Active Management in 401(k)s

A new study from the Vanguard Group has revealed that more and more 401(k) participants are turning to professional advice, and finding it can make a real difference in bolstering their retirement savings plan. Back in 2007, only 17 percent of Vanguard’s 401(k) account holders were invested in a professionally managed option. By 2012, that figure was up to more than a third. Vanguard expects half of all its 401(k) plan participants to be invested in such plans by 2017.

At the same time, though, participation in plans has stalled out or even dropped. The average deferral rate was 7.3 percent in 2007, but has dipped slightly to 7.0 percent now. You can probably blame the recession for that.

Maybe the more important figure adds in employer matches to 401(k) accounts. The average total contribution rate, counting both employer and employee contributions, is now 10.5 percent, meaning the average worker is getting just over 10 percent of his or her salary put away for retirement.

The Falling Cost of Health Care

Consumer inflation, as reported by the Labor Department, came in very low in the latest report yesterday – an increase of just 1.4 percent over the past 12 months. But maybe the most interesting aspect of that report was what’s been happening to health care costs. The price index for medical care — a figure that includes products, such as drugs and supplies, and services, such as doctor and hospital visits — fell 0.1% in May. The largest factor was a drop in prescription drug prices of 0.6 percent.

That is highly unusual, to say the least. Incredibly enough, the last time the medical costs index dropped for even a single month was way back in 1975, or nearly 40 years ago. 

Over the longer term, medical costs rose by 2.2 percent over the past 12 months, which slightly outpaced the overall inflation figure. Even so, that’s the lowest annual medical inflation we’ve seen since the 1970s.

Avoiding Bad Charities

We all would like to leave a legacy behind us, and it's cruel the way many charities prey on the goodwill of people, just to line their own pockets. Earlier this month, The Tampa Bay Times, in conjunction with the Center for Investigative Reporting, produced a list of America’s 50 Worst Charities, in order to help us stay away from some of the worst offenders.

The report said that America's worst charity is one called Kids Wish. Kids Wish claims to provide similar services to the Make a Wish Foundation, which grants wishes for terminally ill children, and plays off the similarity in the names. Kids Wish raised $18.6 million last year, much of it through telemarketing, and spent just $240,000 on the kids it was supposed to help. Make-a-Wish – which never uses telemarketers – raised just $3.1 million last year, but spent $1.8 million on helping children.

Nonprofits should be transparent about how they raise and spend their money. Before making a sizable donation to anyone, demand to see their financial accounts. And take pains to avoid any of the 50 Worst. 

The Outlook on Higher Interest Rates

The Federal Reserve has employed two primary weapons in its battle to bolster the economy in recent years. One has been its asset-buying programs, known collectively as quantitative easing. Since Fed chair Ben Bernanke announced back in late May that the end may be in sight for that program, the market has reacted badly, with the S&P 500 dropping 2.5 percent since then.

But the other side of the approach is that the Fed has kept interest rates at near-zero levels in hopes of making money available for investment. If and when it eases up on that policy, the markets could react very favorably.

According to a study conducted by Bloomberg News, the Fed has raised interest rates four times in the past 30 years, and the S&P 500 has responded by rallying an average of 16 percent over the next two years. The most recent instance of the Fed hiking interest rates was back in 2004, after which the S&P rose by 11 percent over two years.

Dropping Fees for 401(k)s

Here's a little bit of good news for people depending on 401(k)s as a cornerstone of their retirement savings: The fees on such accounts continue to decline. The average expense ratios for 401(k) accounts dropped by 2 basis points in 2012, the third straight year in which they fell.

The average expenses for equity funds held in 401(k)s are now 0.63 percent, and the expenses for bond funds are 0.50 percent. The expenses for hybrid funds, which invest in both stocks and bonds, are naturally in between the two, at 0.50 percent.

It's worth noting that 401(k) participants tend to enjoy much lower expense ratios than other investors. In 2012, while 401(k) investors in equity mutual funds were paying that 0.63 percent expense ratio, the average expense ratio on a stock fund sold in the United States was more than twice that, at 1.40 percent.

Going Macro

The Business Roundtable, an assemblage of CEOs at large American companies, had some gloomy news in a survey released yesterday. Although 78 percent of the respondents said they expected their company's sales to increase over the next six months, just 37 percent said they plan to increase their company's capital spending, and just 32 percent said they plan to expand their company's workforce.

Not coincidentally, the CEOs expect the American economy to continue to grow at an anemic pace. The same survey predicted that GDP would increase at a rate of 2.2 percent for 2013, which would match the rate of growth for 2012.

There was a piece of good macroeconomic news yesterday: The U.S. government announced that it was on track to post its lowest budget deficit in five years. The deficit for the first eight months of the current fiscal year - which started on October 1, 2012 - is down 26 percent from the year-earlier period.

Watching the Market's Volatility

In case you haven't noticed, the markets have gotten much choppier lately, with a lot more volatility than we saw in the first few months of this year. Out of the first seven trading days in June, through yesterday, the Dow Jones Industrial Average had moved up or down 100 points up or down at some point during the day on six of those days.

How unusual is that? Through the first 60 trading days of the year, the Dow had seen just 21 days with swings that big, or just about a third of the time. Clearly, something has been happening in June.

Does this portend more volatility in the long run? It might. The VIX index, which is designed to predict the market's volatility, has been inching upwards lately - but it's still not very high, at 16.79. The VIX has been below its long-term average of 20 for this entire year.