The Finance Buff » News

It's Not 529's (Or 401k's) Fault

TFB — Thu, 12 Nov 2009 14:39:00 +0000

Ever since I switched from reading Financial Times to Wall Street Journal (FT subscription ran out; no option to use airline miles), I started encountering more and more sob stories. If this continues, I'll be like Frank at Bad Money Advice.

On Tuesday I mentioned the story about laid-off employees burning through their severance and turning down job offers. On Wednesday I read this article about people stopping using 529 plans because of market losses:

More Parents Are Becoming 529 Dropouts

[Link goes to Google. WSJ will display full article if you come from a link through Google.]

"in the wake of last year's market collapse and some high-profile fund blowups, some investors — and financial advisers — are paring back their reliance on 529 plans and in some cases are considering alternatives."

The article goes on to say people are investing in muni bonds, real estate, and fixed indexed annuities outside of the 529 plans instead.

To which I have to say "It's not 529's fault!" A few weeks back, there was an article on Times magazine about how 401k plan is bad and should be abolished. I didn't have time to comment on it back then. Now I just want to say "It's not 401k's fault!"

A 529 plan or a 401k plan is a container. Whether you make money or lose money depends on what you put in them. A plan is not an investment. When our mainstream media don't make this basic difference clear, no wonder the public is confused.

I also wonder if people came up with the ideas for muni bonds, real estate, and fixed indexed annuities on their own, or they were sold by some financial advisers. I suspect it's the latter.

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Burning Through Severance, Turning Down Job Offers

TFB — Tue, 10 Nov 2009 18:04:01 +0000

While on the commute train this morning, I read this article on Wall Street Journal:

Life on Severance: Comfort, Then Crisis

* Link goes to Google. WSJ will display full article if you come from a link through Google.

It tells us stories about how some people coped with unemployment while on severance pay. The subjects in the article spent just like before, burning through their severance. They also turned down job offers because they didn't like the job description.

Let me know what you think.

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How Much Should Unbiased Financial Advice Cost?

TFB — Thu, 29 Oct 2009 13:29:00 +0000

How many times have you heard "before you make any big money decisions, check with your own financial advisor"? NPR's Marketplace Money program says that all the time. It can't be taken at face value because it assumes that everyone has a financial advisor.

I've never had a financial advisor. I'm guessing the percentage of the population who have a financial advisor isn't that high. If they all say people should check with their financial advisor, why don't most people have one?

1. Too many sharks. For those who have a financial advisor, I'm guessing again that most are not working with a fee-only advisor who acts as a fiduciary and only gives advice in the best interest of the client.

There are many salesmen and saleswomen out there selling expensive products to unsuspecting clients. Advisors who work in bank branches and "full service" brokerage firms are notorious for this. Ameriprise advisors don't have a good reputation either. When people can't tell an unbiased advisor from a salesman/woman, they are afraid of getting burned. They end up not using an advisor at all.

2. Too expensive. If people are not paying the advisor through expensive products, a fee-only advisor can still be expensive.

Some will take you only if you let them manage your investments and pay them 1% of your assets. Some won't take you at all if you don't have at least a six-figure minimum asset level. 1% on $100k is $1,000 a year. 1% on $500k is $5,000 a year. And that's just for investment. There's much more to financial advice than just investment.

3. Easy to DIY. If you set your mind on it, it's not that hard to learn about these financial planning topics, although the same can be said of almost anything: plumbing, exercising, lawn care, you name it.

You can educate yourself by reading books, newspapers, magazines, and now blogs, listening to radio programs, and watching TV and video. You can Google or get on Internet forums and message boards and get all kinds of information.

You have the same problem with not being able to separate the good from the bad if you don't know much about the subject to begin with. You still have to be able to apply what you read or heard to your own situation. By definition the books, radio and TV programs, blogs and Internet forums can only be generic. Thus the "check with your own financial advisor" CYA disclaimer.

For the most part, people are on their own. If news media reports are representative of what's happening in the real world, people on average are not doing a very good job at managing their finances. I would think we will be better off if we can get unbiased advice at an affordable price. The price paid for doing it right will be recovered many times over by avoiding costly mistakes. Still, given that there are many sharks out there and even good advice can be expensive, DIY seems to be the only viable alternative.

How much should unbiased financial advice cost? Suppose I convince you that you can trust me for giving you good quality, unbiased, individualized financial advice. What do you think should be a fair price?

Let's get specific. Suppose a couple want to save for college for a child. They want to know which account type (UGMA, Coverdell, 529, Savings Bonds, Roth IRA, regular taxable, etc.) they should use, which provider, and which investment options they should choose. What do you think they should pay? $0 because people can just Google? $5? $25? $100? $200? $500?

If you have a trusted advisor to whom you can ask unlimited number of questions and get advice whenever you need it, how much should it cost? $0? $10 a month? $20 a month? $50? $100? $200? $500?

I ask these questions not just as a hypothetical. I'm willing to help others with their personal finance questions. If I start giving individualized advice though, I'll have to become a licensed advisor and maybe get a CFP. I don't necessarily have to make much money from it (my full-time job covers my living expenses), but I do want to at least cover my cost of regulatory compliance and liability insurance. However, if people are not willing to pay much for such advice, obviously there's no point of getting licensed and certified and paying the associated costs.

So do you think there is an under-served market for unbiased financial advice? I can think of some friends and family members who can use some advice if it doesn't cost an arm and a leg.

Usually an under-served market exists when there is a big gap between what customers are willing to pay and what it costs to produce what they want. I suspect that's the case in the financial advice market.

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Austin Frakt on NPR

TFB — Sat, 24 Oct 2009 03:46:27 +0000

Remember The Incidental Economist (TIE) who used to co-blog with me here? His real name is Austin Frakt. He's famous now. His blog posts, which I still help host under his own domain name, have been cited in Washington Post, Mother Jones, The Atlantic, and many other high profile places. He's been quoted in Business Week twice. He got a 15-second sound byte on NPR today.

Congratulations, Austin!

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Lesson from the Recession: Keep Your Job

TFB — Mon, 12 Oct 2009 13:35:00 +0000

In The Right Lessons and The Wrong Lessons, I said the right lessons from the recession and the bear market are "so simple they don't need any further explanation." A reader Mark suggested that I shouldn't be so dismissive.

"If you tell him/her it's so simple that he should be ashamed of himself for failing to grasp your full meaning, then your are negating that investors desire to learn – in effect saying 'do it because I said so.'"

After thinking about it for a little longer, I agree with Mark. So I decided to write down what exactly I learned personally from the recession. These will serve as notes to myself in the future. I apologize if the lessons look so obvious. I hope there is enough personal flavor to make them more interesting.

The first lesson I learned: Keep Your Job.

After the recession, I come to realize how important it is to keep my job. My employer had a RIF in 4th quarter 2008. Fortunately I survived. The company didn't pay a year-end bonus like it used to. Nor did it give a "merit increase" to anybody in 2009. I expect my 2009 income to be 10% less than what I earned in 2008.

A 10% pay cut is nothing compared to losing a job. This blog would get more interesting with my unemployment stories, but it wouldn't be fun for me. I have an emergency fund. I prefer not to use it. I don't want to find out how unemployment insurance works in my state.

I want to make sure I add enough value to my employer so they would keep employing me. I used to goof off sometimes during working hours and post on forums, tweet, or reply to comments on my blog. I'm weaning off from such activities. I installed a Firefox browser plugin called LeechBlock. It's a voluntary Internet filtering program. You tell it which sites to block between which hours on which days and it will block them.

It's fun to post on forums, tweet, and reply to comments on my blog. I get some thank-you's from time to time, but those won't pay the bills. Although I get some money from ads on this blog, the ad dollars are far too small relative to what I earn from my job.

I'm aware that some successful bloggers can earn over $200,000 a year from their blogs, I don't think I will ever get there. I'm a very shy person. I'm not good at self-promotion or networking. I take a "if there's value, people will see it" approach (or is it "if you build it, they will come"?).

In late 2008, I was asked to contribute a chapter to the book The Bogleheads' Guide to Retirement Planning. This book got published recently (I'm still waiting for my copy). It turned out that among some 20 contributing authors, I'm the only one under a pseudonym. Of course I would love to see my contribution recognized by my real name, but I don't want to jeopardize my job in any way, now or in the future.

Not knowing what lies in the future, I decided to keep my non-work related activities from my future employers. I don't think it makes any difference to readers of the book or this blog what my real name is.

For the foreseeable future, I will earn my living from my job. I'd like to keep my job and grow my employability. If you see that I post on the blog or forums less frequently, please excuse me. Keeping my job is really important to me.

[This post contains a link to Amazon.com. Amazon.com will pay a commission of 4% - 6.5% to me if you make a purchase within 24 hours after you click on the link.]

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Financial Times Business Book of the Year 2009 Shortlists

TFB — Fri, 18 Sep 2009 13:24:00 +0000

Every year, Financial Times newspaper gives out a Business Book of the Year award. It's officially known as the Financial Times and Goldman Sachs Business Book of Year Award. Last year's winner was When Markets Collide by Mohamed El-Erian of PIMCO.

The shortlist of candidates for the 2009 award includes:

	Animal Spirits by George Akerlof and Robert Shiller, economics professors at Berkeley and Yale, about how human psychology affects macroeconomics.
	Good Value by Stephen Green, CEO of HSBC, about money and morality.
	Imagining India by Nandan Nilekani, co-chairman of InfoSys, a large IT outsourcing company in India, about India and globalization.
	In Fed We Trust by David Wessel about the recent financial crisis.
	Lords of Finance by Liaquat Ahamed, an investment manager, about the Great Depression.
	The Match King by Frank Partnoy about a fraud in 1920s.

I haven't read any of these books yet. A few of them sound interesting.

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Feel-Good Retirement Savings Initiatives

TFB — Mon, 14 Sep 2009 13:35:00 +0000

Over the Labor Day weekend, the Obama administration announced some new retirement savings initiatives that are supposed to help Americans save money for their retirement. Although they are all well intentioned, I doubt they will have a material impact on the overall picture of retirement savings in America. I call them feel-good measures because the new initiatives merely clarify existing laws and regulations. Let's look at them one by one.

1. Sample language for 401k plan auto-enrollment. The IRS gave employers some sample language for adding auto-enrollment to their 401k or SIMPLE IRA plans. The IRS also made it clear it's legal to automatically increase the employees' contribution percentages.

Half of the workforce does not have a retirement savings plan at work. Auto-enrollment can't help if you don't have a plan to begin with. For the other half, the employers will still have to take the trouble to add auto-enrollment. After that, auto-enrollment usually only covers new employees. Employers very rarely re-auto-enroll existing employees if they are not already enrolled. So we are only talking about a low single digit percent of the workforce here.

Changing somebody's paycheck is always tricky. According to a recent study by Vanguard, only 20% of the plans have auto-enrollment at the end of 2008. Of the plans that have auto-enrollment, the typical default contribution percentage is 3% of pay. 3% is better than 0%, but it is still far too low.

2. Buy I Bonds with tax refunds. The IRS will add a checkbox to the tax form and upsell taxpayers on purchasing I Bonds with their tax refunds, in the same way airlines sell seat upgrades and travel insurance.

If the taxpayer wanted I Bonds for their tax refund, they can always buy the bonds themselves after they get the refund. The checkbox on the tax return just makes it a little easier. However, the I Bonds bought with tax refund are still subject to the same $5,000 per year per person paper bond purchase limit. They still can't be sold until after 12 months. Some people are due for a surprise.

3. Contribute unused vacation to 401k plan. When you leave your job and you have unused PTO hours, you can turn them into 401k contributions instead of getting paid in cash.

Once again, you have to have a 401k plan to begin with. Then your employer will have to amend the plan and allow it. Finally, the contributions from unused PTO hours still count toward your annual contribution limit unless the employer eliminates the cash-out option and automatically shoves the unused PTO hours to the 401k plan. I can't see many employers will choose to do that.

This might help some people who won't have a 401k plan in their next job and don't need the money when they leave their current job. Again, we are talking about a small percentage of people here.

4. New Special Tax Notice about rollovers. The IRS published two new model tax notices for 401k plan distributions when people leave their jobs.

The new notices make rollover sound like the default option and downplay the cash-out option. I don't know if people actually read the notice in their paperwork. It's all nice and well if people read it. I'd also like to know if people who cash out their 401k plan now didn't know about the rollover option or they knew it and still chose to cash out. If it's the latter, the new tax notices won't do any good.

I would much like to see our government stop dancing on the edges and put forward some real reform. I realize the real reform has come from the legislature. Maybe President Obama can push for it after he's done with health care.

How about unleashing that "public option" called the TSP? Let companies who don't have their own plan subscribe to the TSP. That will cover half of the workforce in one fell swoop. Let employees choose between the employer's plan and the TSP. Give some real competition to the high cost plans.

How about liberating the market-based solutions called the IRA? Increase the IRA contribution limit and let people choose between the IRA and their 401k plan. Allow rollovers to an IRA at any time.

What about the company match? If the employer makes the match immediately vested, the match can follow to the TSP or the IRA. If the employer wants to impose a vesting schedule, the match can stay in the employer plan. It's not that hard.

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Stable Value Funds, Money Market Funds, and Saving Too Much

TFB — Fri, 21 Aug 2009 13:22:00 +0000

I read Stable value funds: they look good until you look closer from The Investment Fiduciary. Stable value funds look like money market funds, until there are systematic withdrawals. When that happens, the insurance company can make a negative "market value adjustment" to the fund. If you invest in a stable value fund, make sure you are not among the last ones out.

Speaking of money market funds, Marketplace Money Economic Editor Chris Farrell declared in Fall of the Money Market

"[M]oney market funds are no longer a safe enough parking place for cash."

I still don't understand why safety must be measured in nominal dollars. My arguments are in my previous post Breaking The Buck Is Not a Big Deal. Both bank accounts and money market funds can and do lose money after-tax, after-inflation. You can only spend after-tax, after-inflation dollars.

Right now reward checking and online savings accounts happen to pay higher interest than money money funds, with FDIC or NCUA insurance to boot. But that's a separate issue.

There is a allegation floating around saying the financial service industry misleads Americans into saving too much, just so the industry can have more assets to manage and charge fees on. I was going to write something about it, but Penelope Wang from CNNMoney said all what I wanted to say in Can you live on less in retirement?

The bottom line is that it's a lot easier to deal with money issues when you are working than when you are not. It's also a lot easier to deal with too much money than not enough money.

Professor Kotlikoff of the Saving Too Much fame sells a financial planning software called ESPlanner. I may have to shell out $199 someday to see if it's really revolutionary. I'm skeptical because there is simply too much unknown for the future. Garbage In Garbage Out is a serious problem for any software that involves projecting into the future.

Too bad ESPlanner doesn't offer a free trial. Otherwise I'd be happy to do a thorough review. I know there is a free ESPlannerBasic, but it's not the same.

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Call Out Bad Money Advice

TFB — Thu, 13 Aug 2009 13:07:00 +0000

If you like this blog, you will probably also like Bad Money Advice. I recently came across it and I really like it.

At times I like to set the records straight on some popular myths in the media: missing the 10 best days in the stock market, 401k loan double taxation, Roth 401k, credit score, and so on. In addition to recommending good books, I also report bad books: Elliott Wave, Magic Formula, Rule #1, Strapped.

Sometimes I feel frustrated because there is so much bad advice out there. I'm also afraid calling out personal finance gurus, journalists, and other bloggers may make me appear smug, aloof, or mean-spirited.

I'm so glad Frank Curmudgeon is out there fighting the battle. He takes the bad money advice head-on. He cross-referenced Suze Orman's 2009 Action Plan with her earlier books. He back-tested Phil Town's Rule #1. He's not a fan of the Latte Factor^® (neither am I). He held no punches on other bloggers' goofy posts (I did the same about engine failures).

Well done, Frank, and keep up the good fight! I see some of my readers already beat me to it (SJ, Dave C., Wm Tanksley, …). Check out Bad Money Advice if you haven't.

Should I join the campaign to call out bad money advice or do you think it's a bad form picking on others?

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Selection Bias, The Wanting Mind, Bank CDs, and Socially Responsible Investing

TFB — Fri, 31 Jul 2009 08:07:00 +0000

Here are some of the blog posts I enjoyed this week:

Profiles in Selection Bias at The Incidental Economist – Be careful when you read media reports about statistics drawn from different population.

TIE says the media love selection bias and don't know it. I say they don't care whether there is selection bias because they love the attention-grabbing headlines. Think about the audience. Who has time to really think about it?

Understanding and Conquering "the Wanting Mind" at AllFinancialMatters – How do you fight with getting drawn into the latest and greatest? JLP says "STOP LOOKING for a replacement of what you currently have!"

I agree. I'm definitely a late adopter on almost everything. My computer runs on an AMD Duron processor from 2002 or 2003 with 768MB of RAM. It was a budget configuration back then. It's still working just fine. If something is working, I'm not looking for replacing it.

Warning: Banks Automatically Renew CDs Upon Maturity, 7-Day Grace Periods at My Money Blog – Jonathan found out that many banks auto-renew CDs to very low rates when the CDs mature. If you missed the grace period, the early withdrawal penalty can eat into what you earned in the previous term. What a nice trap!

I'm not a fan of bank CDs. Banks run promotions before they drop down to below-market rates. The mere thought of opening and closing accounts everywhere and leaving my SSN behind gives me pause. If I want a CD, I will buy one in my brokerage account. Not the highest rate, but good enough with no hassle.

Low-Cost, Socially Responsible Mutual Funds at The Oblivious Investor – I don't believe in socially responsible investing, for reasons I mentioned in a previous post Unsure About Socially Responsible Investing (SRI). Now I can't help but wonder if charging excessive fees in socially responsible funds is socially responsible to the bleeding heart investors.

From the Archive

Here are two posts I wrote in October 2006. I think they are still relevant today. If you missed them back then, here's a second chance.

9-Step Plan From Dilbert – How many steps have you checked off? I got eight. I can't believe I still haven't got that last one done.

Book Review: The Only Investment Guide You'll Ever Need – Lot of gems worth reminding ourselves:

A Penny Saved Is Two Pennies Earned
Trust No One
In the financial marketplace, you get what you pay for, if you are careful. If you try to get more, you get burned.

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