The average person might be forgiven for associating the term 'Underworld' with gangsters, evildoers, and criminals. But, the truth is that one of the largest assets of US Households is also managed by one of the least transparent industries - cloaked in the guise of legal language, tons of paperwork, and hidden fees and charges.
US retirement assets were close to $18 Trillion in 2007, according to ICI, the trade association of the mutual fund industry. A large portion of these assets are managed by the big insurance companies, and for a lot of them, it has been business as usual. Although technological advancements have been made, the fees charged to participants are rarely disclosed, and plan employers have NO IDEA just how much they're paying for the service!
If you went out and bought a car, you know exactly how much it costs. There's a breakdown of the cost with taxes, extra fees, and other charges very clearly listed. Unfortunately, there's no law dictating that financial firms provide this clear cut breakdown for their 401(k) products. While some legislation has made it through, it's still up to the employer to take an active role in determining exactly how much he or she is being charged. Often, fees and charges are removed directly from the account, and participants don't receive a bill for these. As a result, they NEVER know how much they're being charged. In a recent post, I linked to a Bloomberg video that did some investigative reporting on this very subject.
So, what's a business owner to do to keep abreast of the situation? If you have a 401(k) plan or are thinking of sponsoring one, make sure you get a DETAILED ESTIMATE of all costs, fees, and expenses. The Department of Labor has created a worksheet for you to submit to financial service companies. Get bids from about 3-5 different firms. Have them fill it out and then compare the total costs to make sure you're looking at an apples-to-apples comparison for similar services. A copy of this worksheet can be accessed on the DOL's website at:
http://www.dol.gov/ebsa/pdf/401kfefm.pdf
If you have a current plan, send the form to them anyways. This will help satisfy your fiduciary obligations that require you to be aware of plan costs and to ensure that they're reasonable for the services provided.
It's preferable to have someone who's compensated on a fee basis manage your plan. If a broker is going to be paid a commission, is he going to put you in funds that perform better or that give him a higher payout? It's best to avoid such conflicts of interest. The more you learn about your plan, the better off you'll be. While you have many priorities as a business owner, ensuring you have a good 401(k) plan will not only mean you're paying reasonable fees, but also keeping your employees happy.
Wednesday, June 25, 2008
Tuesday, June 24, 2008
Dude, where's my 401k?
“Say hello to my little friends”. Sounds familiar? Does your mind picture guns blazing and bullets flying? Well, I have a new arsenal of friends too, but they’re virtual. Kind of.
If you’re new to this country, you wouldn’t be chastised for thinking that my friends might be characters in the same league as C-3PO and R2D2. But, they’re the best kind of friends – they make you rich! What’s better than a generous friend? They have varied names such as 412i, 529, 403b, and top dog 401k, who you might have heard about. Call me suspicious, but maybe someone at the IRS is an RPG geek.
We’re now around the corner for the next Prez election. Among the myriad promises for Universal health care and a new pool in your back yard, I’m still not quite clear where all this money is going to come from. And the best part is, the powers that be don’t even ask nicely for your money. They take it out even BEFORE you get a hold of your paycheck! You’ve probably noticed the legal mumbo jumbo – the small print that takes out big dollars before the measly portion that you can actually call yours is given to you. They call them “withholdings”. They should call it “taxes that cost an arm and a leg”. Where the hell does all that money go anyways? And what the hell is it spent on? Better roads, less traffic, more parks, better schools? The only thing I’ve noticed are those new cameras at traffic lights, that nonchalantly take your picture as you desperately put pedal to the metal.
Do you have that suspicious nagging feeling that the rich pay less in taxes? If you’ve formed your own corporation, you get all sorts of little and big perks. But, if you’re an employee, suck your thumb. At least that might give you some comfort. There might be a way to lessen the pain, however. If your company offers any type of retirement plan, go bow down and kiss the feet of your HR admin person, even if she’s as old as your grandma. If it’s a guy, well, use your imagination. Then, ask her (or him) to explain in ‘simple English’ what your options for the plan are. Keep an ear out for the word “matching”. In HR speak, “matching” = free money for you. Unless you’re absolutely drowning in debt because of that new condo you just bought or that Lexus that parks itself, it’s a good idea to contribute to your company’s plan. Make sure you’re well diversified. That’s more HR speak that translates into “Don’t put all your eggs in one basket”.
So, the next time you’re on a date and you’re being quizzed about the economy, you can toss in comments like, “Short term economic variables have a disproportionately magnified effect on stock market prices, but I’m a disciplined long-term investor with a diversified global portfolio”. Even if you have no idea what you just said, it sure sounded cool.
If you’re new to this country, you wouldn’t be chastised for thinking that my friends might be characters in the same league as C-3PO and R2D2. But, they’re the best kind of friends – they make you rich! What’s better than a generous friend? They have varied names such as 412i, 529, 403b, and top dog 401k, who you might have heard about. Call me suspicious, but maybe someone at the IRS is an RPG geek.
We’re now around the corner for the next Prez election. Among the myriad promises for Universal health care and a new pool in your back yard, I’m still not quite clear where all this money is going to come from. And the best part is, the powers that be don’t even ask nicely for your money. They take it out even BEFORE you get a hold of your paycheck! You’ve probably noticed the legal mumbo jumbo – the small print that takes out big dollars before the measly portion that you can actually call yours is given to you. They call them “withholdings”. They should call it “taxes that cost an arm and a leg”. Where the hell does all that money go anyways? And what the hell is it spent on? Better roads, less traffic, more parks, better schools? The only thing I’ve noticed are those new cameras at traffic lights, that nonchalantly take your picture as you desperately put pedal to the metal.
Do you have that suspicious nagging feeling that the rich pay less in taxes? If you’ve formed your own corporation, you get all sorts of little and big perks. But, if you’re an employee, suck your thumb. At least that might give you some comfort. There might be a way to lessen the pain, however. If your company offers any type of retirement plan, go bow down and kiss the feet of your HR admin person, even if she’s as old as your grandma. If it’s a guy, well, use your imagination. Then, ask her (or him) to explain in ‘simple English’ what your options for the plan are. Keep an ear out for the word “matching”. In HR speak, “matching” = free money for you. Unless you’re absolutely drowning in debt because of that new condo you just bought or that Lexus that parks itself, it’s a good idea to contribute to your company’s plan. Make sure you’re well diversified. That’s more HR speak that translates into “Don’t put all your eggs in one basket”.
So, the next time you’re on a date and you’re being quizzed about the economy, you can toss in comments like, “Short term economic variables have a disproportionately magnified effect on stock market prices, but I’m a disciplined long-term investor with a diversified global portfolio”. Even if you have no idea what you just said, it sure sounded cool.
Monday, June 23, 2008
Bloomberg Video on Hidden Fees in 401(k) Plans
http://www.blinkx.com/video/the-truth-behind-hidden-fees-in-401-k-plans/eRJhAzXCFV94aG1CH6pc_A
This is a great investigative report on how ridiculously high fees can really affect employees' 401(k) investments. Employers need to realize that some of them could get sued if they aren't aware of exactly how much they're paying for their plans.
Zubin J. Bomanshaw
Portfolio Manager
Integrity Investment Advisors, Inc.
This is a great investigative report on how ridiculously high fees can really affect employees' 401(k) investments. Employers need to realize that some of them could get sued if they aren't aware of exactly how much they're paying for their plans.
Zubin J. Bomanshaw
Portfolio Manager
Integrity Investment Advisors, Inc.
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