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Here are some easy, low-cost ways small businesses can help employees save more

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This article is reprinted by permission from NerdWallet.

Donna Skemp of Bend, Oregon, struggled to save before she signed up for an automatic savings plan offered by her employer’s payroll services company. Now, some of her pay goes into a federally insured, interest-paying savings account that she can access any time with a debit card.

“It’s painless, and it’s so easy,” says Skemp, accounting and office manager for the nonprofit Every Kid Sports, which pays sports registration fees for children from low-income families.

Skemp is lucky — more than one-third of private-sector workers don’t have access to workplace savings plans via payroll deduction. Many small-business owners may think such plans are too expensive or complicated to administer. But that’s not necessarily so.

Payroll deduction makes a difference

Americans don’t save nearly enough for emergencies or retirement, but we’re more likely to save if the money is automatically deducted from our paychecks. People are much more likely to contribute to a retirement plan, for example, if they’re offered payroll deductions, according to AARP’s Public Policy Institute. In addition, 7 of 10 working adults say they probably would participate in an emergency savings program via payroll deduction if their employer offered it.

Read: 7 advantages a late starter has over the FIRE world in saving for retirement

Unfortunately, the smaller the business, the less likely it is to offer a workplace savings plan. In the past, that made sense, because the cost of setting up and administering these plans could be high. Technology and competition have lowered costs in recent years, however. Some startups and robo advisers have been targeting the small-business 401(k) market, as have some large investment companies. Costs vary, but they don’t have to be exorbitant: JPMorgan Chase, for example, recently announced a workplace plan for small businesses with monthly charges that start at $75 a month plus $5 per participant.

Looking beyond 401(k)s

Small-business owners who want an even lower-cost option could set up payroll deductions deposited into SIMPLE (Savings Incentive Match PLan for Employees) IRAs, says Mackey McNeill, a certified public accountant and personal finance specialist in Bellevue, Kentucky, who works with small businesses.

Workers can’t save as much in these as they can in a 401(k), McNeill notes. The regular contribution limit for SIMPLE IRAs was $13,500 this year, compared to $19,500 for a 401(k). But SIMPLE IRAs typically have few fees and regulatory requirements, with only one IRS form to fill out annually, McNeill says.

Those lower fees open up a way for employers to help workers save. Instead of paying $1,500 to $2,500 a year in administrative costs for a 401(k), which McNeil says is typical for her clients, small employers could use that money to help match their employees’ contributions in the SIMPLE IRA.

Another potential option is state-sponsored retirement accounts, which typically use payroll deductions to deposit money into Roth IRAs for employees. Three states — Oregon, Illinois and California — currently offer programs that are or will eventually become mandatory for most employers that don’t have retirement plans. Several other states are setting up these plans or considering it.

Adding an emergency savings plan

A big problem with retirement accounts is that they can be costly to access in an emergency because of taxes and penalties. Skemp, 60, learned that during the 2007-09 recession more than a decade ago, when she lost her job and had to raid her retirement account to pay her mortgage.

Also read: Here are the average retirement savings by age: Is it enough?

Emergency savings accounts, either as a stand-alone benefit or one that’s connected to a retirement plan, can help prevent such costly withdrawals and improve workers’ financial stability. Several large companies now offer such accounts, while benefits companies including Gusto, the one Skemp’s employer used, and Businessolver offer the option to smaller businesses.

Even if small-business owners aren’t ready to set up a formal emergency savings program, they can encourage workers to save through split direct deposit. Any employer that offers direct deposit can offer split deposit, which allows people to automatically divide paychecks between checking and savings accounts or among accounts at different banks.

Skemp says she wishes she’d known years how important a regular, automated savings habit could be.

“I would be so far ahead of the game right now,” she says.

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Don’t stop investing in bonds

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Given the current doom and gloom, with the occasional spell of relief, over interest rates rising, does it still make sense to invest in bonds when saving for or living in retirement?

Well, it sure didn’t seem to make sense when interest rates were (and still are) at historic lows. Like, who in their right mind wants to earn 0.318% on a 10-year Treasury, which is what it was earning roughly one year ago?

And it might not make sense now that rates have risen from the March 2020 lows. Remember, the principal value of your bond does decline when interest rates rise.

But what folks might be missing in the current topsy-turvy environment is the role that bonds should or ought to play in a portfolio.

Safety, not income

According to Larry Swedroe, co-author of Your Complete Guide to a Successful Retirement and director of research at Buckingham Strategic Wealth, the main role of fixed income in your portfolio should be safety, not return, not income, not cash flow.

In other words, if all else goes to pot, if stocks should crater, bonds are there to provide safety of principal—at least at maturity.

Plus, bonds are there for diversification purposes. Bond prices should rise when in value when other assets, say, stocks are falling in value, and vice versa.

“Rule No. 1 that every investor should abide by is that you want to make sure your portfolio has a sufficient amount of safe, fixed income to dampen the overall risk of the portfolio to an acceptable level,” he said. “Because if not, and equities drop, which they tend to do once every 10, 15 years or so, 40, 50% or whatever, then you’re going to exceed your tolerance for risk.”

At best, he said, you won’t be able to sleep, enjoy your life, and everything else. And, at worse, you’ll engage in the worst thing you could do: panic and sell. “And once you sell…I think you’re virtually doomed to fail unless you just get lucky.”

Bottom line for Swedroe: “You have to have enough safe bonds.”

Now how much you should invest in bonds, stocks and cash is, according to Sébastien Page, author of Beyond Diversification and head of global multiasset at T. Rowe Price, “is, without doubt, the most important portfolio construction decision an investor makes.”

How much to invest in bonds?

According to Swedroe, how much you should invest in fixed income is a function of your ability to take risk. And your ability to take risk is determined by four factors: your investment horizon, the stability of earned income, your need for liquidity, and options that can be exercised should the be a need for a plan B. What’s more, Swedroe said owning bonds whose maturity is beyond your investment horizon takes on more risk than is inappropriate.

Ability to take risks

Investment horizon (years)

Maximum equity allocation (%)

0-3

0

4

10

4

20

6

30

7

40

8-9

50

10

60

11

70

12-15

80

16-19

90

20+

100

Source: Your Complete Guide to a Successful & Secure Retirement

Like Swedroe, Page also believes the decision turns in part on one’s human capital, the present value of your future salary income. And once you factor in a person’s human capital, which Page argues acts more like a stock than a bond, a balanced portfolio with a healthy allocation to stocks, not bonds, is the answer.

To be fair, the allocation to bonds isn’t static throughout the life cycle in either Page’s or Swedroe’s model portfolios.

For instance, in Page’s model portfolios, you’d allocate 15% to bonds in the 20 years before retirement, 45% at retirement, and 69% some 20 years into retirement, which is close to the rule-of-thumb that would have you subtract your age from 120 to determine how much to invest in stocks and how much in bonds. So, if you were 47, you’d invest 73% in stocks and if you were 87 you’d invest 33% in stocks.

The right bonds depend on your investment objectives

Investing in the right bonds is equally important as investing in bonds, said Massi De Santis, a certified financial planner with DESMO Wealth Advisors. According to De Santis, the right bonds help you avoid unnecessary risks and make the most out of your portfolio, particularly in a low interest rate environment.

What are the right bonds? That depends on your investment objective.

For growth portfolios, De Santis recommends that the bond component should be diversified across the bond universe, including government, government agency, investment-grade corporate and global bonds. The duration should be in the intermediate range (about 5-7 years).

The Vanguard Total Bond Market Index Fund ETF
BND,
-0.06%
,
the SPDR Bloomberg Barclays International Treasury Bond ETF
BWX,
-0.34%
,
and iShares Core US Aggregate Bond
AGG,
-0.07%

 are ETFs that would work for this objective.

For conservative portfolios, De Santis recommends highly rated short- to intermediate- bond durations that are similar to the horizon of the goal. The iShares 0-3 Month Treasury Bond
SGOV,
,
SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
BIL,
,
Vanguard Short-Term Treasury Index Fund ETF
VGSH,
,
Vanguard Short-Term Bond Index Fund
BSV,
-0.02%
,
iShares Core 1-5 Year USD Bond ETF
ISTB,
+0.04%
,
and iShares 1-3 Year International Treasury Bond ETF
SHG,
+2.51%

are ETFs that would work for this objective.

And for income-focused portfolios, De Santis recommends government, inflation-protected and investment-grade corporate bonds where the duration of the goal is the average maturity. The iShares TIPS Bond ETF
TIP,
+0.10%

and the Vanguard Long-Term Bond Index Fund ETF
BLV,
-0.19%

 are examples of ETFs that would work for this objective.



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These money and investing tips can remind you to not take Mr. Market’s moods personally

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, help you make sense of your investment portfolio when stocks and bonds are choppy and Mr. Market’s mood seems to change hourly.

Sign up here to get MarketWatch’s best mutual funds and ETF stories emailed to you weekly!



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Emerging market equities’ place in retirement portfolios

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How much should you allocate of your retirement portfolio to emerging market equities?

It’s a timely question, since many widely-followed Wall Street firms are telling their clients that emerging market stocks are the only equity category whose expected return over the next decade is above inflation. Perhaps the most prominent of such firms is GMO, the Boston-based investment firm co-founded by Jeremy Grantham. It is projecting that the emerging market equity category will beat inflation over the next seven years by 5.0% annualized. In contrast, the firm is forecasting a 6.2% annualized loss to inflation over the same period for the S&P 500
SPX,
+1.95%
.

As is also widely known, however, GMO has been making similar forecasts for many years now, and at least so far has been very wrong. Over the trailing 10 years, according to FactSet, the iShares MSCI Emerging Markets ETF
EEM,
+1.09%

  has produced a 3.4% annualized return, almost 10 annualized percentage points below the 13.3% annualized return of the SPDR S&P 500
SPY,
+1.84%
.

Fortunately for our purposes, Credit Suisse has just released the latest edition of its Global Investment Returns Yearbook, authored by finance professors Elroy Dimson, Paul Marsh, and Mike Staunton. This yearbook arguably is the most comprehensive database of global returns, as it reports performance since 1900 for “equities, bonds, cash, currencies and factors in 23 countries.” For the first time, furthermore, this year’s yearbook was “broadened to include 90 developed markets and emerging markets.”

This long-term perspective is especially crucial when assessing emerging markets. That’s because we can all too easily forget that many emerging stock markets disappeared altogether at various points since 1900 due to “major events such as revolutions, wars and crises.” Their losses need to be taken into account when judging emerging markets’ prospects, and this Yearbook does.

This long-term perspective is crucial for another reason as well: Some emerging markets over the last 121 years have performed so spectacularly that they graduated to the “developed” category. Index providers employ a complicated methodology for determining when that graduation takes place and, as you can imagine, a lot is riding on that determination. But the inevitable result is that some of these emerging markets’ spectacular performance gets credited to developed market benchmarks rather than to emerging market indices. This yearbook’s authors employ an elaborate methodology to place each market each year in the appropriate categories.

You may say you don’t care how a country’s stock market is classified, just so long as it performs well. But you should care. If you invest in emerging market equity index funds, you at least implicitly are relying on the decisions that index providers make about what counts as an emerging market. There’s no way around it.

Long-term performance

Without further ado, let me turn to what the Credit Suisse Yearbook reports. Over the last 121 years, emerging market equities have produced a 6.8% annualized return to a US-dollar investor, 1.6 percentage points below that of developed markets’ 8.4% annualized. I note in passing that developed market bonds beat emerging market bonds over this period by a similar magnitude: 4.9% annualized versus 2.7%. These returns are plotted in the accompanying chart.

These long-term returns suggest that the last decade’s results are not as unusual as they may otherwise seem.

Do these results mean that there’s no need to allocate any of your retirement portfolios to emerging market equities? Not necessarily. Part of the rationale for investing in them derives from their potential diversification benefits: If they zig while developed market equities zag, and vice versa, then a portfolio that invests in both would incur significantly lower volatility, or risk, than one that invests in developed market equities alone. This in turn could translate to superior risk-adjusted performance even if emerging market equities underperform.

The yearbook’s authors find that emerging market equities do provide some diversification benefit. However, that benefit has been declining over the last several decades, as correlations between their returns and those of developed markets have been rising.

The bottom line? I came away from this latest edition of the Credit Suisse Yearbook with diminished long-term expectations for emerging market equities.

That doesn’t mean we should automatically avoid them. But we should base any decision to invest in them on other factors besides their long-term returns.

GMO and the other firms advocating for emerging market equities do just that, by the way, basing their bullishness on valuation considerations. They believe that emerging market stocks are very cheap, according to any of number of valuation metrics, both in their own right and relative to developed market (and especially U.S.) stocks.

GMO and similar firms may very well be right, of course. But the 121-year record suggests that they will have to be very right indeed to overcome emerging market equities’ long-term tendency to lag developed market equities.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.



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