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Retirees: GAO finds managed account fees offset gains

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NEW YORK (8/19/14)--Any retiree wants the best return on retirement accounts. But trying to achieve strong returns by using managed investment accounts could backfire, according to a new Government Accountability Office (GAO) report (Marketwatch Aug. 5).
 
Managed accounts involve professionals making decisions about what vehicles the products invest in, versus passive investing that tracks common indices such as the Dow or a market sector such as small cap funds. That hands-on management requires investors to pay higher fees, which may offset some or all of the gains. The GAO report looked at eight managed account providers accounting for 95% of the market.
 
Since regulatory changes in 2007 gave employers the OK to automatically enroll 401(k) participants into managed accounts, these kinds of investments have become more popular, offered in 36% of plans in 2012, up from 25% in 2005. Many observers think the plans will only become more popular as baby boomers approach retirement, a time when many workers turn to the more tailored advice managed accounts offer.
 
The GAO observed that fees for managed accounts--fees in addition to the expense ratios participants already pay to invest in mutual funds--range widely, from nothing to as much as 1% of the account balance each year. As a result of the added fees, the GAO found that "401(k) participants who do not [consistently] receive higher investment returns from the managed account services risk losing money over time."
 
Some managed account providers claim the funds earn a bonus of as much as three percentage points a year. But the GAO study, citing Vanguard data, reported that "published returns for managed account participants" were "generally less than or equal to returns" of other popular 401(k) investments, including target date funds or balanced funds invested in a mix of stocks and bonds.
 
In addition, the GAO study noted a lack of standards allowing consumers to compare managed account performance with that of other 401(k) investments, leaving investors with no way to accurately size up an investment. The GAO report also noted that the Labor Department, the 401(k) plan regulator, does not mandate disclosure of performance benchmarking for managed accounts, although it does for other 401(k) investments.
 
The report also cited a possible conflict of interest for managed account providers, who may have a financial incentive in recommending that retirees stay in the former employer's 401(k) plan and continue to pay managed account fees. It might be a better choice for retirees to transfer assets to an annuity or individual retirement accounts, the GAO report noted.
 
The report noted, too, that some managed account providers might not serve as fiduciaries; a fiduciary must make decisions based on what's financially best for you and also has to disclose any possible conflict of interest. The Credit Union National Association's Home & Family Finance Resource Center has reported that, "Three-fourths of investors incorrectly believe that financial advisers are fiduciaries and two-thirds wrongly believe stockbrokers are fiduciaries ... That ignorance can be costly."
 
The Labor Department requires a managed account provider to act as a fiduciary, and assume liability for flawed advice, when participants are enrolled automatically in these accounts. But if participants opt in to managed accounts, the rules do not "have a similar explicit requirement," according to the GAO report. "[S]ome providers may actively choose to structure their services to limit their fiduciary liability," the report noted.
 
For related information, read "Making Dollars and Sense of Financial Planner Designations" and "Your 401(k) Manager Not Always Best Adviser" in the Home & Family Finance Resource Center.

Give college-bound students crash course in fin. ed.

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WASHINGTON (8/12/14)--Young adults might be smart enough to get into college but often are ignorant about even the most basic financial skills. This is not surprise--in the United States less than half of the states mandate a course in personal finance as a requirement for high school graduation (GTN News Aug. 4). 
 
Further, a 2014 financial literacy survey by the National Foundation for Credit Counseling (NFCC) reveals that the majority of adults say they learned the most about personal finance from their parents. This is true whether mom and dad possess good or bad financial habits. 
 
Does your young-adult student need a crash course in personal finance? The NFCC provides a checklist of basic knowledge that will benefit everyone managing his or her own money:
  • Budgeting. Be clear with yourself and with your student about how much money is available for expenses. Help him create a workable monthly budget that balances income, loans, and gifts with anticipated expenses. This discipline is a skill that will pay benefits for a lifetime.
     
  • Recording financial transactions. Show your student the importance of recording all transactions in a check register or monitoring online, tallying the running balance daily, and balancing financial statements every month. Tracking expenses might reveal some surprises (60% of your income is spent on dining out?) and provide opportunities to change direction.
     
  • Using credit.  Tell your student why it's important to commit to paying each credit card bill in full and on time each month. By using credit wisely, she will be learning how to live within her means while creating a positive credit file that could help when buying a car, renting an apartment, obtaining insurance, and even landing a job.
     
  • Getting financially organized. Help your student commit to keeping all financial records, bills, and bank statements in one location. This will help ensure that he will pay bills on time, avoid late fees, and keep an unblemished credit score.
     
  • Recognizing the dangers of identity theft. Discuss forms of identity theft, the kinds of personal information that need to be protected, and how to protect them--even, and especially, from friends and roommates. Discuss the pitfalls of careless, unprotected use of social media.
The NFCC recommends that parents and their young adult leaving the nest make an appointment with a certified financial counselor at an NFCC member agency location. Hearing financial advice from a professional may have a stronger impact than hearing it from mom and dad. To find one near you, call 800-388-2227 or use NFCC's DebtAdvice.org. The staff members at your credit union are also valuable resources.
 
For related information, read "Money 101: School Your College-Bound Child" and "The College Affordability and Transparency Website: Tools to Make Informed Choices" in the Home & Family Finance Resource Center.

Dealing with debt? Contact your credit union

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McLEAN, Va. (08/05/14)--More than a third of the U.S. is having trouble paying debt on time. Thirty-five percent of Americans have debt in collections--a bill overdue by 180 days--according to a new study from the Urban Institute, Washington, D.C. Payments this late have been reported to a credit bureau and can affect your credit score (USAToday.com July 29).
 
On average, each of the 77 million Americans with debt in collections owes $5,200, which includes debt from credit cards, medical bills, utility bills, child support, membership fees, and even parking tickets. If you're in this situation here are steps you can take:
  • Contact your credit union. If your debt includes credit union accounts, contact a credit union representative to discuss the possibility of modifying your loan or credit card terms to make payments more affordable. Credit unions have options that will keep you from resorting to nontraditional lenders, such as payday lenders, who prey upon borrowers who believe they have no other options. Credit union credit cards, mortgages, home equity lines of credit, and other products generally have lower interest rates and better repayment terms than you can find elsewhere. For non-credit union debt, contact those creditors as well and explain your situation. They also may be willing to work with you.
  • Reduce expenses. There usually is wiggle room in spending categories such as dining out or getting take-out, transportation, and entertainment. Don't stop there, though; scrutinize every expense.
  • Increase your income. Find an additional job or pick up overtime hours if you can. Start a side business offering a skill you're good at such as babysitting, making repairs, or helping the elderly. If you have an extra room, consider renting it out. Consider selling assets such as jewelry, an RV, a second car or collectibles.
  • Contact a reputable credit counselor. A credit union representative can refer you to a credit counselor within the credit union or to a reputable nonprofit credit counseling agency such as an affiliate of the National Foundation for Credit Counseling. A counselor will look at your financial picture and help you develop an action plan.
For related information, read the Turning Point "Understand All Your Options for Dealing with Debt" in the Home & Family Finance Resource Center.

Budget for winter holidays in July

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WASHINGTON, DC (7/29/14)--Pondering Christmas in July is a good idea if it gets you saving.
 
The average American spends $800 on holiday-related expenses every year, according to the National Foundation for Credit Counseling (NFCC), Washington, D.C. Despite the significant outlay, many consumers forget to plan for these annual costs and instead charge them to credit card.
 
If you charge $1,000 and pay only the minimum 2% balance, at an 18% annual percentage rate it will take you 12 years to pay it off. And by the time you do you will have spent $2,353. Now imagine if you have to do this every year.
 
The NFCC offers a better alternative--spend the next five months planning for the holidays. Here are five ways to save $1,000:
  1. Tighten your everyday spending with the goal of saving about $1 a day between now and Dec. 25. This could easily net you $150.
  2. Adjust your W-4 to accurately reflect what you owe in taxes. The average tax return is $3,000, but that money doesn't arrive until April. By taking less out of each paycheck, you can save that money for the holidays. 
  3. Cut back on monthly expenses that aren't fixed. Aim to spend $10 less every month on categories like gas, food, and entertainment.
  4. Sell unused items. Sell clothes at consignment shops, books, utilities, and CDs online at sites such as Amazon, or have a garage sale.
  5. Open a holiday savings account. Don't use existing accounts because you could too easily spend that money on other items.
"If you're still paying for holiday spending 2013, consider rethinking your gift giving for this year," said Gail Cunningham, spokesperson for the NFCC. "It makes no financial sense to pile new debt on top of old. Kindness and experiences are meaningful substitutes for purchased gifts, and are remembered long after the wrapping paper and bows have been discarded." 
 
For related information, read "Practical Ways to Save Money" and "Shop and Save in Every Season" in the Home & Family Finance Resource Center.

It's time for 529 plan withdrawals

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NEW YORK (7/22/2014)--College is just around the corner for newly graduated high school seniors, which means the first tuition bills will appear at any moment.
 
To help guide families who are using 529 plans to pay for tuition, the College Savings Plans Network (CSPN) offers these guidelines (July 10):
  • Start early. Find out from your plan how long the funds transfer will take, whether the plan will send a check to you or directly to the college, and if there's anything else you should know as you start withdrawing funds. Once your beneficiary decides on a school, the earlier you start the process, the better.
     
  • Know before you go. Tuition due dates vary--some are not until after the course add/drop period, some are before the semester starts. Check with your school to find out its due date for tuition payment, and make sure you start withdrawing your funds well in advance.
     
  • Do your homework. Make sure to check with your plan to find out what it defines as qualified higher education expenses. This generally includes tuition and fees, room and board, and the cost of books, supplies, and equipment required for enrollment or attendance. If you are unsure if any specific item qualifies, ask your plan administrators.
     
  • Keep a record. For tax purposes, keep records and documentation of higher education expenses for any withdrawal you intend to treat as qualified.
     
  • Be prepared. Make sure your distributions do not exceed your higher education costs. If the distribution does not exceed the amount of the student's qualifying expenses, you do not have to report it as income on your tax return. But if the distribution exceeds those expenses, you must report the earnings on the excess as "other income" on your tax return.
For related information, read "Money 101: School Your College-Bound Child" and "The College Affordability and Transparency Website: Tools to Make Informed Choices" in the Home & Family Finance Resource Center.

Family scenarios affect Social Security benefits

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NEW YORK (7/15/2014)--Don't deny yourself a significant source of income in retirement. If you were married for 10 years or more and are divorced, you could be claiming half of your former spouse's Social Security benefits (The Wall Street Journal July 9).

Divorced spousal benefits are just one source of potential Social Security income. Here's more information about divorced spousal benefits and other family scenarios that could affect you:

Divorce: Subject to these conditions, you can earn as much as 50% of your former spouse's benefit--and your ex doesn't even have to know you're claiming it:
  1. You both are entitled to benefits based on your own work.
  2. The marriage lasted at least 10 years.
  3. You haven't remarried.
  4. You are age 62 or older.
Spousal benefit: Even if you never have worked outside the home, you are eligible for Social Security retirement benefits equal to half of your working spouse's retirement amount.

The spousal benefit amount is determined by your age when you begin claiming benefits, regardless of whether the working spouse chose to receive benefits early or not. In other words, if your working spouse chose to receive benefits early, you still can receive your full spousal benefit by waiting until full retirement age.

Surviving spouse: Surviving spouse benefits depend on when your deceased spouse originally claimed his or her benefit and the age at which you claim the benefit:
  1. If you both were at Social Security's full retirement age, you are eligible to receive 100% of your deceased spouse's retirement benefit, assuming that is higher than your own.
  2. If you both took your benefits early, the benefit is reduced.
If you are divorced, you can receive the same survivor benefits as a spouse, as long as the marriage lasted at least 10 years.

Survivor benefits: Unmarried children younger than 18 years old are eligible for survivor benefits. The child calculation is subject to certain rules that typically bring the benefit down to 75%.

Underage children when you retire:  If you had children later in life, once you qualify for Social Security benefits, any of your children who are unmarried and younger than 18 years old also can receive as much as 50% of your retirement benefit amount.

For related information, read "Who Goes First? For Couples, Retirement Is All About Timing" in the Home & Family Finance Resource Center.

Emergency savings bleak? Starting to save is key

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NORTH PALM BEACH, Fla. (7/8/14)--More than a quarter of Americans do not have an emergency savings account. Of those who do, two-thirds have less than six months' worth of living expenses, according to a Bankrate.com survey (Bankrate.com June 23).
 
The percentage of respondents who say they have no emergency savings has fluctuated between 24% and 28% since 2011. Student loan debt, high household expenses and flat wage growth all contribute to Americans' low savings rates (USAToday.com June 23).
 
If you have no emergency savings, getting started is the most important step. Follow this advice from the consumer publications editors at the Credit Union National Association in Madison, Wis., to cut spending and build your account:

* Get cooperation from family. Discuss money management with your partner, develop a spending plan together, and agree who will take financial responsibility for what. Be honest about your finances. Set SMART goals: specific, measurable, attainable, results-oriented, and with fixed time frames. Once you and your partner are the same path, involve your children. Make learning about money fun, be consistent in your teachings and be a good financial role model.

* Control living expenses. Try to reduce monthly expenses by evaluating TV, Internet and phone bills. Check with providers to make sure you're getting the lowest rates. Compare insurance policies. Check the Association of Insurance Commissioners website (naic.org) for price comparisons and the Insurance Information Institute (iii.org) for advice about picking reputable companies. Take a close look at what you're spending on food; cut back on going out for meals and picking up takeout. Buy ingredients for interesting meals and make extra for leftovers for lunches.

* Make your credit union your partner. Use direct deposit and automatic transfers from your checking into savings. Automate payments and transfers by using online or mobile bill pay. Refinance your home loan or car loans to take advantage of lower rates, if you qualify. The professionals at your credit union can help you get and stay on track with saving and prudent borrowing.
 
For related information, read "Practical Ways to Save Money" and "Live Simply, Reap Savings" in the Home & Family Finance Resource Center.