How did it come to THIS?

Apart from the few of you who have been living in the rain forest or meditating in the Himalayas, the rest of us have not only heard, read, felt, discussed, and been lectured about the current financial crisis, but may also have been fired or directly affected in some other way.

HOW DID IT COME TO THIS?...where the smartest people with degrees from the fanciest schools, legions of consultants, billions of dollars, and decades of experience PERPETUATED this biggest of all PONZI schemes? Who was asleep at the switch that keeps the lights on in the global economy? Who was steering this financial Titanic when the looming iceberg was barely a speck on the horizon? Will the real perpetrators please stand up?

Alas, for many people looking to lay blame, the answer is close at hand. Go look into a mirror and stare really hard at the cause of this monetary destruction. If you took out a no-doc loan that you couldn't afford, if you were flipping homes or real estate feeling really good about yourself because real estate can only keep going up, if you ran a bank and turned on the risk to goose up your profits, if you were in elected office and could have raised the alarm but kept the party going because of increasing state or local revenues. The list goes on and on....right from the highest levels of governments and central banks that didn't tighten regulations, the insurance companies and brokerage firms that repackaged and sold these mortgages, to the end consumer who went out on a limb and gorged on cheap debt by loading up on expensive houses, cars, and other consumer goods.

The interconnectedness of the global economy only exacerbated the problem. Countries with high savings rates and therefore surpluses were only too eager to purchase the safest currency in the world - US Treasury debt. And the cycle inexorably continued, as domestic banks awash with cash, low rates, and light lending terms distributed it to a voracious public. I'm reminded here of the John Donne line,
"Each man's death diminishes me,
For I am involved in mankind.
Therefore, send not to know
For whom the bell tolls,
It tolls for thee".

To a greater or lesser degree, a lot of us contributed to this mess, and we're the ones who'll need to pull ourselves out. There is no other way. We cannot depend on the $700 billion bailout, the next President, elected officials, company bosses, or family members to pull us out.

For the lay person, I would recommend a back-to-basics strategy. Read and re-read George Clason's timeless classic 'The Richest Man in Babylon'. This book encapsulates the most basic tenets of financial prudence. In fact, it ought to be mandatory reading for all school students, and maybe even for adults. A little re-education might not be so bad after all.

Keep a cash reserve on hand. I would recommend about a 6 month to a 1 year reserve.

Re-evaluate your savings goals, your expenses, your 401k contributions, and other investments.

Simply put, spend less, save more, especially if you're used to maxing out those credit cards.

Although it might be difficult in the current economic environment, seek a part-time job or extra hours at work if possible. Enroll in a class to learn new skills or go back to school for a new degree.

It is tough in this time of dire need not to want to lay blame and punish those responsible. That will come, hopefully, in due time. And the clean up is not going to be easy, cheap, or painless. There needs to be more bloodletting and I predict more despair before this is over. But, humanity has suffered greater tribulation, and we'll emerge from it stronger, wiser, and more resilient. Hopefully, we don't lose the humanity in us along the way.

Zubin J. Bomanshaw
Integrity Investment Advisors, Inc.

Employers: Navigating the 401(k) Underworld

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.

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.

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.