the pot every day orevery week, or the market's wiggles will make you nervous. We're talkingyour long term future here, not something you may need to cash in after afew months or one year.
Click here: http://www.research.lipper.wallst.com/researchSeriesIntro.aspto access Lipper's industry leading market commentary and research.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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