Motley Fool Money - What Makes a Good 401(k)?

Episode Date: July 25, 2023

When interest rates rise, investors are supposed to move to safer assets. (00:14) Jim Gillies and Ricky Mulvey discuss:   - Medpace shares hitting an all time high.  - If investors should prepare for a market correction during a "dopamine fiesta".  - The bull case for air bags and seatbelts. Plus, (16:37) Robert Brokamp takes a look at how Americans are saving for retirement, and how to make better use of a 401(k). Companies discussed: MEDP, ALV Pullback report: www.fool.com/pullback  Host: Ricky Mulvey Guests: Jim Gilles, Robert Brokamp Engineers: Tim Sparks, Heather Horton  Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you on this earnings season. That's good to be seen, Ricky. So before we dive into some of these off the beaten path companies that you want to talk about, we got a great question from Marco in Mexico City. He wrote to us, quote, I just started investing early this year thanks in no small part to you guys. As you know, this year has been amazing for investing.

And so far, it's been a dopamine fiesta to see everything go up and up and up. However, I feel like I need to start to mentalize for correction very soon. Isn't everything overvalued right now? Is the rally justified? I'm seeing the NASDAQ 100, the S&P 500, and almost every major stock following the same pattern of 2021. I know these things are impossible to predict that past performance doesn't indicate future performance and that I should keep my mind focused on the long game.

But seeing major indexes reach the same value they had in last. late 2021 makes my primitive mind scream panic. And I feel like I need to be mentally prepared for another fall. Do you have any advice for this novice investor? I have actually quite a bit of advice for this novice investor or at least a few comments. Advice may be generous. First off, investing is not a short term. First of all, I think this is a great question. I really do. I mean, this is a new investor who is not taking the lessons perhaps of 2021. I mean, they were bad lessons, but the lessons of 2021 when people saw everything going up and up and up and up was to sit back, party, and go, this will always continue.

So I really like that this question is actually Marco is taking the opposite attack. I think that's a healthier way to start. I also think, Ricky, if we're not, I think dopamine fiesta might be my new favorite term, which I'm going to be probably using everywhere for the next three months. So really what's going on here is you're making a couple of perhaps, you're making a couple of perhaps unconscious assumptions. You're assuming that it has to fall, that things have to fall because things have been really good. Number one, things never have to fall, just like they never have to rise. Things are going to kind of unfold the way they do. And the way that we know

markets and stocks do unfold is we know that, you know, three out of four years, you know, stocks go up, one of four years, they go down. They went down pretty good last year. So, you know, some of this is a reaction to how bad things were last year. The other thing is investing is not a short-term sprint. We hope that investing is a lifetime pursuit, pastime series of accomplishments. I've been doing this personally for about 25 years. I've been doing this publicly for almost 20 years. I've seen a lot of markets go up.

I've seen a lot of markets go down over the long term. We know that the indices generally do about 10 to 11 percent annualized, assuming dividends reinvested, and that is without any picking of our spots, picking individual companies. I'm just talking about indexes. And Marco is talking here about indices. But then we can start looking at individual stocks. And I'm keying in on where he says, quote, isn't everything overvalued right now? I will heartily say, no, everything is not overvalued right now.

I'm saying that as a stock picker who is doing a public stock pick every two weeks. Now, okay, this might be a case of, you know, if you go to the barber and ask if you need a haircut, what are they going to tell you? They're going to tell you need haircut. You ask an investor are things, everything overvalued? I hope they will say, most people will say, most investors will say, no, not everything is overvalued. So, just based on a market return, I think Marco is fine. As long as Marco is this dollar cost averaging, looking over the long term, you'd be

dollar cost averaging every paycheck, every month, whatever, into stocks for the long term. And that's just indices, okay? And then if you want to start picking individual stocks, we're going to talk about a couple in a minute here, I think there's opportunity all over the place in individual stocks. I do tend to look in the smaller areas of the market. So, smaller stocks, maybe midcaps at the largest. But I think there's all kinds of opportunity if you have the right mindset. And I hold that the right mindset here is to be a lifelong purchaser, an owner of stocks,

a lifelong investor. So I think I understand why Marcos perhaps a little bit perturbed, because it can be, you got to think, oh, it's got to go down. The answer is, remember, this is independent events. It doesn't have to go down, just like it doesn't have to go up, be a lifelong, learner, be a lifelong investor. And the last thing I'll say is, avoid trading in and out. Because trading in and out, we know that that is hazardous to our wealth.

People who sell everything because they think the market has to go down and then it doesn't. Then they buy back in 20 or 30 percent higher. And that's when the market goes down. So avoid trying to make decisions based on what you assume the world is going to do. Because I promise you, whatever you assume, whatever everyone assumes, I promise you going to get some or all of it wrong. Jim, if you ever want to start a jam band with me, I think dopamine fiesta is a strong candidate for a name.

Absolutely. Let's move to MedPace. MedPace reported yesterday. It's a medical research company based in Cincinnati, Ohio. It runs clinical trials and contract research for biotech, pharma, medical devices. The stock had an all-time high today. Some highlights from the quarter included revenue being up by a third from last year. Its backlog of projects reached 2.6 billion.

That income hits 61 million for the quarter. That's up about 20% from the prior year. What stands out to you? I know you follow this company closely. I do. You say it hit an all-time high today. I haven't actually looked. So, oh, well, that's too bad, isn't it?

I say that facetiously, tongue-in-cheek because this is a two-time recommendation for the service I head up, which is Hidden Gems Canada. Once was early in the pandemic, I think we got on the scorecard about $65 to $70. The next time was just about a year ago when I was pounding the table because this was a company that was dramatically undervalued to go back to what we were talking about for Marco earlier. I think we got the scorecard the second time around 140, if I remember correctly. This is a favorite company of mine. I really like what Dr. August Trundle, who is the CEO and the founder of this company, he's

been the only CEO the company's had since he founded in 1992. Really like what they're doing there with their business. I like that he seems to like to tweak analysts who asks silly questions, which always amuses me. So, you know, this is, as you say, revenue is up by a third from last year. Yes, you know, this is a growth story that a lot of people, until maybe fairly recently, haven't noticed is a growth story. The backlog of projects is worth about $2.6 billion.

I prefer to express it in terms of book-to-bill ratio. So the amount of new work they've booked in any given quarter versus the amount of revenue they build out. That's at about 1.25 times as of this quarter. Slightly less than last quarter, slightly more than a couple quarters ago. But what the number of when a book to bill, anything over 1, 1.0 indicates a growing company. So again, we're back to a growth story and all things equal, a book to bill ratio of 1.25 says you're going to get 25% growth in the near future. Net income, yes, is up about 20%. That's pretty good. But what really stood out to me about MedPase this quarter because I was reading the transcript

this morning from the conference call. And remember I said that he likes, Dr. Trundell likes to tweak analysts. And I've seen him tweak analysts in the past over things like not growing fast enough for them. And he's like, well, we're going 20 plus percent. We're very comfortable. What do you care? Another time talking about Ibada where, you know, he says, our Ibada is real Ibada. We don't do these adjustments that everybody else likes to do. But this time around, one of the analysts on the call said, you know, basically said, are you taking market share? It's a very generic question. And Dr. Trundle responded back with, look, this is a quote, look, I don't know what that really means. You know, and we've on an entirely organic basis, we've outstrip the growth of any of our peers.

And I guess the way most, I hear most analysts talk about it, it's bookings that are share. On that basis, I guess we've been losing share for a decade, but I tend to look at things in terms of revenue and profit. And there, we appear to be taking share, but I can't can't quantify what that represents. So, basically, I'm going to truncate that and say, you know, Dr. Trundle basically telling the unnamed analyst on the conference call, stop asking silly questions. That's how I too long didn't read that. But no, I think it's a great quarter. They talked a little bit about the health of their customers, the people who are booking for the contract research that MedPace does. He said, Dr. Trundle said, after a couple of quarters where it looked a little lean,

It says, no, everything's looking pretty good this quarter. Everything has come back. So I think it was a really solid quarter. I was a little excited when I saw last night after they reported earnings. I was a little excited because the stock immediately reacted was down about 9 or 10%. But I did see in the pre-market this morning that kind of a race. And as you say, it's hit all-time highs. I have now looked since we started this conversation.

And yeah, it looks pretty good. This is again, again, to go back to Marco, this is the theme here. back to Marco from the third. This is now a company I have owned personally for over three years. It's a company that, as I mentioned, has been recommended multiple times, at least in the service that I run. This is a company that I intend to ideally hold for another decade plus if the fates align and allow us to do that. And so an earnings report like this, I'm really happy about it, but part of me is a little wistful. I was kind of hoping we get another opportunity to add some more. But yeah, looks pretty good. And we look forward to like an, a good, like, a

like I said, another decade plus of what's going on here. You really like CEOs who hate earnings calls is what I've been picking up for this. I really do. Let's move on to the auto industry, Jim, because General Motors reported today, but that's too far on the beaten path. Let's turn our attention to AutoLiv, ticker ALV. This is the world's largest automotive safety supplier. They like seatbelts and airbags.

This is the farthest thing from an exciting story. They reported on Friday. Seems like they have serious network effects, though, because they sell to all major car manufacturers. I was going to say, you're saying it's not exciting enough. How dare you, sir? Who doesn't love airbags and seat belts? Of course, airbags are not just what's in the passenger side or in the steering wheel now.

There are curtain airbags in cars. There are underneath airbags. There are other types of airbags that basically work with the seat belts and the pretensioners in the seat belts such that your seat belt actually in the event of a crash. This all happens in milliseconds, of course. in the event of a crash, your seatbelt actually lets out to allow you to actually move forward, which sounds like, no, we want a seatbelt holding us down. The seatbelt actually lets out so you actually aren't, it doesn't hurt you as you come to a sudden

deceleration and stop. The seatbelt lets out. The airbag deploys, so that protects you from the frontal crash say, and then the seatbelt grabs you and pulls you back. And this all happens in milliseconds. It's really what Autolib has done in full disclosure, I've owned Autolibs, and Elib shares personally since 2006. I've purchased, again, multiple times. This was a great quarter for them. The strides that they have made in terms of automotive safety over the years is fantastic. There's airbags now in the exterior of cars, for example, in some models to protect pedestrians who might get in the way. AutoLiv is developing as well airbags for motorcycles, which is interesting. But yes, as you mentioned, they are in every manufacturer,

practically every model. I think there's some, it's been a while since I've seen this stat, so it might be a little bit out of date. But I believe that the last number I saw, there's some AutoLive content in 50% roughly of the vehicles on the road. So, whether you're a GM fan, whether you're a Ford fan, a Fiat fan, a BMW, even a Tesla, there are products from AutoLive in practically every make and model that's out there. So, yeah, and this was an excellent quarter. A lot of cash generated. It's much better than last year.

Revenues were up significantly. I'm just pulling up here. Revenues were up 27%. Cash flow went from a loss a year ago to almost $380 million. Adjusted earnings per share were pretty good. You know, a lot of this. And a lot of this, if you looked at what happened to the auto industry during the pandemic, how the inventories kind of got all skewed and pulled apart, if you, you, you look at the

If you just kept the faith and said, you know, good companies, everybody had some issues during the pandemic as we've kind of emerged from the pandemic stoppages and shortages. Good companies tend to reassert their good company characteristics. That's what AutoLiv has done. Really happy to see what they did this quarter. So that's a little gushing, I suppose. Highlighting and improving global supply chain looks like the kinks are getting worked out there. Jim, traditionally though, auto stocks are highly, highly sick.

cyclical. Why don't you think this is a company to play those cyclical games with? Because essentially of their breadth, they have, you know, there has been periods where this stock has not been a great, a great purchase, as every company has prices where you probably shouldn't purchase a stock. But no, this one has been the breadth of their offerings, again, across all major makers and many of their makes. The fact that there has been a long-term trend going back three decades now of increasing safety content per vehicle. You know, you think back to the 80s and 90s when you sit back to the 70s when, you know, seatbelts were mandated and then, you know, you started having airbags generally only on

the driver's side. Okay, now we're going to add the passenger side. Okay, mid 2000s, they start adding curtain airbags on the side. Like I said now, there's now a knee airbag in certain makes and models to protect your knees in the event of a frontal crash. exterior content or the exterior bags. Plus, you know, we, you know, our cars wear out. We tend to like to buy more cars and the cars today have increasing safety content per vehicle than they did in the past. But again, you want to add to your holdings when prices make the most sense.

If you are paying today's price for AutoLiv, it's not bad, actually. Today's price is pretty good. But if you bought, say, in the wake of the global financial crisis, 2008, 2009, that was an excellent time to buy. You wanted to buy, say, the middle part of the decade, 2015, 2016. I hope you've enjoyed the dividend you've received because you haven't really gotten a lot of, you know, from that purchase price. So, as with everything, price matters, valuation matters. But, you know, over the long term, this company has been, frankly, a winner. Jim Gillies, appreciate your time and your insight. Thank you.

Quick note before we get to our next segment. Sometimes it pays to wait for a pullback. Our analysts at Motley Full Stock Advisor have compiled a list of five stocks, whose prices have tanked but still have strong fundamentals and potential growth ahead. Just one example is a company that lost more than three quarters of its value despite showing surging revenue. We're revealing this stock along with four more in our new five pullback stocks report, available free only to Stock Advisor members. simply go to fool.com slash pullback to learn about these picks. We will also put a link in the show notes.

Now, do you have a good 401k? Robert Brokamps breaks down the numbers and the features you probably aren't using. If you want to have the same lifestyle and retirement that you had while working, you need to save a lot of money. Yes, Social Security will replace around 35% to 40% of your pre-retirement income and even less for higher income workers due to the way Social Security is designed. So the rest of the money you need will have to come from savings. The best way to save for retirement is to contribute to a tax-advantaged retirement account. So how many workers have such accounts? According to a survey from the U.S. Census Bureau, in 2020, 18% of working-age adults had an IRA. 35% of working-age adults had an employer-sponsored defined contribution plan

that are known as something like a 401K or 403B or the federal Thrift Savings Plan. So there are a couple of takeaways from those stats. Number one, the majority of workers do not have a retirement account. And that's pretty scary. But the second takeaway is that the most common retirement savings account is an employer-sponsored to find contribution plan like a 401K. So for most workers, the quality of that account and the extent to which they take advantage of it will be key determinants of the quality of their retirements. So, bro, let's say you're in the one-in-three workers who have a 401K, 403B, that kind of thing. What makes for a good 401K? Well, the interesting thing about these employer-sponsored

accounts is you're kind of stuck with whatever the employer provides. Now, the regulations from the IRS and the Treasury Department, those folks allow for all kinds of features and frankly, a good deal of flexibility, but it's ultimately up to the employer to determine the costs and features of the plan they offer. So to get an overview of the retirement plan landscape, let's take a look at some key stats from vanguard's recently published, how America, S-Saves report, which is an analysis of the 5 million accounts within the 1700 defined contribution plans that's administered by Vanguard as of the end of 2022. Of course, Vanguard isn't the only employer or the only provider.

But what's going on in these plans, I think is likely somewhat representative of the overall 401k universe, especially within medium-sized and larger employers. Okay, so the first thing people want to know about their 401k is, are they going to get a match? And according to Vanguard, at least for the plans they administer, the good news is that 95% of 401ks offer some kind of a match. And for almost half of them, you don't even have to participate in the plan. You don't have to contribute anything to get the match. The employer just throws it in.

For the others, you'd have to put in some money, and then you'll get a match based on a formula. And there are over 100 different formulas in the Vanguard plans. But the most common is that if you contribute 6%, your employer will throw in another 3%. So the average matching rate when you throw in the matches where the employer just throws in something versus how much you have to get as a match of your contributions is 4.5%. So that's pretty good. Employers are throwing in 4.5% of a salary into the 401k. Another key feature these days, in my opinion, is the percentage of plans that offer Roth accounts. That's 80%. That's good. That goes up a little bit every year. It's still amazing to me that 20% don't offer the Roth, but I think we'll get to 100% at some point. Now, one of the tricky parts about putting money in a 401K is that you do have to generally leave it a loan until you reach 59.5. There are some ways to get the money earlier. One of those is through a loan, and 83% of plans allow for you to borrow most loans. It's up to 50%

of the vested balance or $50,000, whichever is less. The good news about borrowing from your 401 is even though it's called a loan, you don't have to apply for it. You can just get the money. And the interest on this low, you pay to yourself. Downside is you do have to pay it back. If you don't pay it back, it's considered distribution, and you'll pay taxes and maybe penalties if you're not 15 and 9.5. And then another way that you can get the money out if you need it is through something called a hardship withdrawal. And 95% of plans allow this. And it can be for all kinds of different things, but you have to check with your plan to see what is considered a hardship so that you can

take the money out. The thing to remember, though, is with a hardship withdrawal, you still pay taxes and you might still have to pay the 10% early distribution penalty if you're not 59.5 if the reason for the hardship withdrawal doesn't fall under a certain approved lifts list by the IRS. So be very careful with hardship withdrawals. So let's say you're not taking the money out. You're deciding how to invest it once the money's in the 401k. What do we know from these studies about what people are doing with their money in those investing accounts? Right. And this is another challenge of 401k. And that for most of them, you just have to choose

from the investments that are offered. According to Vanguard, the average number of funds offered within their plans is 17.4. Then, the average number of funds is actually used by a participant is just 2.4. So they're not choosing that many funds. Now, 20% of the plans do offer a self-directed brokerage account on the side. And this is great because it's like any other brokerage account. You can buy stocks, other mutual funds, ETS, a lot of flexibility. And I think we as Motley Fools would wish that more plans.

plans offer this because then we could buy stocks within our 401K and not just the mutual funds that are offered. That said, the evidence from Vanguard is that even for the plans that offer this, it's actually not that many people take advantage of it. If you're curious how much these folks are investing in the stock market across all Vanguard plans, 72% is invested in stocks. Now let's move into perhaps the most popular investment within 401ks these days, and that is a target date fund. So a target date fund. Each target date fund has a date in it. And then within that fund, you will have other mutual funds that provides sort of a prudent asset allocation based on that retirement date.

So for far away retirement dates, it'll be very aggressive, mostly in stocks, some cash and bonds. And then as you get closer to the retirement date, it gets more conservative. And it's very diverse. I have a large cop, small caps, U.S. international, all kinds of stuff. Nowadays, 96% of plans offer target date funds. The percentage of participants who have access to a target date fund and are using one is 83, And for 59%, they're just investing in the Target Date Fund and nothing else. Even if you walk your way up the income spectrum, folks making more than $75,000 a year,

about half of them are in a single Target Date Fund. And many of these are workers in their late 20s, even to their early 40s, bro. And I would imagine that a Target Date Fund probably isn't the best option for all of their money because it includes things like debt instruments and bonds, which they may not need as a younger worker. Yeah, even the most aggressive of target date funds. People who are going to retire in 2060 will have a good 5 to 10 percent of invested in cash and bonds. And theoretically, as long as you have the risk tolerance, you probably don't need cash in bonds at that point. And as you get closer to the retirement dates, they get more conservative. And some of them have only

40 percent in stocks by the time you reach the retirement date. And that's probably too conservative for most fools as well. So it definitely makes sense to look at the fund, make sure you have a good one, does it really reflect your risk tolerance? And as you become a more advanced investor, you may not need them at all. All right. So we've talked about some of the benefits that many get from their 401k's Roth accounts, matches from their employer, even brokerage accounts. But how are people doing when it comes to taking advantage of those features? The good news is that for the most part, if people do have access to a 401k or that type of plan, they are participating. In Vanguard, 83% of eligible folks are participating. How much are they

saving? Well, the median employee contribution rate is 6.2%, and the average is 7.4%. Why the difference? That's because a relatively small handful of very wealthy people are super savers and they're pulling up the average. So that 6.2% medium is probably more reflective of the typical worker. That's just what they're putting in. Doesn't count the employer match. The percentage of workers who contribute more than 10% is 24%. And the reason I'm throwing that out there is we probably all know that most people are not saving enough. Most people should be saving between 12 and 15%. And most people are not there, even when you throw in the employer match. If you throw in the employer match, according to Vanguard, the median person is saving about 10%. Again, you should be saving between 12 and 15%. Now, how can

you get more money in your account? Well, it makes sure you're taking full advantage of the employer match. And at Vanguard, only 69% are taking full advantage of match. That means 31% are not contributing enough to get the full match. And to me, that's like getting a bonus check and deciding not to cash it. I mean, I fully understand that some households are struggling, financially doing to all kinds of factors. But for those who are not and not getting the full match, contributing at least that much is a no-brainer. For other people who are behind in their savings, once they reach their 50s, they can contribute more. This year, in a 401k, you can contribute another $7,500 if you're 50 or older. What percentage of folks are taking advantage of that? 16%.

I find that kind of low as well, because once you reach your 50s, you're probably in your peak earning years. Ideally, the kids are out of the house, out of college. This is the time for you to become a super saver to catch up, but it looks like only 16% are taking advantage of that. And then there's the Roth accounts, right? We already said 80% of plans offer it, but only 17% of participants are contributing to a Roth account. So that's a negative view of the Roth account, bro. However, about five years ago, just 11% of people were contributing to those. So, it's either, what is it, about less than one-fifth of people are using a Roth account,

or there's been a 50% increase in Roth account usage over the past few years, depending on how you want to frame it. Yes, okay, yeah. So that is good news, and I think it's going in the right direction. And why do I think more people should be contributing to the Roth? That's because we're at historically low tax rates. Tax rates are definitely going to go up. But at the end of 2025, by law, they're going to go up unless Congress acts.

Plus, Social Security is underfunded, Medicare is underfunded, the government spends too much. At some point, tax rates have to go up. So even those in a middle-to-hire income bracket might contribute at least some money to Roth accounts to hedge against those higher tax rates, because remember, as long as you follow the rules, withdraws from a Roth are tax-free. So we've thrown a lot of statistics and features of 401Ks. What's your parting advice? And, you know, what do you do if you've listened to all of this and thought, you know,

my 401K isn't that great. So the good news is you can ask for changes. I've told the story on the show before that when I joined the Molly Fool back in 1999, we did not have a very good 401k. And a group of employees banded together and said to the fools in power, I said, hey, we should have a good 401K. Can we have better features? Can we have better investments?

Unfortunately, the fool was nice enough to listen to us, and we have a pretty good plan now. So I would say, talk to your HR department, maybe get your colleagues on board. Your boss is in the same boat you are. You all will benefit if you have a better 401k. So identify the features that you'd like, identify the investments that you think would be better. And generally, it won't cost your boss more money to do this. They might have to amend the plan and there might be a one-time fee, but basically everyone will benefit if you have a better plan.

And the other thing I will just say is take advantage of your plan, right? You can have the best 401k in the world, but it doesn't matter if you're not participating in it. So, you've got to save at least 12 to 15%. And that percentage is a combination of what you put in as well as the employer. But if you really didn't start saving until your 30s or 40s or 50s, maybe you need to save even more. And then monitor the investments that you're choosing to make sure that you're choosing the best investments for you and the right asset allocation for your risk tolerance. As always, people on the program may own stocks mentioned and the Motley Fool may have formal recommendations. for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey.

Thanks for listening. We'll be back tomorrow.