Year: 2008

All or Nothing at All

All or Nothing at All

I had some “down time” today (taking my third child to junior college), when I could sit and think about some of the issues in the markets, when all of a sudden, a weird correlation hit me.? Similarities between:

  • The near bankruptcy of the Equitable back in the early 90s.
  • Neomercantilism
  • The relationship of Moody’s and S&P to MBIA and Ambac.

Now, I write as I think, so at the end of this, I hope to have a theory that links all of these.? For now, let me tell a story.

When I was younger, I worked for AIG in their domestic life companies.? While I was there 1989-92, the life insurance industry was undergoing a lot of troubles from overinvestment in mortgages and real estate.? Many companies were under stress.? A few went bankrupt.? One big one was probably insolvent, and teetered in the balance — the Equitable.? I was the juniormost member of AIG’s team.? I have a lot of stories about what happened, and why AIG lost and AXA won.? If readers want to read about that, I’ll write about it.? For now though let me mention what I did:

  • Produced an estimate of value of the annuity lines in four days.
  • Estimated the “hole” in reserving for the Guaranteed Investment Contract line of business (accurate within 10%, according to the writedown they took later)
  • Wrote an analysis of AXA that indicated that we should take them seriously (probably ignored).
  • Analyzed the Statutory statement, the Cash Flow testing, and Guaranteed Separate Account filing (Reg 128), and came to the conclusion that the latter two were in error.? (Those filings, I later learned, forced the NY department to
    tell Equitable that it had to find a buyer, because they could not believe the rosy scenarios.)
  • Analyzed the investment strategies that the Equitable employed in the late 80s.? (They doubled down.)

Two years after that, I was at the Society of Actuaries annual meeting, where I met a well-known actuary who had worked inside the corporate actuarial area of the Equitable during the critical years.? I.e., he watched and analyzed the assets and the liabilities as they arose.? The conversation went something like this:

David: What was it like working inside the Equitable during that period of fast growth?

Corporate Actuary: It was amazing.? It took everything we could do to stay on top of it, and still we fell behind.

D: Didn’t you think that perhaps you were offering guaranteed rates that were too attractive?

C: We wondered about it, but with money coming in, everyone felt great about the growth.? We simply had to find ways to productively deploy all of the cash flow.

D: But wait.? Didn’t the investment department have a difficult time investing all of the proceeds?? With that much money coming in, the likelihood of making severe errors would be high.

C: Were you a bug on the wall at our meetings?? Yes, that is exactly what happened.? The money came in faster than we could invest it prudently.

D: Wow.? I thought that was what happened, but it amazes me to hear it confirmed.

They offered free options, and surprise, investors took them up on them.? They couldn’t make enough to fund the promises, and undertook a risky strategy in the late 80s that I called “double or nothing.”? The strategy failed, and they almost went broke, except that AXA bought them, pumped in a little capital, and then the real estate market turned.

What’s my point here?? Twofold: one, rapid growth in financial institutions is rarely a good thing; it usually means that an error has been made.? Two, there is a barrier in many financial decisions, where responsible parties are loath to cry foul until it is way past obvious, because the cost of being wrong is high.

So what of my other two cases?? With the neomercantilists, which I have written about more at RealMoney, they entered into the following trade: sell goods to the US and primarily take back bonds.? This suppressed inflation in the US, and lowered interest rates, because their bond buying reduced the excess supply of bonds.? In one sense, through export promotion, the neomercantilistic countries sold their goods too cheaply, and then had little current use for the US Dollars, since they did not want their people buying US goods.? So, they took the money and bought US bonds, probably too dearly.? Certainly so, after taking the falling US Dollar into account.

With the major rating agencies and the major financial guarantors, they are locked in a co-dependent relationship, one that I highlighted in a RealMoney article three years ago.? The financial guarantors are next to a cliff, and the rating agencies have a choice:

  • The guarantors are clearly in trouble, but how bad is it?? Do we push them over the edge to save our franchise, at a cost of a lot of forgone revenue in the short run?
  • Or do we sit, wait, and hope that things are not as bad as the equity markets are telling us?? This could preserve our ability to make money, and the government is giving us pressure to go this way, for systemic risk reasons.? Besides, someone could bail them out, right?

Ugh, I went through this back in 2001-2002, when the rating agencies changed their methodology to become more short-term in nature.? Funny how they always do that in bear markets for credit.

So, what’s the common element here?? Each situation has a major financial entity at the core.? Underpriced goods or promises were made in an effort to attract revenue.? When the revenues came too quickly, errors were made in deploying the revenues, whether into goods or bonds.? The faster and the larger the acquisition of the revenues, the larger the problem in deployment.

In each of these situations, then, there is a cliff:

  • Do the rating agencies push the guarantors over?
  • Does the NY department of insurance force Equitable to find a buyer?
  • Do neomercantilistic nations keep sucking down dollar claims in exchange for goods, importing inflation, or do they finally give up, and purchase US goods, and slow down their own economies, and the inflation thereof?

This is what makes practical economics tough.? Cycles that are self-reinforcing eventually break, and when they break the results can be ugly.? Why else are credit cycles long and benign in the bull phase, and short and sharp in the bear phase?

A Practical Reason to be Aware of ETF Activity

A Practical Reason to be Aware of ETF Activity

In investing, it is important to understand what industries the companies in which you invest are in.? There are several reasons for this:

  • Companies within an industry tend to face the same cost pressures.
  • Companies within an industry tend to face the same revenue drivers.
  • Companies within an industry tend to face the same regulators and political pressures.
  • Companies within an industry tend to face the same behavior from debt-financers and equity investors.

Now, some companies have competitive advantages that are difficult to replicate, but those are not plentiful.? It is no surprise then that equity performance within industries tends to be tightly correlated.

Now consider ETF activity.? The largest ETFs cover whole stock markets, or sectors containing many industries.? The trading can drive the prices of many stocks regardless of the fundamentals in the short run.? The ETFs allow for simple decisions to be made.? “Financials stink; sell the XLF.”? “Technology stinks; sell the XLK.”? “Energy and materials will do well here, buy the XLE and XLB.”

The thing is, in each of those sectors, there is a lot of variation.? Is there a reason to worry about financial companies that focus on mortgages?? Yes.? Does that have anything to do with insurers?? Aside from mortgage, financial and title insurers, no, it doesn’t.? What do chemicals have to do with base metals?? Not much.? Do refiners and E&P companies benefit similarly from a rise in the price of oil?? No, it is the opposite; one buys oil, the other sells.

ETF trading activity can be a benefit to the fundamental investor.? When your companies come under pressure from ETFs because ETF holders sell indiscriminately and the company that you own is not a party to the macro phenomenon that is leading to the selling, it is time to buy a little more.? When your companies rise because ETF buyers buy indiscriminately and the company that you own is not a party to the macro phenomenon that is leading to the buying, it is time to sell a little.

ETFs simplify decision-making for many investors.? Sophisticated investors will avoid the simplification and drill down the economics and the industries and companies that they own, leading to greater profits in the long run.

The Fiscal Elephant in the Room

The Fiscal Elephant in the Room

WSJ budgetThose that know me well know that I have been following the entitlements issue for over 15 years. I feel that the leadership of the American Academy of Actuaries has blown it royally over this whole period, and before, through and before the Greenspan commission (his worst legacy). We had a chance to warn the nation, and did not do it. We allowed actuaries who could do the math, but didn’t understand the politics, to write in our journals, and talk to Congress, and suggest that everything would be fine.

Well, things are fine now, and they might be fine for the next president, but they won’t be fine by the 2020 election.

I am talking about Medicare/Medicaid. Unless there are significant changes made, there is no way that we can afford the promises that have been made.? The graph from the Wall Street Journal (from this fine article), on the right, depicts spending excluding interest.? Including interest payments makes the graph worse, and more so as time goes on.? In general, Americans don’t like sending more than 20% of GDP to the Federal Government.? By 2020, that will no longer be possible to avoid, unless significant changes are made.

This is the same issue that faces every state in the nation (except Wisconsin) and the Federal Government over their retiree health care programs; they didn’t set aside money for the future payments, but decided to pay-as-it-goes.? Now, what choices are there to remedy the situation?? Not many good ones:

  • Raise taxes significantly.
  • Raise the age for Medicare eligibility to 75 or so (don’t phase it in).
  • Means-test eligibility (lousy incentives there, as it is for Medicaid)
  • Eliminate part D now, while there is no imperative to keep it.
  • Create a reimbursement system that forces the creation of a two-tier medical system.? For the elderly, it will mean limited help in their waning years.? Treatments for expensive prolonging of life will have to come out of private sources.? Call it the Federal Elderly HMO.

The likely solution will involve all five policy options in some form.? How it works out depends on how much political resistance the elderly Baby Boomers will put up.? Another political hurdle: much as I dislike National Health Care, that is a wild card in this mix.? That could be the de facto way that limits the benefit payments that seniors receive.

I’m not into doom and gloom.? I manage money that is invested in stocks, and I have to look for advantage every day.? But we have put off real reform of entitlements for over 25 years, and we continue to do so.? Which of our six remaining presidential candidates is willing to talk about reforming Medicare?? I haven’t heard any of them go that way; it just loses votes.? But when it is hitting us between the eyes twelve years from now, younger people will be incented to vote in politicians that will curb benefits.

My investment implication is this: don’t rely on Medicare existing in its current form past 2020.? Plan today for the medical care you will need then.? Unless you have a funded private plan behind you, that means saving for the future costs.

Back in the Black

Back in the Black

No way. If you had asked me two weeks ago whether I would get back in the plus column for 2008, I would have said, “Yes, but in eleven months.” Well, my broad market portfolio is up on the year. Even now, I know that when I write next week, I could be on the other side of the line.

The thing that gives me some degree of confidence at this point relates to what I wrote at RealMoney earlier today:


David Merkel
Rebalancing Trade
2/1/2008 2:56 PM EST

It’s not supposed to work this fast, but I did a rebalancing sale on Alliance Data Systems. Looked really cheap after the merger agreement blew; I guess it was cheap! Hanging onto the balance for more gains. It’s been a weird year so far. On the bright side, I am back to breakeven for 2008, and I have a better, cheaper, more financially sound batch of stocks than I did in mid-2007.

That means something to me. I even think my portfolio has more growth potential than the one I was running with in mid-2007, and I don’t pay up for growth. I do accept it if it is being offered gratis.

There is something different going on in the markets now. It is as if the wind has moved to my back and out of my face. That said, it could just be a bear market rally, or a brief spurt of mid- and small-cap value amid a market favoring growth investing.

Then again, I am grateful to God for the turn; I’ve made a number of good picks and sales lately, and they have paid off more rapidly than normal. With that, I am ready for some retrenchment here, but who knows? My philosophy is to play for maximum advantage; if I have made gains early in the year, I want to play for more. I always hated the idea of indexing if one had a good start to the year. Why cheat your clients? Do your best regardless, and most of the time, it will win.

Hey, I’m just grateful to have made money in 2008. Hope you make money too, and more than me.

Full disclosure: long ADS

Getting an Initial Read on a Deal

Getting an Initial Read on a Deal

I wrote at RealMoney.com today:


David Merkel
What Would Make More Sense to Me, Redux
2/1/2008 10:14 AM EST

Nine months ago, I wrote this: Microsoft and Yahoo! are in several different businesses with modest synergies between them. Buried inside such a merger would be (at least):

  • An Internet advertising company
  • A web/(other media) content producing company
  • An operating system/applications software company
  • A consumer entertainment products company
  • A web search company, and
  • A web marketing company.
  • Going back to our discussion of GE earlier this week, Microsoft does not need more businesses in its portfolio. It needs to focus its activities on what it does best. Same for Yahoo! but their problems are less severe unless they do this merger.

    If I were Microsoft, I would accept defeat, and sell all web properties to Yahoo! If I were Yahoo!, I would spin off all content production in a new company to shareholders. You would end up with three focused companies that would be able to hit their markets with precision, in a business where scale matters inside your market, but not across markets. The ending configuration would be:

  • A software company for everything except the web — Microsoft, which would pay another huge special dividend with the proceeds from the sale.
  • A web search, advertising and marketing company — Yahoo!, which could focus on competing with Google, and
  • A web/(other media) content production company (would it make money?)
  • This to me would be rational, but corporate cash gets spent by self-aggrandizing folks with egos, so this is not likely to happen in the short run. But I think the eventual economic outcome will resemble something like this.

    Microsoft has not shown a lot of competence in the areas that Yahoo! has focused on, and because of their long history of growth, I’m not sure they get how to run a company that is transisting into maturity. I would be bearish on the total concept.

    The market has awarded an additional $3.7 billion to the combined valuations on Microsoft and Yahoo! off of this news. After some time, that premium should reverse, and it will come out of the valuation of Microsoft. But then, I only play in tech when it is trashed, so what do I know?

    Position: none

    =-=-=-=-=-=-=-=-=-

    By the end of the day, that initial valuation premium of $3.7 billion turned into a deficit of $1.2 billion, and that was against a rising market. I’m not that kind of trader, but some deals make sense, and some don’t. When you find one that doesn’t make sense, and the market value of the package rises, one can short both the acquirer and the target, and wait for rationality to arrive.

    That’s not to say that all deals are bad. Value can be added through synergies or improved management, or unlocked through expense savings and more leverage. Microsoft-Yahoo is unlikely to fit any of those descriptions in any major way.

    Book Review: The Volatility Machine

    Book Review: The Volatility Machine

    There are some books that were important to forming the way I think about economic problems, but if I write about it, I feel that I can’t do justice to the quality of the book. The Volatility Machine, by Michael Pettis, is one of those books. Michael Pettis was a managing director at Bear Stearns, and an adjunct professor at Columbia University when he wrote it.

    The book was written in 1999-2000, and published in 2001. It explains how economic activity in the developed world travels into the smaller markets of the developing world, amplifying booms and busts. Coming off the Asian/Russian crises of 1997-1998, it was a timely book. During boom periods, capital flows from the developed countries to the developing countries; during bust periods, capital gets withdrawn. There is a kind of “crack the whip” effect, where the tail feels the change in direction the most.

    Borrowing short is a weak position to be in, as the Mexican crisis in 1994 showed us, as the Fed raised rates and the tightening spilled into Mexico, which was financing with short-term debt, cetes. The same is true of corporations that finance with short debt; they are ordinarily less stable than firms that finance long. The Volatility Machine explains why the same forces apply to both situations.

    Buffett has said, “It’s only when the tide goes out that you learn who’s been swimming naked.” Rising volatility is that tide going out, and it reveals weak funding structures and bad business/government plans. Booms set up the overconfidence that leads some economic parties to presume on future prosperity, and choose financing terms that are less than secure if the market turns.

    Countries that are small and reliant on continued capital inflows are vulnerable to volatility. In the 1970s-1990s, that was the developing countries. Today, the developing countries vary considerably. Some have funded themselves conservatively, some have not, and a number are net capital providers. The US is the one reliant on capital inflows. So what would Michael Pettis have to say in this situation?

    You don’t have to look far. Today, Michael Pettis is a professor at Peking University’s Guanghua School of Management. He is studying China from the inside, and writes about it at his blog (I read it every day, and will add it to my blogroll the next time I update it), China financial markets. Among his most interesting recent posts:

    China’s latest batch of numbers aren’t good

    Chinese pro-cyclicality makes predictions so difficult

    More on why high share prices don?t mean Chinese banks are in good shape

    The new China-Europe-US world order

    Things have gotten grimmer in China

    His views are complex and nuanced, and reflect the sometimes asymmetric incentives that politicians and policymakers face.? When I read his writings on China, I am simultaneously impressed with the rapid growth, and with the potential fragility of the situation.

    So, enjoy his blog if that is your cup of tea.? If you want to learn how international finance affects developing economies, buy his book.

    Full disclosure: if you buy the book through the link above, I will receive a pittance.

    Could Have Been a Lot Worse…

    Could Have Been a Lot Worse…

    One month down, eleven to go?? Can we stick our heads out of the foxhole yet?

    Personally, I was off just a little in January.? Comparing myself against a bunch of value indexes, which did better than growth indexes in January, I did better than all of them.? We’ll see what the future brings, though, these things can turn on a dime.

    So what worked for me?? Arkansas Best, National Atlantic (not out of the woods yet), Charlotte Russe, Gehl, YRC Worldwide, Alliance Data Systems, Reinsurance Group of America, and Honda.

    What hurt?? Nam Tai, Gruma, Valero, Deutsche Bank, Royal Bank of Scotland, and Anadarko Petroleum.

    Common factors:

    • Financials with complexity got hurt
    • Energy was lackluster at best
    • Industrials, Retail, and Trucking did well
    • Value took less pain
    • What got whacked before went up

    One final note here.? Look at this graph from Bespoke.? The “sea change” there mirrors my own turn in performance.? What does that tell me?? Perhaps it tells me that in late 2007 there were a lot of hedge funds liquidating positions that value managers liked to own.? After the end of the year, the selling pressure ebbed, and value seekers came in.? At RealMoney today, both Cramer and Marcin were commenting on they could find stuff to buy when the market was down in the morning.? I agreed; I haven’t seen this many good values since 2002.? I’m not counting on anything here, but I think my portfolio has attractive valuations and prospects.? Much as I am not crazy about the macro environment in many ways, I have some confidence that my portfolio should do better than the S&P 500 in 2008.

    Full disclosure: long NTE GMK VLO DB APC RBS ABFS NAHC CHIC GEHL YRCW ADS RGA HMC

    Seven Brief FOMC Notes

    Seven Brief FOMC Notes

    1) From an old post at RealMoney:


    David Merkel
    Nominate Fisher for the ‘FOMC Loose Cannon’ Award
    6/1/05 4:05 PM?ET

    It was pretty tough to dislodge William Poole, but if anyone could win the coveted “FOMC Loose Cannon” award in a single day, it would be Richard Fisher, after suggesting that the FOMC was “clearly in the eighth inning of a tightening cycle, we’ve been doing 25 basis points per inning, it’s been very transparent, and very well projected by the Federal Open Market Committee under the leadership of Chairman Greenspan,” and, “We’re in the eighth inning. We have the ninth inning coming up at the end of June.” [quoted from the CNBC Web site] Why don’t they have media classes for rookie Fed governors and Treasury secretaries? Even if he’s got the FOMC position correct, typically the Fed governors come out with a consistent message, and then, they cloak and hedge opinions, in order not to jolt the markets.

    Okay, so Fisher dissented.? So he hasn’t had a predictable tone since becoming a Fed Governor.? Big deal.? The Fed needs more disagreement, and more original thought generally, even if it is wrong original thought, just to challenge the prevailing orthodoxy, and force them to think through what are complex decisions that might have unpredictable second order effects.

    2) I hate the phrase “ahead of (behind) the curve,” because there is nothing all that clear about where the curve is.

    3) Watch the yield curve, and note the widening today.? That is a trend that should persist, regardless of FOMC policy.

    4) Rate cutting begets more cutting, for now.? The current cuts will not solve systemic risk problems embedded in residential real estate, and CDOs, anytime soon.? They will help inflate China (via their crawling dollar peg), and healthy areas of the US economy.

    5) Where is the logical bottom here?? How much below CPI inflation is the Fed willing to reduce rates before they have to stop, much less raise rates to reduce inflation?? My guess: they will err on lowering rates too far, and then will be dragged kicking and screaming to a rate rise, as inflation runs away from them.? The oversupply in residential housing will cause housing prices to lag behind the price rises in the remainder of the economy.

    6) Eventually the FOMC will resist Fed funds futures, but for now, the Fed continues to obey the futures market.

    7) The stock market loves FOMC cuts in the short run, but has not honored them in the intermediate-term.

    Time to Begin Increasing Credit Risk Exposure

    Time to Begin Increasing Credit Risk Exposure

    Ugh, today was a busy day.? My views of the FOMC were validated as to what they would do and say, though I was wrong on the stock market direction on a 50 bp cut.? The bond market direction I got right.

    Look at this post from Bespoke.? Ignore the percentage increase, and just look at the raw spread levels.? Better, add an additional 3%+ (for the average Treasury yield) to the current 685 spread, for a roughly 10% yield.? When you get to 10% yields, the odds tip in your favor on high yield.? That said, today’s crop of high yield corporate debt is lower rated than in the past.? Don’t go hog wild here, but begin to take a little more risk.? I was pretty minimal in terms of credit risk exposure for the last three years, owning only a? few bank loan funds, the last of which I traded out of in June 2007.

    With fixed income investing, if I have a broad mandate, I start by asking a few simple questions:

    • For which of the following risks am I being adequately rewarded?? Illiquidity, Credit/Equity, Negative Convexity (residential mortgages), Duration, Sovereign, Complexity, Taint, Foreign Exchange…
    • What are my client’s tax needs?
    • How much volatility is my client willing to tolerate?
    • How unconventional can I be without losing him as a client?
    • What optical risks does he face from regulators and rating agencies, if any?

    One of my rules of thumb is that if none of the other risks are offering adequate reward, then it is time to increase foreign bond positions.? That is where I have been for the past three years, and now it is time to adjust that position.? With respect to the list of risks:

    • Illiquidity: indeterminate, depends on the situation
    • Credit/Equity: begin adding, but keep some powder dry
    • Negative Convexity: attractive to add to prime RMBS positions at present.
    • Duration: Avoid.? Yield curve will widen, and absent another Great Depression, long yields will not fall much from here.
    • Sovereign Risks: Avoid.? You’re not getting paid for it here.
    • Complexity/Taint:? Selectively add to bonds that you have done due diligence on, that others don’t understand well, even if mark-to-market may go against you in the short run.
    • FX: Neutral.? Maintain core positions in the Swiss Franc and the Yen for now.? Be prepared to switch to high-yield currencies when conditions favor risk-taking.

    That’s where I stand now.? The biggest changes are on credit risk and FX.? That’s a big shift for me.? If you remember an early post of mine, Yield = Poison, you will know that I am willing to have controversial views.? Also, for those that have read me here and at RealMoney.com, you will know that I don’t change my views often.? I’m not trying to catch small moves.? Instead, I want to average into troughs before they hit bottom.? If you wait for the bottom, there will not be enough liquidity to implement the change in view.

    With 401(k)s and Other Defined Contribution Plans, Watch Your Wallet

    With 401(k)s and Other Defined Contribution Plans, Watch Your Wallet

    When financial matters are opaque, there must be a large discount to prices representing clarity to interest people to buy.? Unfortunately, with 401(k)s and other defined contribution plans, it is sometimes akin to being limited to the “company store.”? I’ve written about these issues before, both here and at RealMoney.? Here’s a good example of one of them:


    David Merkel
    Pension Consultants: Watch Your 401(k) Expense Levels
    9/27/2006 5:36 AM EDT

    I want to point you to an article of John Wasik’s of Bloomberg. Having worked in the pension business while an actuary at a mutual life insurer, I had the experience of reviewing the pension services proposals of a number of competitors, and of complementary service providers. Most players were honest, but there were a number of players, while technically not breaking the law, would stretch ethics by finding ways to disguise fees by wending them into the change in unit value of the funds inside a deferred compensation plan. Why embed them in the unit value change? Slice up a fee over hundreds or thousands of participants, and over 365 days a year, and it is remarkable how little people notice it, because most people don’t bother to go and look at plan expenses as disclosed in the Form 5500. Even if everything were disclosed in detail there (some charges don’t get unbundled), an individual doesn’t see that the pro-rata expenses are coming out of his hide. Unless the plan sponsor goes the extra mile to try to minimize costs to participants, there is little that an individual can do.

    We had a rule at our firm. We only take fees from one source, and we disclose them. We had a second rule: we only pay commissions once, and they can be disclosed to the ultimate client, or nondisclosed, but not both, but if nondisclosed, the ultimate client must know that.

    Oe reason why we did not hire certain investment consultants was the potential for conflict of interest. We eventually hired a consultant to aid us in manager selection that took no fees from the managers, so we could get unbiased advice. There were other consultants that were less than scrupulous in that matter. Without naming names, we terminated our first investment manager consultant because we learned they would not recommend managers to us, unless they were receiving a fee from the manager. That fee would get built into the expenses would into the unit value, or, come out of my firms profit margins, which were for the good of the participating policyholders.

    Now that was just my experience, so take that for what it’s worth, perhaps I’m just an investment actuary with a axe to grind. If you want a more general view of the problem, you can review this 2005 study of conflicts of interest done by the SEC. Now, as John Wasik notes, “The commission didn’t take any enforcement action after the report was issued, nor did it name any of the firms surveyed.” The problem is still there, and I’m afraid your only advocate is for you to appeal to your plan sponsor to watch out for the best interests of all participants, which is the duty of trustees under ERISA.

    Position: none, but at the mutual life insurer, we had a saying, “We’re out to save the world for 25 basis points on assets, plus shipping and handling.” Beats a lot of other deals out there…

    Now, here is another piece from Bloomberg: Fees on 401(k)s Rock Boomers Facing Flawed Disclosure.

    The difficulty here is that fees on small plans are sometimes high, and defined contribution plans don’t allow for easy examination of the total fee structures.? How much are the investment managers taking?? The recordkeeper? The custodian/trustee?? The marketer?? It is not always clear.? What can be worse is the manager selection, which are usually random on average (before fees) in terms of any outperformance versus indexes.

    Now, in fairness, anytime you have a large number of small accounts, the costs will be high as a percentage of assets.? But there are limits.? Disclosure needs to be improved, but until then, ask your plan sponsor for all of the Form 5500 documents.? There are two classes of expenses.? Explicit: what the fund pays for directly.? Implicit: what gets deducted from investment returns.? Add the two together, because that is the total load.? Insist on as full of an accounting as the plan sponsor will give you.

    If you are paying more than 1% of assets per year, then something is wrong, unless the asset classes are esoteric, which should not be the case for DC plans.? Remember, you have to be your own guardian with defined contribution plans.? No one will do it for you.? And, if a few of your colleagues complain at the same time, you will be amazed at how quickly it will be taken seriously, because the administrative staff of the plan sponsor usually doesn’t get that much feedback.

    Theme: Overlay by Kaira