Many workers routinely leave their retirement plans behind when they leave for another job, or when they retire.  And, in the interest of full disclosure, there are some legitimate reasons for doing so.  On the whole, however, holding onto an old 401(k) is not the wisest strategy.  Here’s why…

EXPENSES

By conservative estimates, disclosed and hidden plan expenses cost participants an average of 3-5% annually, with as many as 14 different entities profiting from literally dozens of potential charges. 

Discussing 401(k) expenses in a PBS interview, John Bogle, founder of Vanguard, said, “The financial system puts up 0% of the capital, takes 0% of the risk and gets almost 80% of the return… That is a financial system that is failing investors…”

And, as the industry increasingly markets fee-stacked Asset Allocation and Target Date offerings, average total expenses could easily soar beyond current estimates to 5, 6 or even 7%.

LIMITED INVESTMENT CHOICES

If your plan is like most, it probably offers fewer than 20-25 investment options.  How those particular funds found their way into your plan should concern you.  

Conflicts of interest may be influencing fund selection recommendations.  In some cases, Providers manage or own the funds they are recommending.  In other instances, they are receiving compensation from the recommended funds.  Too often, these conflicts result in the inclusion of inferior investment options inside your plan.

Additionally, these limited offerings often provide investors with little opportunity for proper, high-quality allocation among small, mid, large and international sectors. 

WASHINGTON MONEY GRAB

Congressional and White House debate concerning a potential government takeover of 401(k) plans has created quite a stir over the last few months.  Most of the discussion has surrounded the idea of consolidating 401(k)s into something akin to the Social Security system, a plan that presents many problems. 

As proposed, the government would become the beneficiary of your plan at your death – not your family or heirs.  Essentially, the government would give you an annuity payment, and eliminate your access to the cash value of your account.  And, finally, the government would also select the investments. 

Is this possible?  The government might attempt to justify the seizure under ERISA, the law that governs employer plans.  There are many motivations for such a wealth confiscation.  Aside from the obvious, politicians could see this $6-8 Trillion source of wealth as a resource to shore up the struggling Social Security and Pension Benefit Guaranty Corporation programs.  

THE SOLUTION

In most cases, rolling over your 401(k) to a personal IRA is the optimal choice.  Done properly, you maintain the tax advantages, while opening your account to a universe of investments.  Proper allocation, utilizing higher quality investments, becomes more realistic.  And, many, if not all, of the hidden expenses associated with 401(k) plans are eliminated, increasing your opportunity for greater returns.  A rollover into an IRA will give you and your advisor the tools to manage risks, return and expenses more effectively.

Guest Blogger: Nick Smith [email protected]

There’s one thing no one is telling you about our current healthcare problems…
Whether you’re working for a large corporation, running a small business, or happen to be unemployed, there’s a good chance you are paying more for healthcare than you should. 

So what is the solution?  I could get really boring and impress you with a bunch of insurance jargon, but instead I’ll sum it up this way.  Over the last 10 years, Congress has passed several laws and tax incentives that could easily decrease your out-of-pocket healthcare expenses by $2,000 to $8,000 annually.  For a variety of reasons, most health insurance agents have not taken the time to adequately understand these changes.

We believe that the key to fighting extreme health insurance costs is YOU, the American consumer, who throughout history has been able to adapt and overcome all types of obstacles. We believe that with the right tools and knowledge everybody can play a role in busting up the currently broken system. 

As we launch new consumer health insurance solutions, we have made some commitments.  We are dedicated to busting up the “old school” approach of the greedy, commission-focused insurance agent. We will team with businesses and individuals, providing them with the knowledge and innovative resources they need.  Together, we will become the solution to out-of-control health insurance costs.
                                                                                                                                                                                                   
ABOUT NICK: Nick Smith, founder of Smith Health, has spent much time and energy learning the nuances of the health insurance industry, as well as the intricacies of the laws and IRS regulations that govern it.  Nick’s innovative solutions for driving down costs aren’t winning many fans in the insurance industry, because they put the client’s needs ahead of the agent’s.  Discover how Nick can help you control the cost of your healthcare.

It appears the FDIC is playing games again...

In this recent Press Release from the FDIC, Director Sheila Bair pointedly touts the banking industry's strong profitability in the first quarter of 2011.  She then goes on to explain the reason banks were showing those profits.

Bair reported that bank profits for the quarter were $29 billion, or $11.6 billion over the same period a year earlier.  Sounds pretty strong, right?  Here is Bair's explanation for the spike in profitability.

"The industry shows continuing signs of improvement, though there is a limit to how far reductions in loan-loss provisions can boost industry earnings."

How did they do it?  A reduction in their loan-loss requirements - that is the  amount of money banks set aside to cover bad loans - from $51.6 billion in the first quarter of 2010 to just $20.7 billion - a decrease of $30.9 billion.  This decrease in loan-loss provisions returns banks to pre-2008 levels.  Is anybody honestly naive enough to believe loan defaults are back at 2007 levels?

ALL of the industry's first quarter 2011 profitability is directly attributable to this reduction in loan-loss provisions.  In fact, absent this balance sheet gimic, the industry would have lost almost $2 billion for the quarter - compared to a $17.4 billion profit a year ago.  Actual revenue fell by 3.2%.  This marks just the second time in 27 years that bank revenues have seen a decrease.

What's worse, each of those banks now face increased risk, with less than half the reserve to cover those losses.  As defaults pick up again, banks will have significantly less in reserve to cover those losses, creating an even greater rate of bank failure and... you guessed it - more bailouts.

More from the FDIC