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Half of All Americans Are Not Saving for Retirement

This article was written by in Investing. 18 comments.


In April, LIMRA, a think-tank for the financial industry, completed a survey intended to focus on the savings and investment preferences of those living and working in the United States. After receiving responses from 2,697 Americans, a representative sample of the country, LIMRA was able to determine that 49 percent of the country is not saving for retirement. Additionally, more than half of Americans between the ages of 18 and 34, at 56 percent, are not saving for retirement.

Saving for retirement — and receiving the associated tax benefits through typical investment types like 401(k) plans and IRAs — requires a public trust in the financial industry. On one side, financial planners, investment salespeople and brokers, columnists, and bloggers are encouraging the use of financial products that, through both apparent and hidden fees, enriches the industry, while on the other side, investment firms are the beneficiaries of massive taxpayer bailouts and frequently in the news for using taxpayer money for paying their executives bonuses that defy the laws of gravity.

Wall StreetIt may be true that the reason many Americans do not save for retirement is ignorance. There are typical excuses for not saving for retirement, such as the lack of good, seemingly trustworthy information about the options that are available, the lack of knowledge about the benefits of investing in 401(k) plans and IRAs, or the belief that during tight personal economic times, not a cent is available to save for the future. After the recession, however, many people just see the financial industry as unworthy of trust. Organizations like LIMRA, working for the industry and promoting financial products, are unlikely to bring this attitude to the public attention.

The industry is more interested in shaming people unwilling to get on the boats rather than analyzing the leadership capabilities and trustworthiness of the boats’ captains.

I’m saving for retirement with 401(k) plans and IRAs. When possible, I choose plans that have low fees, but the choice is not always up to me. Employees may be able to choose from a selection of investments inside their 401(k) plan, employees can’t choose their company’s 401(k) administrator and broker without a coordinated effort among a large portion of employees. That would be nearly impossible in a large company. Unions are intended to solve some of these issues, but it can often reach the point where being a member of a large union is much like working for a large employer. The power of any individual is limited.

The 401(k) is ingenious for the financial industry, particularly now that it’s automatic. In a perfect world, every single employee is enrolled in a 401(k) plan on their first day on their first job. The investments may not perform well over time, but that’s not particularly relevant for the financial industry. As long as every American is investing a portion of their paycheck every week, two weeks, month, or other period, 401(k) administrators and brokers will continue to thrive. The employee probably benefits when retirement approaches, but that is by no means guaranteed. All you need to do is look at the portion of Americans who planned to retire in recent years but saw their nest eggs trampled on during the recession.

Investors bear the responsibility for changing their risk profile as they near their planned retirement, but there is a mixed message. The financial industry says you need to stay invested in stocks (highly volatile, highly risky) as you approach retirement because most people need their funds to last several decades throughout retirement while at the same time warning people to risk only what they can afford to lose. When people receive conflicting information, making decisions becomes more difficult. And when the conflicting information is coming from the same source — that is, the financial industry — the default reaction is the lack of trust.

Does the financial industry wants to do American citizens a favor by providing options for saving for retirement? No. The financial industry wants its companies to not only stay in business but to profit as much as possible. And to that end, it sells products — investment opportunities — designed to enrich the companies and their shareholders. There’s nothing wrong with this, because consumers will only buy products they need or desire enough. Companies will sell towards that need. And when only half of Americans have discovered retirement savings vehicles like 401(k) plans and IRAs, the industry will resign itself to doing a better job in explaining to the country why their products are needs, not wants.

Saving for retirement is important. For most people, stocks are the only investment type that can grow wealth quickly enough to provide the dream retirement so impressed upon Americans through media. It’s risky, as recent would-be retirees have seen. Thanks to the cognitive dissonance resulting in the understanding that the promotion of retirement is a result of the financial industry trying to increase profits on a large scale rather than corporate concern for the well-being of a nation and the knowledge that Americans must do something drastic to save money in order to fulfill the dream of quitting work, some Americans choose to invest while others would sooner give away their firstborn rather than drink the financial industry’s Kool-Aid.

LIMRA may be right — that most people who do not invest for retirement with 401(k) plans and IRAs have not done so because the industry’s message hasn’t successfully penetrated their consciousness. That may be due in part to a lack of education, but for others, it’s a lack of faith and trust in the industry.

Photo: zoonabar
LIMRA

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Taxpayers Earned $25 Billion on Treasury’s Mortgage-Backed Securities Bail-Out

This article was written by in Economy. 5 comments.

At the height of the recession, President George W. Bush and the congress authorized a bail-out of banks and investment companies headed for failure.

In a similar plan to bail out Fannie Mae and Freddie Mac, the government authorized the Treasury moved forward with the plan to stabilize the financial industry, and to an extent the economy. The Treasury purchased $225 billion in mortgage-backed securities insured by Fannie Mae and Freddie Mac.

These securities were considered toxic because investors believed that the underlying mortgages were risky, and the price on the open market did not reflect that risk. When investment banks couldn’t get rid of these bad products on the open market, the Treasury stepped in and paid a discount to acquire the assets. This helped the investment banks pad their balance sheet with more cash, improving their financial conditions, avoiding bankruptcy or failure, alleviating to some degree panic in the market that could have led to a more damaging recession or economic depression.

One year ago, the Treasury began selling these mortgage-backed securities, and as of today, the government no longer has any of the assets purchased under this bailout plan. Not only that, but the Treasury earned $25 billion on its $225 billion investment. That works out to a total return of about 11 percent over about three and a half years (the purchases began in October 2008), though that doesn’t take into account the timing of the buying and selling transactions. The good news is that the Treasury did not lose money on toxic assets, a legitimate concern at the time.

The concern is not over, however. The quality of the underlying mortgages is still in question. The investments could still fail.

… [I]f the mortgages behind those securities fail, taxpayers will still be on the hook, since federal housing giants guarantee the loans and taxpayers have been propping up Fannie Mae and Freddie Mac.

The $25 billion earned through the bail-out of Fannie Mae and Freddie Mac will go to paying down government debt.

Photo: cliff1066
CNN

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Balance Transfer Day: December 11, 2011

This article was written by in Credit. 19 comments.

Just last month, Bank Transfer Day encouraged disgruntled consumers across the country to move money out of their bank accounts and deposit the funds in credit unions and smaller, community banks. Partly as a result of this successful campaign, hundreds of thousands of American large-bank customers opened credit union accounts since the day the campaign was founded.

Another idea, though it hasn’t gained nearly as much traction with fewer than 600 Facebook fans signed on, is to leave the large credit card issuers behind by transferring outstanding balances to lower-interest cards, like those offered by credit unions. In an ideal world, customers would, on December 11, apply for a zero-interest, zero-fee credit card and include in the application instructions to transfer a balance from a higher rate card.

To figure out who’s behind Balance Transfer Day, you’ll need to trace it through several different initiatives and apparent organizations, but at the root, this effort was organized by a for-profit company whose primary business is an affiliate-based credit card application website. I’m wary about seriously promoting a movement that, when you look layers deep, is organized for the financial benefit of the parent company. Unlike Bank Transfer Day, organized by a woman with no ties or endorsement by the financial industry, the founders of Balance Transfer Day can be easily but not obviously traced to a site called credit-land.com, which has a “Student Credit Card Education Initiative.” This is not a non-profit organization, it is designed to promote the products of the parent website.

Balance Transfer DayThere is no association between this organization and the Occupy movement, though they attempt to make it appear there is a connection by using the Guy Fawkes mask in the Balance Transfer Day initiative logo and using “Occupy” language.

It’s also worth noting that the Twitter handle for the movement is “OccupyBankRate” — a company called BankRate just happens to be a competitor of the organizers. An article on Huffington Post identifies the founder of the movement, Michael Germanovsky, as a laid-off architect, but the writer conveniently neglects to mention that he is also the editor-in-chief of credit-land.com.

Michael Germanovsky

For Michael Germanovsky’s response, please see the comments below the article.

Regardless of who organized this movement and how the organizers are promoting it, individuals should always do what’s best for their finances. In some cases, that could include transferring balances from high rate cards to cards with 0% introductory APRs for balance transfers. There are potential traps, though. And the big issuers just happen to have been improving these offers recently, eliminating or reducing fees to entice more customers.

  • If you do not pay off the entire transferred balance within the introductory period, you will be subject to higher interest rates, and you could be paying more total interest than you would have if you had left the balance on the original card.
  • If you apply for or open many 0% APR card offers around the same time, your credit score could be negatively affected.

The rationale for the transfer from a anti-industry perspective is that since the large banks receive benefits from the government, like a facility to borrow money at 0% APR, it isn’t right that the banks charge even higher rates to their customers who borrow money. By bailing out Wall Street, the government supposedly intended banks to pass the savings to customers in the form of lower rates encouraging borrowing, but the banks decided to use the funds to keep cash on hand to improve their appearance of financial condition for the benefit of their shareholders. Interest rates have been higher since the bailout than they had been in recent years, but there are less expensive options for borrowing than these major issuers.

At the same time, the best zero-balance transfer introductory offers are still promoted heavily by the major issuers. If you look at the website for the underlying company that organized the movement, they promote Citi, Capital One, and Discover as being the best cards for balance transfers. This is despite the movement’s apparent goal to recommend credit unions and small banks.

As a movement, Balance Transfer Day won’t gain as much traction as Bank Transfer Day. The back story isn’t compelling enough, and the motivation, though well-buried, is profit and promotion for the underlying company.

Will this movement inspire you to transfer a high credit card balance from one card to a zero-interest offer on a different card?

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More Banks Drop Debit Card Fees

This article was written by in Banking. 3 comments.

Consumer outrage and backlash does work, apparently. Wells Fargo Bank and Chase Bank have been testing debit card fees in a small number of locations within the United States, but due to the anger unleashed after the largest bank, Bank of America, announced it would add a $5 debit card fee in 2012, the two smaller (but still very large) banks backpedaled. Wells Fargo and Chase are unwinding their test plans, and the bank executives have decided not to continue charging more customers for the benefit of accessing their own funds on deposit.

Chase BankA customer who deposits cash in a checking or savings account has been traditionally doing the banks a favor by allowing them to initiate loans based on the funds held in deposit. In return of this favor, banks paid depositors interest. With banks not lending as much as they have in the past, banks are in no rush to acquire depositors. Thus, they can pay much less interest and increase fees. They’re happy to drive customers away.

Bank spokespeople also cite new regulations as rationalization for new fees. Particularly, the interchange fees banks charge retailers for accepting debit cards at the point of sale are now limited. In effect, banks are switching revenue-generation from retailers to depositors. With this new swipe fee regulation, retailers are now more protected than consumers.

Bank of America’s new debit card fee policy stirred public unrest, and from a public relations standpoint, Chase and Wells Fargo would do well to avoid more public outrage. That won’t be the end of this story for Wells Fargo and Chase. Corporations need to answer to their shareholders, and investors will not want to see a bank willingly part with revenue potential. While the banks are still making great profits in a “post-bailout” environment, expect the executives to tap another source. Be on the look-out for new fees now that certain banks are avoiding debit card fees.

Related: See my article, “The Bank-Fee Wake-Up Call,” on US News & World Report’s “My Money” blog.

Update: In response to the announcements from Wells Fargo and Chase, Bank of America offers a response. The bank will revamp its debit card fees, presumably by lowering the $20,000 minimum to avoid the monthly debit card fee. The bank has not made a decision, though, and unless the bank sees a mass exodus, expect the $5 debit card fee in 2012.

Second update: The finance industry, minus Bank of America, is continuing to listen to customers. SunTrust and Regions Bank have announced that their customers will no longer be subject to the new debit card fees. This leaves Bank of America on its own. Will the largest bank buckle?

Photo: neoliminal
Reuters

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$1.2 Trillion in Secret Fed Loans

by Flexo

We know about TARP, the program that used taxpayer money to lend to the biggest Wall Street banks tin an effort to prevent the collapse of the financial industry. The Federal Reserve loaned more money to Wall Street, however, in secret. The details are only coming out now thanks to the Freedom of Information Act ... Continue reading this article…

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GE Capital May Buy ING Direct

by Flexo
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Update: Capital One has purchased ING Direct. A few weeks ago I mentioned that Ally Bank was considering buying ING Direct, the United States deposit bank arm of the Dutch ING Group. In exchange for a European bailout, ING was forced to agree to sell ING Direct by 2013. As the date nears, more rumors ... Continue reading this article…

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Federal Reserve’s Secret Bailout Helped Banks Profit During Crisis

by Flexo
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While the Federal Reserve was publicly providing money to member banks at interest rates of up to 0.5 percent during the financial meltdown of 2008, a different, less public program bailed out Credit Suisse, Goldman Sachs, and Royal Bank of Scotland with short-term loans with an interest rate of only 0.01 percent. Those banks received the bulk ... Continue reading this article…

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Goldman Sachs Will Tie Bonuses to Long-Term Performance

by Flexo

A big criticism of Wall Street bonuses throughout and after the collapse of the financial industry has been the idea that executives were awarded over-sized bonuses while their companies fell apart. Wall Street fought back against this criticism, usually with the explanation that bonuses were paid in accordance to contracts that were signed before the ... Continue reading this article…

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