Check Your Retirement Plan at Year End

Is your 401(k) plan ripping you off?

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

For most of us, a 401(k) is like a big rock that we don’t want to turn over. We’re afraid of what may be skittering out when we do.

An untold number of 401(k) plans are charging employees too much to manage and administer their retirement kitties. The gremlins of excessive fees add up over time.

While it doesn’t sound like a lot, a one percentage point increase in plan investment fees can cut your retirement income by 28 percent over a work life of 25 years, according to the U.S. Department of Labor (DOL).

Lately, though, employees have silently been winning battles in getting these fees reduced and restoring hope for a decent retirement. Combined with a new DOL rule that will provide expense disclosure, this has been a watershed year for employees fighting to get a decent 401(k) program.

Some 85,000 employees in the $6 billion General Dynamics Corporation (GD) 401(k) plan recently won a settlement in a lawsuit against the company. The workers claimed that they were being overcharged on fees within the plan.

As part of the settlement, the defense contractor’s insurers will put $15 million back into the plan, which will then be regularly reviewed by independent consultants to see that the employees are getting a fair shake on the fees. The company denies any wrongdoing.

Along with another recent case against Caterpillar, Inc. (CAT) by its employees, the General Dynamics suit is a landmark. This litigation represents some of the first victories by employees over bosses who bury and pass along needlessly onerous expenses in 401(k)s.

The General Dynamics settlement is a keystone because it appoints a watchdog, who is in charge of getting the best deal for employees on plan services. For example, administrative fees will be monitored by an independent fiduciary not connected to the company.

Some plans also charge high fees for middlemen called recordkeepers, who are involved in most 401(k)s. Instead of charging reasonable flat fees, these administrators were getting a percentage of assets under management, which was an awful arrangement for employees. The General Dynamics settlement mandated lower expenses for employees.

“Recordkeeping is a commodity,” says Jerome Schlichter, a St. Louis-based labor attorney who represented the General Dynamics employees and workers in similar cases. “Every 401(k) needs one, but cost has nothing to do with the size of the account. It should be a flat fee.”

Schlichter first filed a wave of similar suits against 14 large employers in 2006. Two of the cases have been dismissed, three are in the process of settlement and nine are outstanding.

These suits have shed needed sunlight on practices that few employees know about and most employers are loath to admit. Here are some things you should check with your 401(k) administrator, CFO or human resources department before the end of the year:

• Do you have retail-class funds within your 401(k)? This is the equivalent of Wal-Mart going into another store, buying something off the shelf and charging you the same undiscounted price. Funds within 401(k)s should be institutionally priced. That means expense ratios less than 0.10 percent annually for a stock index fund and 0.15 percent for a bond fund.
• No-bid funds. Your plan administrator should get the best diversified portfolio at the lowest cost. They should bid out services and fund management on a regular basis to do this. That’s their responsibility under federal law.
• Independent Review. An outside expert such as a fiduciary should thoroughly vet the plan to see that vendors are giving you the best price. Every plan can and should do this.

If you have no other contact with your company’s human resource department this year, make sure they are following up on getting you a fair shake in your 401(k). The savings will add up over time and boost your retirement fund.

Every dollar counts in a 401(k) these days since the average American has saved less than 7 percent of the desired amount for a comfortable retirement, reports a Wells Fargo survey.

In the case of General Dynamics, employees will see an additional $1.2 million in their plan.
Sometimes turning over that rock can be quite profitable.

A Holiday Story

Getting the best return on life

By John F. Wasik (Reuters)
Author of The Cul-de-Sac Syndrome

I was in a homeless shelter recently with my daughters and neighbors serving a hot meal to some folks who didn’t have a roof over their heads.

They smiled gratefully and thanked us as they sampled my pasta recipe and other dishes. This was a frozen moment when I had to ponder the investment one makes not in stocks, bonds and funds, but life itself.

My friend Mitch Anthony, speaker and author of “the Bean is Not Green,” always has great insights on this process. He says we need to take stock of our “return on life (ROL).”

Return on life is about measuring what’s important to you in non-tangible terms. A warm place to sleep. A job. Health insurance. A decent meal with people you love.

To evaluate your return on life, you literally have to stop thinking about money. Just stop. Look at what you have and what you can give. What do you value?

“Everyone has a unique set of values,” Mitch tells me. “We have a vision of life. What adds to or subtracts from it? What are our responsibilities to others?”

To gauge ROL, we need to know how much and how often we value certain things. Are we spending too much time at work or worrying about it at home? Do the things that matter most occupy the least amount of our daily existence? What have we put in the backs of drawers that need to be revealed?

In order for us to have this self-conversation, we need to throw out some ideas that have dominated the financial arena and poisoned our lives.

Forget about forecasts.
Nobody has a decent crystal ball, especially after 2008. The world is moving too fast. You can’t plan your life around a business channel. What are your needs? How can you best address them with current resources and time?

Stop focusing on performance.
So you didn’t get a raise or bonus this year. Did you achieve what you set out to do? Are you getting closer to your goals? Life isn’t a steady upward curve. It really looks more like the stock market, which is a jagged line.

Forget about timing.
Some people can plan careers and they are defined by certain milestones: Becoming a manager or partner, getting the big raise, retiring. Life going forward won’t be that simple. We will gradually retire or work into our ninth decades. We will un-retire and pursue different careers. Work isn’t what it used to be.

The one thing we shouldn’t embrace is regret, that indisputable anxiety that we’ve not gotten the best return on life. Or to quote Stephen Sondheim from A Little Night Music: “Isn’t it rich/Isn’t it queer?/Losing my timing/this late in my career?”

The best ROL leaves us with no residue of remorse. It flows organically, like an idea whose time has come. You won’t find it jumping out at you from the business headlines or a blog.

How do you know you’re making a good life investment? You can feel it in your gut, your neck and your heart. I’m not talking about a mutual fund or bond that may or may not pay you back. I’m talking guarantees with the full faith and credit of what makes you tick.

For some, it may be learning piano or a new language. For others, it may be volunteer work or a trip to Antarctica.

I can tell you I’m finding immense pleasure just cooking for my family and others, taking that daily walk and breathing deeply. I can’t value any of these things in monetary terms, but they have value beyond words. I can measure them in warm smiles.

Most importantly, you can gauge your return on life in terms of what you can do for others. This is the compound interest of giving and it could be anything from a kind word to going to a friend’s funeral and talking with survivors.

There’s going to be so much in life that will make you sick with anger and grief. You’ll get a much better return from your life energy if you can multiply good will. That’s the most valuable asset of all.

Happy holidays and peace, prosperity and health!

Halt HAMP

Cut the government’s home modification program

By John F. Wasik, author of The Cul-de-Sac Syndrome

The government’s Home Affordable Modification Program (HAMP) should be scrapped. It was flawed from the beginning and is not going to get much better in helping people keep their homes. It’s time to start over.

This is not a Scrooge-like gesture, and it certainly won’t decrease the surplus population of foreclosed homes on the U.S. market. The HAMP should be put out of its misery because it’s ill conceived and can be replaced with some more effective measures.

If the White House was truly serious about preserving homeownership, it would have never designed HAMP the way it did. It was loaded with laughable incentives for lenders to lower rates on troubled mortgages, including a $1,000 payment to servicers and lenders. What was the White House thinking? Just getting a decent lawyer to open a file could cost a bank $1,000.

Although the government said it has started more than 3.7 loan modifications, it ignores a stark economic reality: in many cases it makes more sense for the bank to continue to foreclose than to work with the borrower. And the people who are in the worst trouble still can’t afford the loan even at a lower interest rate or are jobless.

Bankers won’t say this, but may prefer foreclosure to modification. Then they can get defaulted loans off their books and eventually lend more money. They can also resell the property once it passes through foreclosure. And during the process, they can assess even more fees for late payments.

The most egregious flaw in HAMP and related programs is that it’s voluntary. In far-too-many cases, banks don’t have to do much of anything except show up in court with their team of lawyers, knowing that homeowners are broke and can’t afford decent representation. Banks don’t even have to return phone calls.

Little wonder that Darrell Issa (R-California), the incoming chairman of the House Oversight Committee, wants to dump HAMP. Let’s say that the government has succeeded in obtaining 500,000 permanent loan modifications where mortgage rates are reduced.

If you round up the number of foreclosures from 2008 to the present to about 6 million, that means that more than 90 percent of defaulted loans go into foreclosure. That’s an appalling record if you’re a government agency trying to save homes. Even if the banks manage to survive federal and state probes into allegedly “robo signing” dodgy loan documents, HAMP still won’t be of much help to struggling homeowners.

Persistent unemployment — at 9.8 percent nationally — is going to push even more homeowners into foreclosure. Even the Fed’s $600 billion QE2 easing of long-term rates isn’t going to stem this ongoing tragedy.

Yet killing HAMP without replacing it with a better program is irresponsible. At least three alternatives loom:

Rent-to-own. Let’s say mortgage servicers are granted the property’s title subject to agreement of the borrower and other interested parties as an alternative to foreclosure. Homeowners are not evicted and become renters at a lower monthly payment. They can rebuild equity and can repurchase at a new market value in the future.

Unemployment Forbearance. While these programs are already offered by some lenders, make them widespread and flexible. Lose your job? You can skip principal payments and only pay interest until you or a spouse/partner are re-employed.

Bankruptcy Write-Off. What if you file to reorganize your debts? There needs to be a provision to write down mortgage balances in some way. You can do that with every other kind of debt.

Any change in HAMP will have to acknowledge that the program does nothing to square a home’s mortgaged value with its current market value. In the hardest-hit areas, home prices have dropped from one-third to one half.

Corporations revalue and dispose of downgraded assets all the time and take write-downs every quarter based on various forms of depreciation. Why can’t homeowners do the same? Turnabout is fair play. After all, didn’t the Fed dole some $3.3 trillion in aid to banks during the meltdown, including some $1.25 trillion in distressed mortgage-backed securities?

Congress has imbued the tax code with multiple tax breaks to promote homeownership. You can deduct everything from mortgage interest on first, second and home-equity loans, escape capital gains taxes in most sales and even write off property taxes (if you itemize).

The biggest break of all would be to legally trigger the right to re-negotiate a home mortgage if a property declines in value. If the American dream is still important to Washington, this is a game changer.

Gold Headed for a Bust?

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

John Wasik

Coming soon: the loud thud of a gold bust

Some time in the future the price of gold will crash and it won’t have a fairy-tale ending for the millions of investors who piled on in recent months.

If I could tell you when gold was going to bust, I’d likely be wrong or bigger than Warren Buffett, so I won’t even try. Just be incredibly cautious now. There are too many signs that gold is frothier than a Starbucks cappuccino.

It’s not that I don’t nod in agreement when gold bugs rant about why their metal holds a special value now. The dollar is in deep trouble as the U.S. sinks deeper into debt. Will Portugal and Spain be the next Ireland on the bailout boulevard? Ben Bernanke may not be able to put a dent in U.S. unemployment or the intractable housing crisis.

And yes, I also know the argument on how gold is nowhere near its inflation-adjusted equivalent of its high in January, 1980. According to the Leuthold Group, gold will have to hit $2,400 an ounce to match the $850 high mark it hit in 1980 in real terms. That doesn’t mean it will, of course.

Yet the back story of the world’s financial insecurity isn’t necessarily about gold being the last or only store of value. It just may be the most popular red herring at the moment.

One flaw in the “gold can still climb to $2,000″ argument is that the last boom was due to the hyperinflation of the 1970s and early ’80s. Everyone who is leery of the U.S. debt flooding the bond market is right to suspect that a new version of stagflation (no growth, higher prices) may be upon us.

Right now, though, we’re in a deflationary mode. This “deleveraging” could go on for some time as demand for credit stays low and foreclosures continue to ravage the housing market. Home prices are still falling in some places and hot money has shifted to stocks and commodities because of record-low yields in Treasury securities and savings vehicles.

I also tend to side with the behavioral view of why gold is so popular. Not only is it a play against the continued pessimism on the dollar, it’s a psychological refuge. People think it’s secure because it’s tangible. There’s still a finite amount of gold in a time when you can still print as many dollars as you want — something the Federal Reserve is doing in the short term.

Then there’s the less-often discussed side of gold. Why are they beginning to sell gold in vending machines? Why is the leading gold exchange-traded fund, the SPDR Gold Trust, up more than 19 percent year-to-date even though inflation is barely 1 percent?

Is there an unholy alliance here between a false threat of inflation and irrational exuberance? I think so. I smell a strong aroma of the dot-com mania.

The real story to me is demand for commodities overall. Every developing country needs copper, tin, coal and a host of minerals to build their infrastructures. So they are bidding up prices from the mines of Chile to the coal pits of Australia. That much makes sense to me and it’s definitely a long-term trend.

So I’m suggesting that you become less of a conquistador obsessed with the sun metal and focus on a broad, long-term (buy and hold) portfolio that includes a basket of commodities. You can protect yourself against inflation and take advantage of commodity-price increases.

My two best suggestions are the PowerShares DB Commodity Index (DBC), which holds a number of leading commodities, and the PIMCO Commodity Real Return Strategy Fund (PCRDX), which holds treasury inflation-protected securities and commodity derivatives. It’s a staple in my individual retirement account to stave off inflation.

As for gold, if you’re a real nervous Nellie, maybe you’ll want to invest directly in the metal through coins (Maple Leafs or Pandas are handsome collectibles that I own) or bullion.

Just keep in mind that gold doesn’t pay any dividends, is not directly linked to corporate earnings and has no intrinsic value. And when the hyperinflation fervor goes away, gold will be about as exciting as its less glamorous cousin: lead.

A man displays gold bars at the Sacombank gold bar factory in Vietnam’s southern Ho Chi Minh city January 22, 2010. REUTERS/Kham