WSJ Report: Investors Pull Money Out of Their 401(k)s

Jennifer Levitz of the Wall Street Journal [subscription required] writes in the journal dated 9/23/08, "Investors Pull Money Out of Their 401(k)s - Hardship Withdrawals Rose In Recent Months, Plans Say; Concerns About Tax Penalty."

With stocks falling, credit tightening and unemployment rising, small investors have been raiding their 401(k) accounts or slashing contributions to the popular retirement plans, according to the latest tallies of plan administrators. Others, eager to shield their portfolios from further damage, are reducing their exposure to stock mutual funds to near record lows.

...

The behavior -- described by some market watchers as panicky in the past week -- has led to worries that the retirement prospects are dimming further for Americans, most of whom no longer have private-sector pensions to rely on.

Recent 401(k) winnowing is coming in the form of "hardship withdrawals" -- removing cash from the fund, with a 10% tax penalty, for exigencies such as job loss, the prospect of losing your home to foreclosure or a big medical expense.

T. Rowe Price Group Inc. in Baltimore saw a 14% increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7% from April through June, compared with the same time period a year earlier. Principal Financial Group Inc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5% this year through Sept. 18, over last year, and that the withdrawal amounts are larger.

...

Jim Wharton, a 65-year-old retired Sears Holding Corp. manager in Queen Creek, Ariz., says he moved his entire 401(k) balance of $357,000 to certificates of deposits insured by the Federal Deposit Insurance Corp. recently. The money had been invested in a "stable-value" fund, typically a low-risk, low-yield fund that invests in bonds and interest-bearing contracts backed by insurance companies. He says his next move may be "under the mattress."

According to Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm, the total stock allocation among 401(k) participants is at a five-year low, declining to 62% in August from 68% a year earlier. Hewitt attributes the decline to an unusually high number of investors transferring money into fixed-income funds. It said it believes the trend continued into September.

...

Ms. Schlesinger, the Providence investment adviser, says many workers who were too heavy on stock mutual funds going into the crisis have taken hits on their balance and now wonder what to do.

If they are young, she advises them to rotate slowly into more conservative investments -- to avoid selling their investments at a low price.

But, she says, if they are five years or less from retirement she is advising them to immediately protect their portfolio from further decline by moving at least 30% or 40% into fixed-income accounts. For many investors, that will mean "taking a loss," she says. She says, "I tell them, 'I'd like to think that the rescue plan is at the bottom of the market, but what if it's isn't? We can't gamble with that.'"

Friday Desk Clearing Time - 9/19/2008

To say that this has been an eventful week in the investment world would be an "understatement of immense proportions". So, just to close out a few things we discussed earlier in the week, consider the following major interventions by the government that have immensely boosted confidence in the financial markets:

• AIG Bailout - check


• Money Market Funds Bailout - check (indirect effect of Lehman's bankruptcy and the Fannie/Freddie bailout earlier)

I am happy to report that today's market rally has at least pared somewhat the market (paper) losses in my 401(k) account. With this as the backdrop, I turned to a page one article in Friday's Wall Street Journal, as reported by Jennifer Levitz, Ilan Bhat, and Nicholas Casey: "Wall Street's Ills Seep Into Everyday Lives." This article reports on how "common people" are coping with the turbulence in the financial markets:

Bradford Roth, the 56-year-old chairman of a Chicago law firm, had a clear strategy for dealing with Wall Street's gyrations when he stopped by a local Fidelity Investments branch Wednesday.

He'd make a deposit to his cash-management account, but he wasn't going to check the balance of his retirement account.

"The less you know," he said, "the better you feel. There's nothing wrong with working in your 80s."

Mr. Roth is clearly unsettled a bit.

"I've been talking to my banker and telling him to get all my money out of the market," said Pat Hurley, a 57-year-old electrical contractor from Phoenix. "I'm really worried -- I think the stock market is going to get worse and worse," he said.

Mr. Hurley has $440,000 in his retirement fund, a sizable chunk but not nearly the million dollars he was hoping for. "I finally got back to where I was in 2001 and n0w the stock market's diving again," he said.

This is the reality facing many boomers - a 57 year old with $440,000 in his retirement fund, not the million dollars he was hoping for...

Bob Conrad, a 59-year-old budget director at the U.S. District Court in Dallas, sees his chance for retirement next year slipping further away. After his nest egg lost 10% of its value, he moved his money a few months ago out of stocks. He thought he was set, but soaring food prices and seesawing energy prices already had him worried. And now, "this thing looks like it's going to get worse before it gets better," he said. "That's just my luck. Looks like I'll be working a while longer."

I am not a licensed financial advisor, but I can't help commenting on one thing here-What investment strategy is this 59-year old following, barely 1 year from his hoped-for retirement, that is causing him to lose 10% of his retirement account's value in a year?

I am going to steam ahead to near the bottom of the article where another boomer couple nearing retirement is quoted:

With their retirement savings building in a pension fund since 1983, Seattle residents Pat Williams and her husband, Jim, are now questioning their savings strategy. The retirement accounts, which are run by Smith Barney, a unit of Citigroup Inc., were worth a little more than $1 million until four months ago. Since then, Ms. Williams said the combined accounts have lost $170,000.

Now the stock-market plunge caused by the fall of Lehman Brothers and the sale of Merrill Lynch & Co. had their accounts losing an additional $40,000 a day for the past two days. So tomorrow, Ms. Williams said she and her husband are pulling out roughly 75% to 80% of the money invested in their retirement accounts and putting it in a money-market account while they figure out what to do next.

"We just don't have the staying power," said Ms. Williams, 58. "I can't watch anymore of our money go away."

Mrs. and Mr. Williams are rightly concerned about their investments. Once again, I can't help but comment on what kind of investment advice the Williamses are getting! At age 58 (Mrs. Williams age quoted above), they've lost 17% ($170,000 of $1 million)of their account in 4 months. Not stopping there, they've lost another 4% ($40,000 of $1 million) in the last couple of days. This implies a rough beta of 1.0 with the market taken as a whole.

Since this was the only example with good approximate numbers and ages given, I took the liberty of trying to figure out how they would have performed in an age-appropriate fully diversified portfolio such as a target-date mutual fund over the rough ranges of dates mentioned in the article. I am going to take Mrs. Williams age of 58 as a starting point and assume they will retire at age 65 in 7 years, i.e. the year 2015.

For no particular reason, I will pick the Fidelity Freedom 2015 Fund as their theoretical investment fund and see what happens next. Assume 4 months ago, from the date of the article (May 19, 2008), they had $1,000,000 worth of shares in this fund.

The NAV on 5/19/08 was $12.11/share, so lets say they had 82,576.383 shares for there $1 million. The closing NAV on Thursday, 9/18/2008, the day just before the publication date of the article was $10.74/share. Their account would have been worth 82,576.383 X 10.74 = $886,870.35. This represents a nominal non-annualized loss of 11.31%.

By way of comparison, if they had been invested 100% into the S&P 500 index (a popular benchmark) over the same time period, the real nominal return would have been -15.10%. So their $1 million portfolio would have lost $151,000 which is still less than the $170,000 quoted in the article. This implies a beta of more than 1.0 of their portfolio! (I invite any readers with more insight into investment strategies to help me make sense of this via comments.)

Again, stories of four baby boomers in their mid- to late-fifties terribly close to retirement age, is not a "statistically significant" sample to base any theories on, but they hold important lessons for anyone contemplating retirement over the next 5-10 years.

Last month I wrote similarly about a report in the Dallas Morning News in which I said: "However, these are cautionary tales at best - with coded messages for both retirement savers as well as policy makers. Social Security by itself is not enough, guaranteeing in some locales around the country barely a poverty-level monthly benefit payment, and a purely market-based defined contribution savings system that is too volatile to give savers peace of mind in their sunset years."

Older Workers Rethinking Retirement

Bob Moos of Dallas Morning News (via AARPBulletinToday) reports: "Older Workers Rethinking Retirement". This article draws the spotlight on to the troubling ways that older Americans are trying to cope with the exposure of their retirement nest eggs to declining market conditions. The article quotes three 60-65 year olds, who for one reason or another tied to market conditions have chosen to continue working. Their stories are a troubling reminder for what lies in store for millions of Baby Boomers facing retirement over the next 10-15 years.

The first story is about Neal Ator of McKinney, Texas, does not sound so bad:

...the 65-year-old McKinney resident has since taken a part-time job as a loan officer to supplement his retirement income.

Drawing on his experience as a credit counselor, he sells reverse mortgages out of his home. He hopes the paycheck will offset the losses from his investments and pay for some travel with his wife.

"Many of my neighbors have also come out of retirement," Mr. Ator said. "Besides the satisfaction we get from our jobs, we're all trying to make sure our nest eggs last as long as we do."

The second story is about Scott Daily of Carrolton, Texas. Now things start to get interesting. I will hold my comments until later:

Scott Daily of Carrollton figured he had had enough of the corporate world last year after going through his fourth downsizing. He was looking forward to kicking back, riding his motorcycle and tinkering with old cars.

"I talked to my financial planner, who thought I could afford to do those things, even though I'm only 60," he said. "I'm debt-free -- I don't even have a mortgage. And I've been able to save for my retirement."

Then the market took a nosedive, slashing 30 percent from Mr. Daily's portfolio and sending him in search of a job again.

"I'm not hurting, but I'm wondering whether the economy will deteriorate further," he said.

Over his career, Mr. Daily managed dozens of construction projects across the country, traveling more than 3 million miles. He's now trying to find an employer who values that hands-on experience.

My comment for Mr. Daily: Who is giving you financial advice that is causing you to lose 30% of your portfolio at age 60? Or did I miss the boat on something - is 60 the new 30?

The next and final story is about Peter Laux of Plano, Texas.

Peter Laux, who's 65 and lives in Plano, works as a management consultant four days a week because he believes he can't afford to take much from his shrunken nest egg, which has lost 20 percent in a year.

"If the market were better, I wouldn't work at all," he said. "But my cardiologist tells me I may live to be 95, and my mutual funds certainly aren't giving me the kind of returns I'll need to last that long."

Mr. Laux, who took an early retirement package from Texas Instruments Inc. (NYSE:TXN) , intends to draw Social Security when he reaches 66. But his consulting income lets him enjoy a more comfortable lifestyle.

"Because I don't see myself sitting at home and eating cat food, I will keep chasing consulting jobs," he said.

My comment for Mr. Laux: (essentially the same as for Mr. Daily above) Who is giving you financial advice that is causing you to lose 20% of your portfolio in one year at age 65? Or did I miss the boat on something - is 65 the new 35?

Three stories of retirees or near-retirees from relatively well-heeled suburbs of Dallas, Texas are not a statistically significant sample of individuals in order to represent what the vast majority of Baby Boomers are going to be facing over the next decade. However, these are cautionary tales at best - with coded messages for both retirement savers as well as policy makers. Social Security by itself is not enough, guaranteeing in some locales around the country barely a poverty-level monthly benefit payment, and a purely market-based defined contribution savings system that is too volatile to give savers peace of mind in their sunset years.