All Blog Posts from Econwatch

This weekend, the President announced a handful of new initiatives designed to make it easier for American workers to save more for retirement. The initiatives supposedly make use of research from behavioral economics, the arm of the dismal science that incorporates the way people really act into the design of retirement plans. That’s has proven effective in the past..except this time the Administration loses its nerve.

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The New York Times weighed in the debate over 401 (k) plans this morning. There are a number of ideas that sound just peachy in the la-la land that the Editors must believe exists. But there’s little in the piece that helps advance feasible retirement solutions here in the real world.

Image by Flickr User Joe Shlabotnik, cc 2.0

The debate over 401 (k) reform has heated up in the aftermath of the financial crisis. Perhaps nowhere was pain felt more acutely and immediately than in 401 (k) accounts, which are down approximately 25% from the peak levels of 2007.

With retirement savings depleted, many participants are demoralized and scared. In an April report, AARP said that 30% of retirement plan participants have stopped contributing money into their accounts. Even Congress is getting into the act, suggesting that improved fee disclosure would improve the health of 401 (k) plans. Both lawmakers and the NYT are missing the point in addressing the American retirement problem.

The advent of 401(k)s saw a massive risk transfer from corporations to employees. But as pensions disappeared nobody said, “Hey, instead of your boss paying into a guaranteed retirement plan, the risk of making contributions and managing your retirement money is entirely on you.”

And until the bottom fell out of the market, ignorance was bliss. It helped that 401(k) plans took off at the beginning of a massive bull market. Even as markets hiccuped in 1987 and 1990, they rebounded within a year, masking the larger risks that participants were bearing and diminishing their respect for prudence.

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A native Bulgarian always complains that "Americans are too optimistic!" I try to explain that some of that is part of the DNA here, while he likes to attribute the rosy outlook to a lack of struggle. To prove the point, he cites an old joke from his former country, which I like to call "The Bulgarian Optimist".

The Bulgarian Pessimist meets the Bulgarian Optimist on the street. The Pessimist says, "Things CAN’T get worse!", to which the Optimist says, "No, things CAN get worse!"

I thought about the Bulgarian Optimist when I read a recent research report from Fidelity Investments. The study examined how an investor’s outlook related to his or her retirement readiness. Were investors with a pessimistic outlook more conservative and better long-term planners? Or were investors with an optimistic outlook more aggressive and a bit more reckless when it comes to defining retirement goals?

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By Allan Roth of CBS MoneyWatch.com.

After one of the most awful years in the history of the mutual fund industry, when the average U.S. stock fund and international fund fell by 39 percent and 46 percent respectively, you might expect fund companies would give investors a break and lower their fees. But just the opposite is true.

An exclusive analysis for MoneyWatch.com by investment research firm Morningstar shows that over the past year, fund fees have risen in nearly every category. For stock funds, the fees shot up by roughly 5 percent. (Putnam and Schwab have made hay about lowering some of their fees recently; more on that later.)

Category	Change in Fees	Fees 7/30/2009	Fees a Year Ago
U.S. Diversified	+.06	1.37%	1.31%
Domestic Equity	+.05	1.39%	1.34%
Int’l Equity	+.08	1.56%	1.48%
Taxable Bond	+.01	1.04%	1.03%
Municipal Bond	+.01	1.03%	1.02%
Asset Allocation	-.03	1.30%	1.33%

Source: Morningstar
According to Russel Kinnel, director of Mutual Fund Research at Morningstar and author of Fund Spy, the rising fees are actually a result of last year’s market plunge. Funds charge a percentage of assets under management, so their revenue drops when the market declines. To compensate, they charge customers more. It helps to understand the break points most fund families have in their management fees. A fund managing $2 billion might charge 1.5 percent on the first billion dollars under management and 1.0 percent above that, for an average fee of 1.25 percent. Along comes the market plunge, assets shrink to a billion dollars, and the fund now charges 1.5 percent, a 0.25 point increase. Even Vanguard, which mostly just prices its funds to cover costs, has boosted fees by an average of 0.05 points, according to Rebecca Cohen, Vanguard public relations manager.

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The stock market was pretty scary for a while, but now with S&P 500 up 45% from the lows, it’s time to wake up out of your fear-based stupor, open your 401 (k) statements and take control of your retirement!

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With investment accounts battered during the last year of financial turmoil, many baby-boomers have had to recalculate their retirement plans – a development that's presented employers with a mixed bag of news, according to a Wall Street Journal report Monday.

A recent survey of more than 2,200 U.S. workers by consultancy Watson Wyatt Worldwide found that 44 percent of workers 50 and older plan to delay their retirement, with half of those saying they'll work an extra three years than expected.

The downside for businesses is clear – with more workers staying on, especially experienced employees with higher salaries, payroll pressure will continue at a time when companies struggle for profitability. The slowing of retirements also makes it more difficult to hire new recruits, bringing fresh blood - and fresh thinking - into the company at lower expense.

But there is a flip side.

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