Entries for May 2008

New 401(k) debit cards make it even easier to flunk do-it-yourself retirement. Investors should be wary of the potential pitfalls of 401(k) debit cards, according to an investor alert from the Financial Industry Regulatory Authority (FINRA), a nongovernmental securities industry regulator.

With a 401(k) debit card, you can generally borrow $50,000 or 50 percent of your vested account balance, whichever is less, the IRS says. Your employer must approve the loan. The amount you borrow is set aside in a separate money market fund and will generally earn income on a tax-deferred basis until you draw it down with the debit card or write a check on the account.

How many times have you given out your Social Security number in the past year? You've probably shared it with your employer, bank, health insurer, and landlord or mortgage agent. Even employees at your local gym and utility company sometimes ask you to hand over your number. Nearly 90 percent of Americans have been asked to divulge their full or partial Social Security number in the past year, often to businesses with no clear need for that information, according to a Consumers Union telephone poll.

Americans have been asked to share their Social Security numbers with financial institutions and retailers issuing credit (60 percent), healthcare providers (49 percent), cable TV or cellphone carriers (26 percent), utilities (17 percent), and retailers (16 percent). Many of these companies have no obvious need to collect Social Security numbers.

If you want to retire young, you'd be well advised to find a job that still comes with a traditional pension and health benefits for retirees. Employees entitled to defined-benefit retirement plans that guarantee income for life are more likely to retire at any age than employees who have only defined-contribution retirement plans like IRAs and 401(k)'s, according to an analysis of workers over age 50 by consulting firm Watson Wyatt.

Stock market booms and busts also influence the timing of retirement among workers with defined-contribution plans. Employees are more likely to retire at market peaks and delay retirement during downturns. This phenomenon often puts employees' goals at odds with those of their employers. "When the market booms, defined-contribution plan participants might retire just when companies need to add workers, and when there are market busts, defined-contribution plan participants might stay at work just when companies want to reduce the size of their workforce," says Mark Warshawsky, director of retirement research at Watson Wyatt.

As gas and grocery prices rise, some cash-strapped older workers are rethinking plans to retire. Some 27 percent of older workers say they are putting off retirement because of the recent economic slowdown, according to a recent AARP telephone survey of 1,002 workers over age 45. Almost 25 percent of people between the ages of 45 and 64 are taking money out of their 401(k)'s and other investments. And younger baby boomers between the ages of 45 and 54 say they are even postponing paying bills (27 percent) and cutting back on medications (17 percent).

"Taking money out of your retirement savings has a compounding effect, because that money is not allowed to grow at a time when you have fewer working years to replace the losses," says Tom Nelson, AARP's chief operating officer. "Even more troubling, shortchanging your healthcare can lead to higher healthcare costs down the road."

Only about half of Fortune 100 companies still offer their employees defined benefit pension plans. An analysis by consulting firm Watson Wyatt found that 54 firms had a defined benefit pension plan for newly hired salaried workers last year. Of those 54 firms, 28 offered a traditional pension that guarantees income for life. The remaining 26 offered hybrid pension plans like cash balance plans, an account that the employer deposits a set amount of money into (such as 5 percent of pay) and also deposits interest (which can be a fixed rate or a variable rate linked to an index such as a one-year treasury bill). But increases or decreases in the market don't directly affect the account, because the employer bears all the investment risks and rewards.

When it comes time to retire, the employee can choose to receive annuity payments until the account balance is used up or take a lump sum equal to the account balance. Sometimes vested employees can also cash out the lump sum when they leave an employer.

Here's how retirement plans at Fortune 100 companies have stacked up over the years.

Target-date retirement funds are designed to automatically shift investors' portfolios to less risky assets as they age. You name your retirement year, and the fund managers change the stock and bond allocation inside the fund to an appropriate risk level for your age, in theory getting a bit more conservative as you approach your ideal retirement date.

Almost 80 percent of large U.S. plan sponsors offered target funds as an investment option through their 401(k) plans in 2007, up from 60 percent in 2006, according to research by consulting firm Greenwich Associates. And even if you don't sign up, you could find yourself automatically enrolled in them unless you specifically opt out. "About 40 percent of funds that have adopted automatic enrollment use target retirement date funds as their default, compared with about a third using money market funds," says Greenwich Associates consultant Rodger Smith.

Retiring can be risky business. The Society of Actuaries, a group of professionals who evaluate risk for a living, recently named inflation the top retirement concern among both retirees and people nearing retirement age, according to a survey released this week.

About 57 percent of those already retired and 63 percent of those near retirement age said they were concerned that the value of their savings wouldn't keep pace with inflation, the telephone survey of 801 adults ages 45 to 80 found.