Carlos Sera of Financial Tales defines dollar cost averaging as when one commits to invest a certain dollar amount or percentage of salary to an investment program, usually in a mutual fund or exchange traded fund (ETF), over a consistent period of time.  A good example is a traditional 401(k) plan to which an employee allocates 5% of a monthly paycheck. Sera has several tables illustrating how DCA works. (More on retirement).

Sera likes the dollar cost averaging method because it can encourage someone to invest in the stock market, which in turn gets them on their way to higher lifetime rates of return and a higher standard of living. Another benefit is that when stocks are cheap, you’ll wind up buying more of them; when they’re expensive, you’ll buy less.

As far as whether or not it works,  it enables and encourages many individuals to start saving and building retirement plans. It also positions them to take advantage of bargains in the market. Over time, Sera says, if an investor sticks with it, DCA could produce satisfactory results.

Our own strategy is one of trend following by using the 200-day moving average to determine when you’re in the markets and when you’re out. (How to use the trend following strategy).

Whichever strategy you employ when investing, pick one and stick with it. Bouncing around from one method to the next could wind up being costly to you, and can lead to frustration as you look for a strategy that “works” before giving any of them a chance to do so. Success doesn’t happen overnight!

For more stories on trend following, visit our trend following category.

Kevin Grewal contributed to this article.

The average 401(k) balance that has been held since 2003 fell 24.3% in 2008, according to the Employment Benefit Research Institute. This includes losses, gains, and employer/employee contributions, Adam Kommel for Mutual Fund Wire reports.

By year’s end, the average balance in retirement accounts was $86,513 for 401(k) type accounts.

The S&P 500 lost 37% in 2008. Overall, equities make up 56% of all assets in retirement accounts, and fixed-income makes up the other 41% of assets.

Target-date funds are showing great growth and popularity, with 31% of those invested choosing those funds. The number of twenty-somethings who were invested in a 401(k)s that chose target-date funds went from 19% in 2007 to 23% in 2008.

Does this leave the door wide open for ETFs? Read about which retirement plans incorporate ETFs here.

For more stories about retirement, visit our retirement category.

According to Sara Hansard for Investment News, account balances for young 401(k) participants rose by huge amount from January 2008 through the middle of this year while the balances for those that have been working for most of their lives declined.

Here are the results of a report by the Employee Benefit Research Institute:

• For 401(k) holders ages 26 to 35 who had accounts for four years or less, balances rose 79.9% since 2007
• For 401(k) holders who have held their accounts for 20 to 29 years, an age range of 55 to 64, balances declined by 8% over the same time period

These results seem to be skewed in that those who have had 401(k) accounts for some time have much larger amounts in their accounts and the impact of new contributions on these accounts are much less than that on newer accounts.

This study further supports the argument that ETFs should be implemented in 401(k)s.  The inherent characteristics of these index funds – transparency, intraday trading, tax efficiency and the ability to access hard-to-reach sectors and classes – will enable 401(k) investors to get even more diversified than they currently are and have more control of their retirement portfolios.

View our special report on 401(k) plans for a list of those who offer ETFs within 401(k) plans.

For more stories on retirement, visit our retirement category.

Kevin Grewal contributed to this article.

The financial climate of today has many people looking for different answers to their retirement questions. A deeper and more detailed outlook is being taken by both young and old investors. Here are a few pointers to consider about your retirement position, from Huliq news:

• Look at your strategy, whether it’s with a professional or on your own: The sooner you do this, the better off you will be. Having a strategy can help guide you and help you make the adjustments needed at each phase of your life to make sure you are on the right track to obtain your goal. Ideas such as lifestyle and budget must be addressed.
• Sources of income/savings: Identify the sources of income and savings that will be accessible once you are retired. Social Security is a big question lately – will it even exist? Do not rely on programs such as these. Pensions are another thing to consider. Many employers no longer offer them.
• The 401(k) option: Many employers have moved to this platform instead, as it is more efficient than a pension – for them. Investigate your employer’s plan and keep contributions on the higher end, especially if they are matching you. Consider ETFs in a 401(k) plan also. They are not readily available in these plans yet, but are on the brink of breaking into this arena.
• Eliminate debt and keep working: Both of these are important ideas to consider before you retire. The more you can save, the less you will have to rely on from other sources for income. Each year you delay starting to receive your Social Security checks, you will receive 8% more when you do start receiving them.

For more stories about retirement, visit our retirement category.

We’re only human, and we make mistakes. But try to avoid the costlier ones, such as speeding tickets or ignoring your 401(k) plan. Redeeming Riches lists four costly 401(k) related mistakes and how to avoid them, and we threw in one of our own, as well:

• Bad methods for choosing funds: Picking funds based upon last years’ performance is a huge no-no, especially since the markets change daily. Imagine what a whole year does. Don’t base your investments on what someone else is investing in or add risk to your portfolio without being diversified.
• Not diversifying: By putting all of your eggs into one basket, you are getting the ups of all areas of the market. Asset allocation strategies are important and should be created before going into the market. The ETF Trend Following Playbook can help with some of the necessary homework when working on diversification and strategy.
• Unknown risk tolerance: Everyone wants big returns without any risk, but this seldom happens. You need to understand your risk profile and how that impacts your decision-making with your 401(k) funds.
• Knowing your company match: If you don’t know what kind of match the company is offering, you could be leaving free money on the table. At the very least, you should be putting enough into your 401(k) to take full advantage of any money they are going to give you.
• Not using ETFs: ETFs are touted for their efficiency, their ability to target different areas of the market, liquidity and lower fees. They can be a great addition to any 401(k) plan.

These days, there are a number of plans that incorporate ETFs:

• Darwin Abrahamson, the CEO of Invest n’ Retire, has been doing this for years. His proprietary system helped stick a fork on the notion that ETFs and 401(k)s were like oil and water.
• iShares has the iShares 401(k) Program, which was designed to assist financial advisors who want to have ETFs as standard options in their 401(k) plans. The program identifies administrative providers and networks that offer competitively-priced access to ETFs.
• ING Direct’s ShareBuilder 401(k) program is targeted toward small businesses with 1-50 employees. The plan has been around since November 2005, but ING took it over in November 2007. ING’s plan comes with a lineup of 16 funds, which might seem small, but the idea is to keep it simple. Offering more than that, they feel, simply becomes confusing for investors.
• The owner of Lafayette Copier Sales & Service Inc. in Lafayette, IN, had been using a 401(k) plan that only offered mutual funds. But earlier this year, the plan’s service provider worked out a system that allows participants to create their own portfolios and freely transact any iShares ETF on the market.

For more stories about retirement, visit our retirement category.

Good News 1: Balances Are Up. The average 401(k) balance is up 13.5% in the second quarter, indicating a lean toward more investors raising their deferral savings rates, according to Fidelity Investments. Money Management Executive for Financial Planning reports that this is a reversal of trend seen in the prior three quarters. Only 1.3% of plan participants lowered their contributions, down from 2.2% in the fourth and first quarters.

Good News 2: Matches Being Restored. The majority of employers plan to restore their 401(k) match programs within the next 18 months, according to Money Management Executive. The survey found that 64% of employers plan to do so; broken down, 5% plan to within the next six months; 43% in the next 12 months and 16% in the next 18. Of those who said they would restore the matches, 67% said they would be back to their previous levels while 21% will tie them to corporate profits.

Good News 3: More Contributions. Employees are starting to boost their contributions to their retirement plans, says Jennifer Levitz at The Wall Street Journal. Fidelity Investments says that while people are paying less than they were a year ago, the number of people increasing their contributions was more than the number who were decreasing them in the second quarter.

Good News 4: ETFs In Plans. Sharebuilder 401(k), a provider of retirement plans for small-plan sponsors, is enhancing its all-ETF 401(k) platform. The 401kPRO program is geared toward businesses with up to 250 employees and is offered through registered investment advisors. The new service uses ETFs as underlying investments, explains Marianna Lehman for Ignites. The 16 ETFs offered include S&P 500 funds and a Treasury Inflation Protected Securities (TIPS) ETF.

This is the push that the ETF industry needs to break into the long-anticipated 401(k) retirement market. There are a few small platforms in this space serving small plans, but the ultimate goal is much bigger.

For more stories about retirement, visit our retirement category.

The importance of the 401(k) has only grown in recent years. A growing number of people entering into retirement (especially now that the Baby Boomer generation has begun to enter the ranks of retirees) and a broken social security system means that now more than ever, we’re responsible for the money we take with us into our golden years.

The average age of retirement in the United States is 63, but recent statistics show that it might not be as comfortable as most had hoped. Last year, Americans lost 18% of their net worth, according to a story by David Wyss for BusinessWeek. The Center for Retirement Research estimates that 43% of Americans are considered “at risk,” which means that they’d be unable to keep up their current standard of living after they retire.

Even worse, few Americans are taking decisive action, either by saving, paying off debt or taking advantage of tools such as 401(k)s that are being made available to them.

A Broken System

Americans historically have relied on social security to fund their retirements, but fewer and fewer people can count on this. Many projections suggest that both Social Security and Medicare are going to run out of money within the lifetime of most Baby Boomers, Wyss’s story suggests. And company pension plans are slowly moving toward extinction, too.

Saving for retirement has been a growing problem, and in recent years it’s only become worse. At the end of 2007, the median household in the 55-to-64 age group had total financial assets of just $72,400, according to the 2007 Survey of Consumer Finances. That figure may be even lower after the market meltdown.

This makes the 401(k) more important than ever. Unfortunately, it’s a broken system, which we’ll go into in more detail in the next section. But the good news is that there are solutions out there – it’s just going to require a little noise-making to get it done.

The Trouble with 401(k) Plans

The criticism of the 401(k) industry is getting louder and harder to ignore, and even Congress is paying attention. Rep. George Miller has stepped forward with a number of reforms that many investors and experts on the industry would love to see implemented.

There are two primary issues at play when it comes to why 401(k)s are broken:

• The fee disclosure is extremely poor. In a report for 60 Minutes this April, Rep. Miller held up a prospectus and challenged anyone to find the dozen or more fees that investors are socked with each year. Some of them are easily located; others are kept a mystery. And forget reading the prospectus – it’s a rare one that’s written in plain English. Hidden and buried fees have taken about $2 trillion from investors in the last year.
• There’s a lack of good education out there for investors. Many people, when they get jobs and choose their 401(k) options, are deluged with choices. And those choices are mediocre at best, the 60 Minutes report said. Often investors with little or no expertise are being asked to make difficult choices about the very investments that could determine their futures.

There’s also a lack of awareness on the  part of employers. A recent survey covered  in US News & World Report found that about 73% of employers think that their employees know how much they’re paying in fees. Only 29% of employees are actually aware of what they’re paying. That’s a huge disconnect.

Blaine F. Aikin for Investment News recently wrote that an investment fiduciary’s duty of loyalty demands that the investor’s best interests guide the decision-making process. Mutual funds make up the majority of 401(k) plan options – is that really what’s happening here?

Why Aren’t ETFs a Staple?

It’s true that an increasing number of 401(k) plans are offering ETFs, but this is hardly the norm. Most still use high-priced and opaque mutual funds. Anyone who understands the benefits of ETFs might be scratching their heads over this.

The industry has long claimed that putting ETFs into 401(k) plans might make them more expensive and difficult to operate, since mutual funds are only traded once a day at the end of the day. ETFs are traded intraday, just as a stock would be. The technology didn’t exist, was the claim. Fund companies also claimed that there wasn’t enough of a demand for ETFs to be incorporated into 401(k) plans. The chart below illustrates how the ETF industry has grown in recent years, though:

(Chart courtesy of State Street Global Advisors)

The ETF industry is hungry for this piece of the market. At the end of 2007, 401(k)s had about $3 trillion in assets, and $1.7 trillion of that went to mutual funds. Naturally, the ETF side of things wants a share.

But these days, there are a number of plans that are blasting that myth:

• Darwin Abrahamson, the CEO of Invest n Retire, has been doing this for years. His proprietary system helped stick a fork on the notion that ETFs and 401(k)s were like oil and water.
• iShares has the iShares 401(k) Program, which was designed to assist financial advisors who want to have ETFs as standard options in their 401(k) plans. The program identifies administrative providers and networks that offer competitively priced access to ETFs.
• ING Direct’s ShareBuilder 401(k) program is targeted toward small businesses with 1-50 employees. The plan has been around since November 2005, but ING took it over in November 2007. ING’s plan comes with a lineup of 16 funds, which might seem small, but the idea is to keep it simple. Offering more than that, they feel, simply becomes confusing for investors.
• The owner of Lafayette Copier Sales & Service Inc. in Lafayette, IN, had been using a 401(k) plan that only offered mutual funds. But earlier this year, the plan’s service provider worked out a system that allows participants to create their own portfolios and freely transact any iShares ETF on the market.

These aren’t the only plans offering ETFs, either; those who offer them are appearing on the scene with increasing frequency. More employers, in fact, are making it easier for workers in 401(k) plans to own ETFs, but it’s not a change that is going to happen overnight, says Eleanor Laise for The Wall Street Journal.

But even some big players in the industry are betting on a shift in tide for the stodgy 401(k) market. BlackRock Inc. last month noted the potential for growth index funds have in retirement plans. Ascensus Inc., a 401(k) record keeper, says it has gotten more than 100 inquiries from employers since they added ETFs to their platform in May.

And in a survey of 150 employers by Hewitt Associates, 17% said they’re likely to replace some or all of their plan’s actively managed options with index funds. That figure is up 8% from just a year ago.

This, combined with the fee disclosure bill, could help both employers and employees recognize that index funds can deliver better returns at a lower cost.

Making the Most of Your Current 401(k) Plan

While the use of ETFs within 401(k) plans is clearly growing, the push is not over yet. If your employer doesn’t currently offer a 401(k) plan that incorporates ETFs, you’re not completely helpless. Two things you can do right now to make it happen are:

1. Tell your employer that’s what you want. Many people are still learning about ETFs. Unlike mutual funds, they’re not exactly a household name. Perhaps your employer simply doesn’t know about them. If that’s the case, give an education or pass along some resources. But let your employer know that you want them. Encourage your colleagues to ask, too.

2. Let your congressperson know you support legislation to bring more clarity and sanity into 401(k) plans when it comes to both fees and options within them. Advocate not just for yourself, but for millions of other Americans who deserve something better for their futures.

The squeaky wheel, after all, will get the grease. In the meantime, though, there are still ways that you can be sure you’re getting the most out of your 401(k) plans while you wait for some ETFs.

• Save, save, save. Undersaving has always been a major problem, but in these hard times it seems to be prevailing.  Dwindling down some of your wants and desires to needs may enable you to save a few more pennies and get you over that bump.
• Utilizing company matches. This may be difficult because many employers are decreasing or even eliminating this policy.  If this is the case, up your contribution to the maximum that the IRS will allow, $16,500 per individual for the current year and $22,000 for those of you 50 and older. Not only will this boost your nest egg, it will lower your contribution to Uncle Sam’s pocket.
• Know the rules of your plan. Depending on your plan, there can be rules that can be costly if they’re broken. Some of these limits include the length of time you must hold a fund or limits on how often you can trade per year.
• Pay attention to fees. This is one area that would really reap the rewards if ETFs were routinely included in plans.  The majority of 401(k)s are focused on mutual funds, which generally have an expense ratio of around 1.02%.  Know what you’re paying.
• Encourage workers to save. Many companies don’t offer 401(k)s because of hefty costs and administrative issues and many workers that do have access to 401(k)s simply don’t utilize them. Perhaps the government can make it a bit easier for small business to offer 401(k)s.

Do you know of a 401(k) plan that offers ETFs? Feel free to share it in the comments and let others know!

For past special reports, view our special report page.

Dan Grech for Marketplace reports that although 401(k) retirement accounts have taken a  beating along with the rest of the economy, the hidden or buried fees within have stolen about $2 trillion. Is it time for legislation is Washington to take control?

A new bill in legislation would require 401(k) consultants and administrators to be more open about conflicts of interest and fees. Is full disclosure enough? The bottom line is that these fees add up to tens of thousands of dollars over a lifetime. There is no way to justify this.

Emily Brandon for US News & World Report reports that many employers are fully aware of how much their employees are paying into retirement accounts. About 73% of employers think that employees know how much they are dishing out in fees, but only 29% of employees actually are aware of the fees they’re paying. That’s a huge disconnect.

Many investors would prefer a summary of all fees paid and have this listed in plain black and white. The current plan in the House would require all fees to be disclosed as a single number both on a participant’s quarterly statement and before signing up.

Eventually, ETFs may become a staple within 401(k) plans, as well. We’re seeing some plans that offer them, but they’re by no means a given in these plans yet.

What can you do? Write to your Congress person, stating your support for Washington’s efforts to clean up 401(k) plans and ask that they help start protecting American investors trying to save for retirement. Let them know how important it is to you. Also, get in touch with your HR representative and request that ETFs be an option in their 401(k), and let them know why.

Investors need to step forward and advocate for themselves and fight for what’s fair, because the 401(k) industry won’t change without plenty of prodding.

For more stories about retirement, visit our retirement category. For more stories on 401(k) plans, visit our 401(k) category.

Over the last three months, primarily owing to a recovery in the stock market, the pace of money inflows into actively managed equity mutual funds has skyrocketed. In turn, so have the stock prices of asset management companies, states David Bogoslaw of Business Week.

But what the trend means is a matter of debate. Some suggest that this trend will continue as foreign investors start to pour into the markets through mutual funds, whereas opponents believe that investors will be choosy with where they stash their money.

This is where ETFs come into play and their underlying characteristics make them so appealing to investors.  They offer tax efficiency, more diversification, transparency, lower fees and the ability to be traded intraday, over mutual funds.  In fact, ETFs are becoming so popular that asset management giant BlackRock (BLK) recently announced its purchase of Barclay’s iShares ETF group.

Additionally, we think that in due time ETFs will make their way into the 401(k) arena and become standard options in them, which would be a huge boost to the industry.  After all, Congress is already pressuring 401(k) providers to offer lower expense ratios, more transparency and improved reporting methods. By utilizing low-cost ETFs instead of actively traded funds, a portfolio could potentially increase its value by 1% and offer more transparency.  Lastly, as ETFs become more popular, they will eventually force mutual funds to decrease their management fees because of the basic principles of competition.

Kevin Grewal contributed to this article.

Mutual fund leader BlackRock will be purchasing Barclays Global Investors, which makes up 49% of the ETF market, for $13.5 billion, writes Lawrence Carrel for Reuters. It is likely that BlackRock wants its fair share of the actively managed ETF market. BlackRock’s CEO has suggested as much.

Why is the ETF industry moving into active management? Because active ETFs can do several things that mutual funds simply can’t: their fees are lower, they can trade all day on an exchange like a stock (as opposed to once a day for mutual funds) and holdings are disclosed daily (as opposed to the quarterly disclosure required of mutual funds).

Index funds have lower fees compared to active funds, and ETFs of both variety charge less than mutual funds and offer greater tax efficiency with the perks of transparency. Traders are also able to buy or sell ETFs during market hours.

In active funds, stocks will be actively traded and the ETFs could incur capital gains, but Grail Advisors CEO Bill Thomas notes that subadivsers usually don’t trade a lot and have a reputation for tax efficiency.

The advent of active ETFs is ultimately a great thing for both investors and the ETF industry – it gives investors a greater number of choices, adds new innovation to the industry and the funds come with all the advantages of a regular ETF. Not all products are right for everyone, but these represent another tool investors can use if they choose to.

The financial crisis may have kept investors on the sidelines, but it’s going to be interesting to watch where the money goes as the market recovers.

For more information on actively managed ETFs, visit our actively managed ETF category.

Max Chen contributed to this article.