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Month: October 2015

NPR – Is Wall Street Eating Your 401(k) Nest Egg?

The Fiduciary File: NPR – Is Wall Street Eating Your 401(k) Nest Egg?

High fees are eroding the retirement savings of millions of Americans, but employers who shop around can often find much better options for their employees’ 401(k) plans.

by Annette Elizabeth Allen/NPR

Americans collectively are losing billions of dollars a year out of their retirement accounts because they’re paying excessive fees, according to researchers studying thousands of employer-sponsored retirement plans across the country.

The rearchers say part of the trouble is that many employers that offer 401(k) plans to their workers are outgunned by financial firms that sell them bad plans loaded with hefty fees. That’s especially true, they say, for small and midsize employers that don’t have much financial expertise in-house.

At a manufacturing firm in Minnesota, Justin Johnson, a new employee, is enrolling in the 401(k) plan. He has two kids, and his fiancee is going back to school. Money is tight, but he wants to save for the future.

He’s on the phone with a financial adviser that the small company, named MITGI, uses to walk people through the process. The adviser didn’t want to do a recorded interview, but he let us join in on the speakerphone call when we visited the company to report our story. “So what are the fees like in this plan?” Johnson asks the adviser. It’s an important question because high fees can badly damage your ability to make money over time.

Eric Lipke, the president of MITGI, says he hired a financial adviser to set up a 401(k) plan for his 55 workers because he wanted to provide good benefits. The small Minnesota firm offers to match contributions, which behavioral economists say is a great way to encourage employees to save. But Lipke says he’s not sure if the plan’s investment options and the fees are good or bad.

The fees in this retirement plan make it “extremely competitive,” says the financial adviser, who is with EFS Advisors in Cambridge, Minn. That sounds good. But it doesn’t appear to be true. Federal disclosure documents show the fees are more than three times higher than other plans available to employees at companies like this one, according to Ian Ayres, a law professor at Yale Law School.

“He misrepresented the truth,” says Ayres, who studies 401(k) plans. We asked Ayres if making such a claim is even legal. “No,” he says, “to misrepresent the truth in that way is almost certainly not legal.”

A Pattern Of Excessive Fees

Ayres says MITGI got saddled with a bad set of investment options that’s taking way too much out of the workers’ savings. And he has seen this before. Ayres has analyzed 401(k) plans at thousands of companies across the country. “Sadly, the high-costness is both outrageous and all too prevalent,” he says. “There are billions of dollars in excess fees being charged each year to American workers.” And, Ayres says, smaller companies are more likely to have overpriced 401(k) plans.

The problem is that many people running small and midsized companies are not very good at setting up 401(k) plans for their workers. And that’s somewhat understandable. They don’t know much about saving and investing. They’re in business because they’re really good at other things.

Experts say that sitting down and creating a plan of action makes us 10 times more likely to achieve our goals — especially if we tell friends about our plan to create some gentle social pressure to follow through. Here’s a worksheet to help with that.

“We make tools that are smaller than a human hair in diameter,” says Eric Lipke, the president of MITGI, which stands for Midwest Industrial Tool Grinding Inc.

The Hutchinson, Minn., company manufactures tiny drill bit-type tools used to make pacemakers and other medical devices. Lipke oversees the company’s 55 employees. And he says the firm wants to offer good benefits so it can attract and keep good workers.

“To come and work here for 20 years, 30 years, whatever their working career is, and when they’re done be able to say, ‘You know, I had really good health care, I have a great retirement plan,’ ” Lipke says.

But five years ago, when he went to set up the 401(k) plan, nobody at this company knew anything about how to do it. Lipke needed help. He asked business people running other local companies if they knew a good financial adviser. Somebody recommended this one with EFS Advisors, who said he could set up a good plan for the workers. “We chose him and he did set up the plan, and all but one employee participated right away from the beginning,” Lipke says. “So it was something people liked.”

But Lipke realized he still has no idea whether he ended up with a good 401(k) plan for the workers. “We don’t have a really good benchmark to know how good it is or not,” he says. “We don’t know where to find help for that.”

So, as part of this NPR series “Your Money and Your Life,”we found Lipke some help. We put him and his new human resources director, Sheila Murphy, in touch with another professor who studies all this, Kent Smetters, an economist at the University of Pennsylvania’s Wharton School.

Between Bad And Ugly

Smetters studies 401(k) plans and does a personal finance radio show. We asked him to take a look at MITGI’s plan, including fee disclosures and other details. Murphy and Lipke then called him and asked him basically whether their plan was good, bad or ugly.

“I would put it between bad and ugly,” Smetters told them.

“Oh!” said Murphy, dismayed.

“I think I’ve seen worse but not by much,” Smetters said. “This really is a high-fee plan.”

The disclosure documents for the plan show that the workers at the company are paying about 2 percent in fees. That might not sound like much. But Smetters says it’s really high.

Two percent of your entire life savings every year, compounded over long periods of time — 30 or 40 years — eats up half the earnings on the money you invest. So Smetters says this plan is sucking way too much money out of the employees’ pockets. But, he says, “the good news here is there’s a great opportunity here for shifting to a 401(k) plan” that will deliver a higher return over time.

As for EFS Advisors, the firm declined repeated requests for an interview or a comment. But Sarah Holden, a research director with the trade group the Investment Company Institute, says studies finding that many 401(k) plans are overpriced have focused primarily on fees. But, she says, “what none of the studies have done is look to see what was the range of services that were being included.”

So, for example, one plan might cost more than another, but employees might get more access to financial advisers in the more expensive plan. Of course, many plans could still be way overpriced. But Holden says basically businesses need to shop around.

“It’s their job”, she says, to make sure that the fees they’re paying for the services they’re getting “are reasonable.”

Shopping Around

When he spoke with the managers at MITGI, the Wharton School’s Smetters suggested a few reputable financial firms for them to contact that might have plans with competitive prices.

Smetters says MITGI made the same mistake that many other businesses and individuals do. Many people find a financial adviser just by asking friends for a recommendation. This is what we humans do, right? Anybody know a good plumber? Anybody know a good financial adviser?

But Smetters says this is not the best approach. Somebody who has “financial adviser” written on a business card, often “he’s not only a financial adviser,” Smetters says. “He’s also a sales guy who is recommending that your 401(k) plan use funds that have high expense ratios because that’s how he ultimately gets paid.”

That’s why Smetters says he recommends that people and businesses only use what are known as “fee-only” advisers. By law, a “fee-only” adviser must place your interests first and not accept hidden commissions from mutual funds, insurance companies or anyone else. In other words, they don’t get kickbacks for steering you into high-cost mutual funds.

Murphy, the HR director, has now heard back after shopping around for a better deal for the workers at MITGI. She contacted three financial firms, and one, a major firm, gave her a quote for a plan with total fees of 0.64 percent. Her current plan is about three times more expensive.

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How the 3rd Quarter Market Correction Compared to the Common Cold

How the 3rd Quarter Market Correction Compared to the Common Cold

Have you ever caught a cold that seemed to drag on forever? The kind of cold where your sniffles and coughs persist for weeks?

The third quarter is now almost three weeks behind us, and no one was sorry to see it go. In fact, it was the worst quarter for stocks since 2011, with both the Dow® and the S&P 500® down 10% or more at some point. This is what’s known as a “market correction” – a 10% drop from a recent peak.

Like a cold, a correction is never pleasant. And like a cold, a correction can drag on for a long time; though in the past few weeks the markets have been a good bit healthier. But that doesn’t mean the next correction has to be scary, or that we have to overreact to it. If we try to understand it instead, we might be able to fight some of the symptoms the next time.

No cure for the common correction

Even though we can put a man on the moon or find water on Mars, we still don’t have a cure for the common cold. That’s because there are simply too many viruses that cause colds, each with different strains, mutations, and variations.

The same is true of corrections. There’s simply no way to prevent a correction from happening, because the root causes are too many, too varied, and too complex.

Actually, you could make the case that both colds and corrections are good things. After all, if we never got sick from the every-day sort of germs, we’d never develop antibodies, rendering ourselves defenseless against the truly nasty bugs out there. Similarly, market corrections help bubbles from forming. For example, if stock prices kept going up and up, far above the value of the actual companies behind them, people will eventually realize they are paying too much money for something that simply isn’t worth it. That’s a bubble … and like all bubbles, it will eventually pop. The resulting crash is often far worse than a mere market correction. (This is exactly what’s happened to China, as we’ll discuss on the next page.)

Furthermore, market corrections can even be useful for investors, because they create opportunities to buy good companies at lower-than-normal prices.

If you’re like most people, you know that catching a cold is practically inevitable, so it’s not a shock when you do. Here at Minich MacGregor Wealth Management, we’ve been expecting a correction for quite some time, so we weren’t taken by surprise. With that said, it’s still good to know exactly what caused this particular correction, just as it’s good to know how and why we catch colds. After all, fear is in the unknown. So the more we know, the less we have to fear!

Three Sources of Contagion

Scientists think there are three different ways we contract the common cold. The first is through airborne droplets called aerosols. (Unpleasant as it may sound, imagine someone sneezing in your face to get an idea of how aerosols work.) The second and third ways are hand-to-hand and hand-to-surface contact. (In other words, by touching someone or something that has the virus on it.)

As it turns out, there are three main sources behind the correction we’re experiencing:

  • China’s stock market crash and economic slowdown
  • Falling oil prices
  • Uncertainty over whether the Federal Reserve will raise interest rates or not

Let’s take a brief look under the microscope at all three.

China

For a long time, China’s stock market was on an incredible hot streak. With the state-owned media urging them on, many people started pouring their money into stocks. The resulting growth was explosive but unsustainable. As the demand for stocks increased, so too did stock prices. That didn’t deter investors, who kept buying as long as stocks looked like they would keep going up.

Meanwhile, the overall Chinese economy had actually been slowing down, and, despite its size, was in fact relatively weak in terms of growth. Many sectors of the Chinese economy, like construction and manufacturing, had been financed by cheap credit through the nation’s central bank rather than by demand. Debt skyrocketed, and when those sectors (especially manufacturing) inevitably slowed down, investors awoke to the fact that their nation’s economy wasn’t an effective prop for their nation’s markets. This sudden loss in confidence led to a sharp drop in their stock market. This happened in June, and since then, both the Chinese market and the Chinese economy have been on shaky ground.

Why does this affect us? Well, just as the common cold is contagious, so too is economic sickness. In finance, contagion is “the likelihood that significant economic changes in one country will spread to other countries.” This happens because the global economy is so interconnected. If China suffers, businesses and countries that depend on China for their own livelihood will suffer as well.

For that reason, a large part of the recent market volatility stems from the fear that China’s woes will eventually spread to our own shores.

Oil

You’ve seen it at the pump: oil is much cheaper than it was a year ago. That’s a good thing for consumers! But it’s a bad thing for the energy industry, which in turn impacts the markets.

The reason oil prices have fallen goes back to your Economics 101 class: supply and demand. To put it simply, there’s just too much supply and not enough demand. The United States, Canada, West Africa, Russia, and the Middle East all produce a tremendous amount of oil. At the same time, many of the countries that would normally buy oil are experiencing their own hardships, meaning they have less money to buy it. And as we learned in Economics 101, when the supply of something is greater than the demand, prices fall.

Geopolitics might also play a role. For example, take Saudi Arabia, the most influential member of OPEC, the Organization of Petroleum Exporting Countries. Saudi Arabia has refused to cut oil production despite the fact that the world’s supply far outpaces the demand for it. Why? Some analysts think it’s because if oil prices were to rise, it would only benefit Saudi Arabia’s main competitors, especially Russia and Iran, who all need higher prices to turn a profit. Saudi Arabia, on the other hand, can survive on lower oil prices because of their massive cash reserves, and because extracting oil is far less costly for them. This means that lower oil prices harm their competitors while leaving them unscathed, allowing them to dominate more of the market.

Why are oil prices behind the current volatility? Because falling oil prices makes life harder for energy companies and companies closely aligned with the energy industry. The result is falling stock prices for those companies and the markets as a whole.

The Federal Reserve

For over six years, the Federal Reserve has played a game of limbo with interest rates. How low can they go? As it turns out, pretty low … almost to zero. The Fed’s reason for doing this is that lower interest rates make borrowing less costly. This means businesses and individuals can borrow and spend more, thereby pumping more money into the economy. The result? Economic growth.

Keeping interest rates low, however, can be like using a crutch long after a broken leg has healed. It might keep you from re-injuring your leg, but it can also slow you down. Some experts feel the Fed should raise interest rates in order to prevent possible inflation and to encourage banks to do more with the money they are currently holding in reserve. Others feel that raising rates, especially if done too quickly, could derail our nation’s economic recovery, which is still seen as fragile.

The Fed has made noises about raising rates for a long time, and whenever they do, the markets tend to panic. Such is the case here. It’s the fear and uncertainty over what the Fed will do—and what the consequences will be—that contributes to our current market volatility.

Prognosis

So there you have it: three reasons for the market’s malaise. But what will happen next? When will the markets get better?

It’s impossible to know, of course, just like it’s impossible to know exactly when you’ll get over a cold. That said, there are a few historical indications that point to better times just around the corner.

  • September is historically the month when the markets perform the worst, so there was nothing surprising about this correction happening when it did. Since 1950, the Dow has declined an average of 1.1% during September.
  • October through December, on the other hand, is traditionally strong for the markets. That’s because the holiday season brings holiday cheer for retailers. Last year, the S&P 500 rose more than 4% during that time. A year before, 10%.

Does that mean things will magically get better just because it’s October? Of course not. The markets don’t work like that. So instead of trying to predict the course of the common correction, let’s focus on what we can do to combat it.

  1. Remember that investing isn’t a race, it’s not a game, and it’s not a sport, even if the media often covers it that way. Investing is a discipline. Proper investing, in fact, is a lot like taking care of your own health. It’s about making long-term decisions. It’s about not taking foolish risks.
  2. Remember that just as you won’t assume your next cold will turn into pneumonia, we won’t assume this correction will turn into a full-blown bear market. Could it? Sure. But with a cold, you focus on getting rest and drinking fluids, not on worst-case scenarios. We’ll focus on staying committed to our investment strategy, being patient, and keeping an eye on your portfolio’s health.
  3. When it comes to our physical health, it’s always a good idea to routinely examine our habits. Are we eating nutritiously? Are we getting enough exercise? Are we going in for regular check-ups? As long as the answer is “Yes,” you can feel pretty confident about your health. With your portfolio, we’ll do the same. Are we invested in good companies? Are we diversified? Are we protecting ourselves from unnecessary risk? As long as the answer is “Yes” (and we believe it is), you can feel confident about your financial health.

The third quarter is over. The fourth is just beginning. There are a lot of reasons to believe the year will end on a high note. But even if it doesn’t, we’ll keep fighting the common correction the way we fight the common cold: by sticking to the basics, paying attention, and not overreacting.

By doing that, we can make the symptoms a lot more bearable.

Of course, if you have any questions about the current volatility, how your portfolio is doing, or what the future may hold, please feel free to contact us. In the meantime, Our team will keep a close eye on the markets. we may not be doctors, but that doesn’t mean we can’t give your portfolio a physical!

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It’s not quite as exciting as the work of a fighter pilot, but we do see some similarities.

It’s not quite as exciting as the work of a fighter pilot, but we do see some similarities.

When asked what flying a fighter jet from an aircraft carrier was like, Capt. Korey Watkins, a navy pilot once said, “It’s 60 seconds of excitement followed by hours of sheer boredom.” What she was referring to was the typical Combat Air Patrol or “CAP” flight plan which starts with them being launched by a giant steam catapult under the deck that launches their plane up to about 170 mph to get airborne an up to a safe altitude. Then they fly a prescribed pattern over the area to be monitored for several hours to protect the ship from threats.

As financial advisors who closely monitor and respond to the financial markets for our clients, our timeframes may be a bit longer but in some ways we can identify with her statement. This past August was a good example. Over the course of only 10 days, the relative strength indicators for the S&P 500 went from being significantly stronger than fixed income (bonds) and cash for more than a year and a half, to the exact opposite with fixed income ending up on top, cash being in the middle and the S&P 500 below both of them. In our world, those 10 days definitely count as our 60 seconds of excitement. It has now been more than 6 weeks and all three asset classes have essentially held those relative positions with only small sideways movements. Like flying “CAP”, we are in currently in monitor mode – watching closely for indicators of significant change.

The next bit of excitement will come when this sideways trend moves up or down. We will either see that a bottom may have formed and the S&P 500’s ranking will be on track to once again exceed that of fixed income and cash; or, the current spread will continue to widen, indicating that the correction is not over. Until then we stay vigilant, monitor, look for threats or opportunities and make a move when the time is right based on the information we have. Our job is nowhere near as dangerous as Capt. Watkins, but when it comes to our client’s assets we take it just a seriously.