Average 401(k) rebounds to $60,700, Fidelity says

For what it’s worth: Fidelity Investments says the average 401(k) account balance of the 11 million investors for whom it keeps records rose to $60,700 as of Sept. 30, surpassing the $58,400 average of a year earlier -- which was just before the financial-system meltdown accelerated.

Although financial markets have rebounded sharply this year, the Fidelity figure doesn’t mean that the investments in the typical account more than recouped what was lost in the meltdown. The totals include all employee and employer contributions to the accounts, so the money coming in would have offset some of the prior losses.

Still, psychologically it always feels better to look at a higher 401(k) total than a lower one.

Fidelity’s average balance now is well above the recent low of $47,500 reached at the end of the first quarter, but remains 13.3% below the recent peak of $70,000 in the third quarter of 2007.

The average is skewed by the large accounts of people who are nearing retirement. Fidelity’s median 401(k) account balance was $19,500 as of Sept. 30, up from $17,300 a year earlier.

The median is the middle of the pack -- meaning that half the accounts were above that figure and half were below.

-- Tom Petruno

Mutual fund case hinges on fee comparison

Must mutual fund investors pay significantly higher fees than institutional investors such as pension funds?

That was the issue today at the U.S. Supreme Court as the justices heard oral arguments in a case accusing a mutual fund manager of charging excessive fees.

Several investors have accused Harris Associates, which manages money for the Oakmark mutual fund group, of charging high fees in violation of the federal Investment Company Act.

A ruling for the plaintiffs could force fund companies to lower fees paid by millions of American investors.

Two justices seemed to side with the mutual fund industry, while three others seemed receptive to the plaintiffs.

But even if the justices ultimately were to side with the defendants, their ruling still could result in lower fund fees, said William Birdthistle, an assistant professor at the Chicago-Kent College of Law, who attended the hearing.

That’s because a central issue in the case is whether mutual fund boards should be required to compare the generally lower rates that managers charge pensions, endowments and other institutional investors with the higher rates they charge for mutual funds.

The plaintiffs say the lower fees on institutional accounts prove that mutual fund fees are too high. The industry disputes that logic, saying investors have lots of low-fee options and that, in any case, mutual fund fees have come down steadily over the years.

Three justices -- Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor -- seemed to support the idea that mutual fund boards should use institutional fees as a benchmark when setting mutual fund fees, Birdthistle said.

Existing law, which was set by a 1982 ruling, did not require a comparison with institutional fees.

Such a requirement would boost pressure on managers to justify mutual fund charges and could ultimately push fees down.

"The message would be heard loud and clear by boards and by future trial courts," Birdthistle said.

-- Walter Hamilton

Facing up to, 'Could I outlive my money?'

This Reuters story on aging baby boomers, their money and their financial advisors is set in the future, but it's already reality for some of the oldest boomers (who turned 63 this year), and it’s certainly true for many people older than that:

U.S. financial advisors are due for upheaval as baby boomers, controlling $10 trillion in assets, reach retirement age and shift their investment priorities, said a senior executive at asset manager BlackRock Inc.

Baby boomers will move the industry's main client goal from one [of] accumulation -- investing in assets that create the most value over time -- to one of "decumulation," said Frank Porcelli, who heads U.S. retail for BlackRock, speaking at the Reuters Global Wealth Management Summit in Boston.

"The questions won't be, 'How did I do against the S&P 500?'" he said. "It's, 'Can I meet these liabilities?' "

Instead of a focus on building wealth and a retirement nest egg, those clients will soon focus on making the money last.

Since the markets’ crash last year millions of people already have become focused on how to preserve whatever they have left. That’s what individual investors’ hunger for bonds this year has been all about.

But Porcelli’s rhetorical question of "Can I meet these liabilities?" is, ultimately, a question of investment performance, measured against the S&P 500 or any other benchmark.

If you risk your money in stocks, and the market crashes again, you may well outlive your remaining savings. But people who play it totally safe with their nest egg, and settle for rock-bottom returns, also run the risk of coming up short.

Unfortunately, many people may be looking for a magic formula that doesn’t involve hard choices. From the story:

Porcelli said research conducted by the firm found that 70% of retirement-age clients are willing to move their accounts to another firm, if the firm offered expertise on constructing portfolios to avoid running out of money during their golden years.

This was a far different, and more complex service than aiding in asset accumulation, he said.

"This is the equivalent of financial brain surgery," said Porcelli, adding advisors would have to manage clients' spending expectations, as well as investment performance.

If you’re retirement age and your advisor hasn’t suggested strategies to avoid running out of savings, of course you ought to be looking for another advisor!

Porcelli's point about managing spending plans is dead-on, though, in the post-crash world: Advisors may increasingly find themselves in the position of having to tell boomer retiree clients that they can’t have the lifestyle they had expected, because the capital just isn’t there.

That’s the most difficult conversation many advisers and clients will ever have.

-- Tom Petruno

For many, bonds vs. stocks is no contest

The numbers showing inflows and outflows of money in the mutual fund industry over the last few months tell us two things:

First, the typical American investor won’t be at all surprised if the stock market takes a dive.

Second, that same investor could be very surprised if something bad happens to the bond market -- say, if interest rates were to shoot up, devaluing older bonds.

As Wall Street has continued to push higher this month U.S. stock mutual funds have been suffering net cash outflows, according to data from the Investment Company Institute, the funds’ trade group.

Domestic stock funds saw a net $2.04 billion in cash flow out in the seven days through Sept. 16, the latest data available from the ICI. That followed an outflow of $1.75 billion in the week ended Sept. 9 and an outflow of $3.35 billion in the week ended Sept. 2.

All told, that’s the heaviest amount of net selling in domestic equity funds since March -- when the stock market was reaching 12-year lows.

Now, note that we’re talking about small amounts relative to the $3.5 trillion or so in total domestic stock fund assets. But it’s the trend that’s instructive: The public, on balance, has been exiting even as the market has been rallying.

It’s just the opposite with bond mutual funds, which have about $2 trillion in total assets: Money has poured into those funds this month, exceeding what already were heavy inflows in July and August.

Bond funds (government, corporate and municipal) took in a net $12.7 billion in new cash in the week ended Sept. 16, the largest weekly inflow this year, according to ICI data. That followed inflows of $8.2 billion in the previous week and $12.1 billion in the week before that.

After last year’s stock market meltdown many investors began tilting  their portfolios more toward bonds. They know that bonds are, in general, safer than stocks. The income bonds pay provides a cushion even if the value of the securities declines.

And bonds can rise in value -- generating capital gains – if market interest rates fall, because sliding rates boost the appeal of older bonds that pay higher fixed rates.

That’s what has happened in the corporate, mortgage and municipal bond markets, in particular, over the last two months: Market interest rates have continued to drop, pushing up prices of existing bonds.

The share price of the biggest bond fund of all, Pimco Total Return, closed at a record high of $10.91 on Thursday. The fund's year-to-date total return (principal change plus interest income) is 12.2%. That's less than what stocks have done, but it's comfortable enough -- and that's all many bond investors ask.

With so much new money favoring bonds, the temptation is to think that the crowd must be wrong. If market interest rates were to rise abruptly the rally in bonds would reverse, of course.

Yet few signs are pointing to higher rates. Inflation is subdued. The economy is reviving but it surely isn’t busting out. And the Federal Reserve again this week pledged to keep its benchmark short-term rate near zero indefinitely.

Conventional wisdom is that all of the money the Fed and the Treasury have pumped into the financial system will result in an inflation surge. But that's a story for 2010 or 2011, or maybe even later, if it happens at all.

In the near term, the most likely negative surprise for bonds might just be that stocks continue to perform much better while bonds putter along. That's the kind of disappointment most bond investors probably could live with.

-- Tom Petruno

Photo: The other trusted Bond. (Yes, totally gratuitous. I just like the poster.) Credit: Matt Dunham / Associated Press

American Express to restore compensation cuts, citing economy

American Express Co., which in June repaid the $3.4 billion in government capital it got under the Troubled Asset Relief Program last year, is planning to restore some of the employee compensation cuts it made seven months ago.

From Bloomberg News:

Annual merit increases and contributions to retirement plans will resume in January, and a 10% salary cut for managers in the senior vice president ranks and above will be rescinded, according to a memo today from Chief Executive Officer Kenneth Chenault to employees.

The memo cited "a somewhat more positive outlook about economic conditions in the coming months." American Express will maintain cuts on expenses, including employee travel and entertainment, meetings, consulting and training.

"The challenges we face are far from over," Chenault said, pointing to "stubbornly high" unemployment, lower consumer spending and decreases in home prices. "Even after the recession ends, we are likely to see a prolonged period of slow economic growth."

Note that this is not about bonuses, which is the main battle over banker pay now raging worldwide. Still, one of the reasons why many financial companies have sought to repay TARP money is to get out from under restrictions that TARP rules placed on executive compensation in general.

Restoration of rank-and-file pay raises at AmEx and other companies would be a good thing for the economy, of course, giving workers more spending power.

A survey of 175 big companies by consulting firm Watson Wyatt last month found that 44% of firms that had reduced salaries in the recession planned to restore those cuts in the next six months.

Twenty-four percent of companies that reduced 401(k) match contributions expected to reinstate the matches in the next six months.

More firms expect to restore salary cuts and 401(k) matches soon

Some hope for workers who’ve suffered pay cuts or reductions in their company’s contribution to 401(k) retirement plans in this brutal recession: A growing number of employers say they’re planning to undo that damage in the next six months.

From a Watson Wyatt survey this month of 175 large companies:

--- Forty-four percent of firms that reduced salaries plan to restore those cuts in the next six months, compared with the 30% that had that expectation in a June survey.

--- Twenty-four percent of companies that reduced 401(k) match contributions expect to reinstate the matches in the next six months, up sharply from just 5% in June.

Presumably, salary and 401(k) match reinstatements will depend on the economy turning up. Forty-two percent of companies say they believe the economy either already is rebounding or is hitting bottom now. But 25% don’t expect a recovery before 2010.

The survey also points up the struggle many workers are facing to make ends meet: More than a third of employers (36%) say they’ve noticed an increase in the number of employees taking hardship withdrawals from retirement savings plans in the last two months.

-- Tom Petruno

U.S. savings rate: Not as good as it looks, but getting better

The government's measure of Americans' savings rate soared in May to the highest level in 15 years, but the number isn't quite what it seems.

The Commerce Department measures total personal income, then deducts personal spending to arrive at what was saved. That isn’t a very scientific way to determine whether or how much people actually are saving, because a single month’s data can be skewed by unusual items.

That’s what happened in May: One-time federal stimulus payments of $250 each to retirees and others receiving government aid -- so-called transfer income -- drove total personal income up 1.4% from April, while spending rose a modest 0.3%.

That boosted what the government calculates was left in people's pockets. Savings as a percentage of total disposable income jumped to 6.9% from 5.6% in April.

"With spending up only 0.3% . . . the extra income pushed the personal saving rate to 6.9%. However, this will come off [in June] as transfer income falls back to more normal levels and as some of the money works its way into the spending stream," economists at Goldman Sachs noted in a report today. They believe the underlying savings rate remains near the 5.6% level of April.

Still, that’s a vast improvement from what had been an official U.S. savings rate near zero for much of the time from 2005 through early 2008. The rate was just 0.4% in 2007.

Given the economy’s crash, many people clearly have gotten religion about saving money, if they're at all able to do so. And banks are one of the biggest beneficiaries of that shift, as they rake in cheap deposits from people who don’t want to take risks with the money they’re salting away.

Just since mid-September, when the economy fell off a cliff, total savings deposits at U.S. banks have surged by $500 billion, or 12.5%, to $4.48 trillion, according to Federal Reserve data.

That isn’t all individuals’ money; savings deposits, which include bank money market accounts, include the cash of businesses and others that use those accounts.

In any case, bankers love it: Most, of course, pay much less on savings accounts than they do on certificates of deposit. The average annualized yield on bank money market accounts with a minimum $10,000 deposit now is 0.57%, according to rate tracker Informa Research Services.

By contrast, banks are paying an average of 1.41% on one-year CDs.

-- Tom Petruno

Photo: A consumer using a coin-counting machine in Fairless Hills, Pa. Credit: Mel Evans / Associated Press

 

Will the 'shadow inventory' stunt a housing recovery?

After every bear market on Wall Street, some investors are reluctant to buy because they believe many other investors will be anxious to sell into any rebound, swamping the market and stunting any recovery.

And yet, bull markets get going anyway.

Now the same issue is dogging the housing market.

A new Zillow.com survey of 1,266 homeowners nationwide asks, "If you saw signs of a real estate market turnaround in the next 12 months, how likely would you be to put your home up for sale?"

Twelve percent of homeowners said they’d be "very likely" to try to sell into an improving market, 8% said they’d be "likely" to do so and another 12% said they’d be "somewhat likely."

Zillow refers to that total of 32% as the "shadow inventory" of homes.

"With almost a third of homeowners poised to jump into the market at the first sign of stabilization, this could create a steady stream of new inventory adding to already record-high inventory levels, thus keeping downward pressure on home prices," said Stan Humphries, Zillow's vice president of data and analytics.

By region, just 7% of survey respondents in the West said they were "very likely" to try to sell their homes into an improving market, compared with 10% for the South, 12% for the Midwest and 20% for the Northeast.

Despite the low number for the West, I’ve often wondered through this housing crash whether California would be particularly vulnerable to a supply overhang -- in large part because of the number of aging California baby boomers whose retirement plan had consisted of eventually selling their home (at a big profit) and leaving for a lower-cost state.

For a summary of the Zillow survey, which also delves into home-price expectations and other market issues, go here. A link to the full report is here.

-- Tom Petruno

Photo credit: Joe Raedle / Getty Images

It's OK to look at your investment statements again

Go ahead -- check your 401(k) this weekend. You deserve some good news.

Stock markets worldwide mostly racked up another week of gains, with Wall Street extending its winning streak to six weeks. That’s the longest stretch of green ink since the spring of 2007.

The Standard & Poor’s 500 index, which added 0.5% today to close at 869.60, was up 1.5% for the week. The index has rebounded 28.5% from its 12-year low March 9.

Other market sectors -- including small and mid-sized stocks and emerging markets such as Russia and Mexico -- have staged even more impressive bounces over the last six weeks, as investors have become much more hopeful that the global economy is in the process of bottoming.

Domestic stock mutual funds today reached a milestone, of sorts, according to data tracker Morningstar Inc.: Averaging the performances of all U.S. fund categories, the year-to-date net change now is zero -- meaning, the average fund has recouped all of its first-quarter losses.

That may or may not apply to your individual funds, of course. Among the largest portfolios, for example, American Funds’ Growth Fund of America is up 4% this year and Fidelity Magellan is up 8.4%. But Dodge & Cox Stock still is off 3.9%.

As for making up the losses of the last 12 months -- that will be like scaling a mountain.

Still, the market recovery of the last six weeks is better than no recovery at all. And it hasn’t just been built on blind faith. Plenty of economic reports have offered reason to be less pessimistic, if not actually optimistic. On Friday, the University of Michigan said its index of U.S. consumer confidence edged up to 61.9 this month from 57.3 in March.

The confidence data followed better-than-expected reports Thursday on new claims for unemployment benefits and mid-Atlantic manufacturing activity.

As for corporate earnings, first-quarter results for many major companies (General Electric Co., Nokia, Google Inc. and JPMorgan Chase & Co., among others) have been lousy -- but better than analysts’ worst fears. That’s all many market bulls were hoping to see.

Things also continue to improve in the credit markets. The average annualized yield on an index of 100 junk bonds fell to 12.4% on Friday, down from 12.52% on Thursday and the lowest since early October. The yield has tumbled from 14.88% on March 9.

Companies issued $3.1 billion in new junk debt this week, the most since at least July, according to Bloomberg News.

There still is enormous doubt on Wall Street that the stock market can sustain this rebound. The test of the rally’s staying power will be how doubting investors react when the next significant pullback occurs: Will they rush at the chance to get in at lower prices -- or stay away, convinced that they were right to remain on the sidelines all along?

-- Tom Petruno

CalPERS wants concessions from hedge fund managers

California's biggest pension fund is putting the squeeze on hedge funds that manage a chunk of the giant portfolio, seeking to cut better deals.

The $173-billion California Public Employees’ Retirement System today said it told more than two dozen hedge funds that it wants to "restructure relationships" to gain "better alignment of interests, more control of its assets and enhanced transparency."

CalPERS has a total of $5.9 billion invested with hedge fund managers.

"We can dictate terms that are more suitable" for a major investor, said Pat Macht, a spokeswoman for the Sacramento-based fund that provides retirement and healthcare benefits for 1.6 million government workers, retirees and their families.

The crash in global financial markets in the last year has wounded the hedge fund industry and has caused many investors to pull cash from the funds. The industry’s notoriously high fees have long been a source of irritation with clients, who now are in a stronger position to push back.

In a news release, CalPERS said the fees it pays fund managers "should be based on long-term rather than short-term performance."

As an example of what the pension giant sees as an inequity in the fee structure, it noted that "the present model provides the possibility of a hedge fund manager realizing a 20% performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of the two years, but the investor may break even or even lose money."

Hedge fund fees "should better reflect the cost associated with generating performance and not be an invitation for asset-gathering," CalPERS said.

The pension fund also wants "the most timely disclosure of information possible" about where its hedge fund managers have invested CalPERS' dollars. Hedge funds typically prefer to be secretive about what they're buying and selling, for fear of tipping off rival investors.

CalPERS’ move to tighten its control of hedge fund investments comes ahead of a planned asset allocation study aimed at repositioning the pension portfolio.

Amid the markets’ meltdown, the fund has lost about 32% of its value since hitting a high of $253 billion in June 2007.

-- Marc Lifsher