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Being in the wrong place is not good! This post will save some of you some money.

How Does Your 401k Stack Up?

picture by DRW

People don't like to think about retirement. Understandable. It is thinking about getting old. It is thinking about having to save today for the future. It is about having to make decisions about what to invest in and trying to understand the jargon-laden marketing materials handed out by fund sponsors.

All of this bumps up against the awkward fact that most of us will one day wake up to our 65th birthday.

That's when the choices available to us in prior years will loom large in giving us choices in the coming years.

One of the keys is, of course, the 401k you have at work. The better it is in terms of low fees, good investment choices, company match etc., the greater the opportunity for you to achieve a successful retirement.

Until fairly recently, it hasn't been possible for you to assess your 401k. You pretty much had to settle for what was provided. Today assessing a 401k is typically fairly easy by going to www.brightscope.com. There, type in your company's name and see right away if your 401k is rated.

If it is not rated, I recommend talking to your plan administrator about getting it rated. You want to see how your 401k stacks up against similar 401ks. Do you have good investment choices, are fees low etc.?

You can also enter your investment choices via a link on the page and see explicitly the fees you are being charged on the funds you are invested in. This is the type of disclosure data the Department of Labor has been seeking.

The component ratings are shown as follows:

CLICK TO ENLARGE The example shown here is for one of the biggest employers in Howard County, Maryland. With this information in hand, a participant can question a plan administrator about investment choice. Can it be improved? Why is it "average" compared to peer group plans?

With this data in hand, administrators can take steps to improve the company 401k.
I suggest spending some time looking up the 401ks for family members and seeing how they stack up. You'll be glad you made a bit of effort when the 65th birthday rolls around.

Disclosure: I subscribe to the detailed Brightscope data base and talk to 401k administrators about this data

Interesting Thoughts on Money - Olivia Mellan

Some interesting thoughts on money from the featured speaker at the upcoming Financial Planning Association of Maryland symposium coming up on 11/11/2010.

DIY Investor Resources

DIY investors need a comprehensive list of investment and financial planning related links. This list from the American Association of Individual Investors is an excellent place to start to build a personal list. I would suggest checking the links out and eliminating those you feel aren't useful and then, over time, adding those you like.

As one who has been in the investment field for a long time, I constantly marvel at the resources available to today's investors. When I started managing assets, I had to call various brokers every day to get what is called a "bill run" and to get color on the market. That's how my day started. Today, yields on Treasury bills are available with the push of a button; and views on what is driving the market are easy to get. Analytical tools abound and are free - investors just need to know where to look.

In addition to outside resources, it is important for the DIY investor to fully understand the tools available at his or her brokerage, as I've discussed before. If you're with Schwab, TD Ameritrade, Scott Trade or whomever, putter online until you understand the analytical resources available. Don't let it be like your VCR, where you never learned all the features on how to record etc.

Picture by Matt Steenhoek

Is Your Investment Manager Doing a Good Job?

Many times people will tell me their investment advisor is doing a good job. I ask them what their performance has been, and they don't know. To me ,this is an indication right off the bat that the advisor may be doing a good job for him- or herself but not necessarily for the client. Other times, a person will say that they got a return of 12% and "isn't that good in a world where interest rates are practically zero?"

Well yeah...except that if you are invested in the stock and bond markets, your benchmark isn't short-term interest rates. I'll point out that the market was up 15%, so you paid an advisor 1 to 2% of your assets to produce a return 3% below the market. If you had a million dollars with the advisor for a year, it cost you between $10,000 and $20,000 for management fees and another $3,000 for poor performance.

Most advisors underperform the market over longer periods after all fees and costs are considered. There are mountains of data and books written to show this. In fact, such market stalwarts as Warren Buffett, Charles Ellis, Burton Malkiel, John Bogle and Dan Solin have stated repeatedly that trying to beat the market is futile.

They have also pointed to a better way - achieving the market return at a minimal cost. The biggest pension funds in the country understand this and invest significant portions of their assets indexed to market returns.

So how is it that individuals continue to seek superior returns when they are in fact achieving subpar performance and are paying dearly for it? The answer is up at the top. Most don't know it, and many aren't interested in making the effort to understand the basics of investments.

To the benefit of Wall Street, the phrase "ignorance is bliss" definitely holds. I guess what you don't know won't hurt you - at least until you get ready to retire.

An Exercise In Critical Thinking

Anyone who has come close to a community college in the last few years knows that critical thinking is the theme du jour. To produce responsible citizens, community colleges have taken on the task of getting students to think critically.

Along these lines, my class last night watched this YouTube video of an interpretation of Austan Goolsbee's (head of the Council of Economic Advisors to the president) presentation of the administration's economic record thus far:



For some in the older generation, this will bring to mind the book "How to Lie With Statistics" by Huff. The video shows both sides presenting the same data with opposing interpretations. And commentators wonder why the American people are confused by the economy!

Question: Which view do you agree with?

What's Wrong With This Picture?

You've seen it. It's a full page ad in the local paper. Smiling couple with a Green Box emphasizing their smiling faces and the biggest type on the page asking "Who Says You Can't Get A Competitive Yield In Today's Economy?"

Your eye goes does the page and in the middle you see 9.41% as the total return and 4.88% as the "Distribution Yield/" That sure beats the yield you and I are getting on our CDs, Treasuries, bond finds etc.

But it's not a yield comparable to a yield on Treasuries or CDs etc,! It's a distribution yield based on a total return. Here's my rough guesstimate-probably less than 20% of the people reading this ad could explain the difference between total return and yield. But everyone of them feels that the yield on their investments as they now stand is pathetic. The fact is that the return reflects a sharp drop in interest rates and a consequent rise in bond prices. Experts today are warning about a bond bubble. If interest rates rise and stock prices fall, what will happen to the "competitive yield" on this fund?

We know the managers will do ok - they're charging 1.75% right off the top. It's not clear what the funds they invest in charge.

Read the fine print. If you are over 55 years old, you'll probably need a magnifying glass. In the fine print the breakdown of the portfolio is given, and it states that 64% is invested in equity funds!

Looking for yield? Need income to live on? Invest in equities!

When the housing bubble burst, people acted like they were shocked about how low prime loans were marketed and made requiring no documentation, no down payment, ridiculous teaser rates etc. that would be reset and result in payments the buyer obviously couldn't make.

How many times do we need to be shocked before we start requiring the financial sector to do the right thing.

To me, emphasizing yield on a total return fund (especially when so many are desperately seeking investments that provide a good yield)is misleading and unconscionable at worst.

What's your take?