Author Archives: Chris Costello

401k Management Requires Dissection

What Do an Appendectomy and 401k Management Have in Common?

Picture this. You start to feel a dull sense of pain around your belly button that shifts to your lower right abdomen. Within just a few hours the dull pain has escalated to a sharp pain that can no longer be ignored. When you move, the pain gets excruciating and if by chance you need to cough or sneeze – you’d better be gripping onto something!

At this point, you realize you need to get your butt to the ER. After what seems like a million bumps in the road on the way to the hospital, you check yourself into the ER. The ER doctor then begins the examination. After just a few moments of probing your lower abdomen — she is confident that you have appendicitis.

The doctor explains that if appendicitis is not treated quickly, the appendix can rupture. When that happens, it releases bacteria into the abdomen and potentially leads to other, life-threatening infections.

Because of this danger she explains, appendicitis is considered a medical emergency. It typically needs to be removed within 24 hours of the condition being diagnosed. Given the amount of pain you’re are in, surgery sounds like the least of your worries. So, you tell her, “Let’s do it! Get this thing out of me. Nobody even knows what the heck an appendix does anyway!”

Then comes a response that you were not at all expecting. Instead of starting the process to prep you for the appendectomy, she instead asks you just about the …

Strangest Question You Would Expect a Doctor to Ever Ask

“I would love to perform this appendectomy, but before we can proceed, I need to know how much you have saved for your retirement?”

You are thinking … WTF!  What in the world does my retirement saving have to do with this emergency surgery? But given how much pain you are in, you will answer just about any question if it means getting you closer to the pain meds.

“I have about $70,000 saved up in my 401k,” you answer proudly. Still, you hadn’t seen the 401k management questions in the admittance form. What’s this about?

Her reply leaves you totally dumbfounded. “That is great but, unfortunately, you don’t have enough saved for ME to perform the appendectomy you badly need.”

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Target Date Funds - Fox Stealing Chickens

With Target Date Funds Simple Isn’t Always Easy – On The Investor

When it comes to 401k accounts, target date funds (TDF) have seen massive adoption in the past 10 years. Over 70% of 401k plans on the market offer some form of TDF and 60% of people in their 20s use them. 1. By 2019, Cerulli Associates estimates 90 percent of new 401k contributions will be invested in TDFs. 2.

This rapid adoption isn’t particularly surprising. In concept, a TDF is not a horrible investment for retirement when used correctly. At first glance, they offer many of the things you want in a solid retirement strategy. Namely, they offer simplicity and a diversified allocation that becomes more conservative the closer you get to your targeted retirement date.

But take a look at the elephant in the room when it comes to target date funds. They can be built with 100% proprietary funds, often from the same institution providing the 401k plan to the participant!

That seems a little like the fox guarding the chicken coop, doesn’t it?

Vanguard is the current market share leader, managing $224.9 billion in TDFs. They are followed by Fidelity and T. Rowe Price (as of 12/31/16, according to Morningstar Inc.’s annual Target-Date Fund Landscape report). These three firms manage more than 71% of all TDF assets, effectively controlling the industry.

The simplicity of a TDF can’t be denied. Unfortunately, you often end up paying for that simplicity in the form of the higher internal fees associated with these proprietary funds.

A Target Date Fund Case Study: Walmart’s 401k plan

For an example, let’s take a look at Walmart’s 401k plan. With 1.5 million 401k participants and $22 billion in plan assets, it is one of the country’s largest retirement plans. Given this size, Walmart can negotiate extremely low fund costs for its associates. The TDF options within their plan have internal expenses of 0.34%. That is roughly 50% of the industry average 0.71%. This makes Walmart’s plan one of the best-case scenarios for TDFs when it comes to expense.

Yet even in this “best-case scenario” of comparatively low expense ratios, a Walmart employee can do better.

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Tame The Bear Market Will Tank

The Stock Market Will Tank. And That Is OK!

It is true. The stock market will tank. It isn’t a matter of IF but WHEN and HOW MANY times in your lifetime.

The sooner you can accept this and not be surprised by it, you will have joined an elite investor club. Sadly, there are very few members. Even one of history’s most prominent figures couldn’t keep his emotions in check when it came to investing. Now let me be clear about something: I am not calling for or predicting WHEN the market will tank. I just know that it will at some point.

Since the beginning of when they started measuring the aggregate prices of company stock, the market has regularly and periodically reminded investors that when things go up, they always come back down. Fortunately — so far at least — the downs have been temporary.

The Market Will Tank – A Bear Market

In fact, since the conclusion of WWII, the stock market (as measured by the S&P 500 index) has declined by at least 20%, what is typically defined as a Bear Market, a total of 14 times! (Note: there were three periods that were “only” down 19%. Forgive me, but I am still going to include them in the Bear Market list.)

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Easy Keys to Building Wealth

The 4 Easy Keys to Building Wealth

It seems that there is a short list for everything these days. Top 10 things to never say on a first date. The 5 best foods for your toddler. Top 20 places to travel to in your lifetime. And my personal favorite – any list that has the top 10 fails!

I would like to offer yet another list. But unlike providing just the entertainment value of my favorite “Fails” list, this list will serve you in a much more life-altering way. If followed, I am confident it will change your financial future.

This list did not come out of the pages of academia but rather from my last 2 decades working in Financial Services. I have spent 20+ years sitting kneecap to kneecap with real human beings helping them shape and plan for their financial futures. I have seen the whites of my clients’ eyes amidst the dotcom bubble burst in the late 1990s and again, with many of those same clients, in the financial crisis of 2008-2009.

It often seems that the financial industry in general wants to make investing and building wealth seem more complicated than it needs to be, so I hope to simplify what you really need to know. There are many things with investing that are out of our control – the economy and the stock market to be specific.

The great thing about this list is that all 4 things are areas of your life that YOU CAN CONTROL.

I hope that by boiling the millions and millions of google search results down to just these 4 key points that maybe, just maybe, a number of people reading this article will see their lives changed for the better.

So … drumroll please for the 4 Easy Keys to Building Wealth …

#1: Spend Less Than You Make (i.e. Save Money)

This is the one I am most passionate about. I have seen first-hand countless numbers of my clients retire with more than $1 million in their portfolios – and they never made even close to six figures in their careers. They didn’t inherit it. They didn’t sell a business for millions of dollars.

The one constant was that whatever they made, they spent less than that. Simply, if their monthly take-home pay was $4,000, they only spent $3,000. They most certainly didn’t maintain balances on a credit card. And when they had to borrow money (for a home or car), they worked to pay it off as soon as possible.

I put the “spend less” attribute #1 on the list because it is the most difficult for many people.

The next 3 are much easier to follow, but the act of spending less than you make is probably the single trait that will have the most impact on your financial life – both now and in the future. Very few people have the discipline to spend less than they make. It is main reason why few people in this country are financially secure.

#2: Get Your Allocation in the Ballpark of Being Right (Stocks vs. Bonds)

Too many investors spend an inordinate amount of time stressing over the selection of individual mutual funds while simultaneously neglecting what may be the single most important decision in investment selection an investor can make in their lifetime – the balance of stock funds vs. bond funds.

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Technology Provides the Next Frontier in 401k plans

Did you know that of the 20,000+ individual 401(k) accounts that blooom has analyzed, over 80% were invested incorrectly? Yea, that’s right…over 16,000 people didn’t have the right investments in their account.

What that tells us is that the current system that employers have in place for plan participants is not working. Technology now has provided a solution to this problem through online investment management services, commonly referred to as Robo-Advisors, such as blooom.

Blooom is a low-cost, Registered Investment Advisory online service created to help improve the way average Americans manage their 401(k) retirement plans. In just five minutes, the blooom assesses a client’s 401(k), including hidden fees, from start to finish and provides ongoing professional management for as little as $5/month.

It is predicted that by 2020 the amount of money personal investors will invest through the use of technology will grow by 68%. In this Podcast blooom’s CEO, Chris Costello, talks about how technology is revolutionizing the 401(k) space and how important it is for employers to be at the forefront of providing this latest employee benefit to their participants.

Listen to the 401(k)Fridays podcast featuring blooom’s Chris Costello here.

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