Happy Fed Day! Ed’s Daily Notes for June 18th   2 comments

The Federal Reserve’s Open Market Committee announcement is today at 2 pm EST, followed by Chairman Janet Yellen’s announcement at 2:30 pm. Get your popcorn ready…

Bloomberg: Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers

Former employees shifted $321 billion from 401(k)-style plans to individual retirement accounts in 2012, up about 60 percent in a decade, according to Cerulli Associates, a Boston-based research firm. As a result, IRAs hold $6.5 trillion, more than the $5.9 trillion in 401(k)-style accounts.

A three-month Bloomberg investigation found that former employees at major companies such as Palo Alto, California-based Hewlett-Packard (HPQ) Co. and United Parcel Service Inc., as well as AT&T, have complained that sales representatives lured them into rolling over their 401(k) nest eggs into unsuitable IRA investments. The investigation was based on interviews with retirees and brokers, confidential arbitration records and other documents.

While retirees can generally leave their savings in 401(k) plans, financial firms entice them with cold calls, Internet ads, storefront signs and cash incentives to switch to IRAs. They tout the advantage of the IRA’s wide variety of investment choices over the typical 401(k) plan’s limited menu.

Yet that appeal can also be a pitfall for retirees offered expensive and high-risk investments. IRAs often charge higher fees than those associated with 401(k) plans, giving brokers an incentive to promote rollovers.

I have an issue with this article. All 401(k) plans, as well as all IRAs, are not the same. In addition, all investors are not the same. A savvy investor who knows what they are doing, but has their money in a limited menu 401(k), would probably benefit from moving their money to a low-cost IRA (they are out there). A stupid investor who transfers their money without doing any homework gets what they deserve.

Another issue I have with the article is how it defines “fees”. In a lot of 401(k)’s, while there may not be any direct “fees”, when you look at the investment choices, you can find them there. There are plenty of high-fee 401(k) funds, where the management fees are pulled out of the invested funds, thereby lowering the returns. I remember one 401(k) I was in, where many of the mutual fund investment choices carried management fees of 3%. Needless to say, I was only in that 401(k) for the matching funds.

There is one thing the article gets right:

Bank of America Corp (BAC).s’ Merrill Lynch and E*Trade (ETFC) Financial Corp. offer as much as $600 up front to anyone who rolls over a 401(k) into an IRA.

“If someone offers you $600 to roll over your IRA, you can be sure you are going to be paying a lot more additional expenses later,” said Mercer Bullard, an associate professor at the University of Mississippi Law School who heads Fund Democracy, an advocacy group for mutual-fund shareholders.

That is true in more than just investing, but this is one practice that should be banned.

My advice: Always do your homework, whether you are buying a specific stock, or rolling over your 401(k). A little healthy cynicism can save you a lot of financial pain later. There is no such thing as “free money”, especially when someone is telling you about it.

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Posted June 18, 2014 by edmcgon in Federal Reserve, Investing Education, News

2 responses to “Happy Fed Day! Ed’s Daily Notes for June 18th

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  1. Well I was in agreement up to the part where you say the “intensives” should be banned.
    First off I don’t like that idea because it means just one more way that the government is involved in this, and besides it doesn’t change the fact that they will still be extracting those fees from these people, but just now without trying to give them anything in return.
    What’s more like you say for the person with common sense it will be a red flag, that if you ban it, you take away that nice red flag.

    On top of that the stupid people will always be with us and so there is no reason that the smart people shouldn’t benefit from brokers wanting to entice people to their service. For instance giving away say 3 months of free trades might be valued at $XXX, but it is certainly worth it to the brokers to do things like that to have you as a customer. Fees like commissions are how they make money, and if they don’t make any money we wouldn’t have any brokers. It is the very fact that they have competition that they make offers like these. These are a good thing, not a bad thing.
    My brother refuses to use a credit card that gives money back. Why? because we all know that comes from profits from either the stores fees or from the people dumb enough to run a balance. Well if I could arrange it so that if I didn’t get get those “perks” the cost of things would go down, I would be all for it.
    But the truth is that isn’t going to happen, so for me not to have a credit card that gives me money back, is just leaving money on the table.

    If the government really wants to help the average (and stupid) “investor”, they need to really take away their freedom.
    Most people have no clue of what to invest in or when. Just take a look and compare the market to 401Ks and you will see them always lagging by a very big amount The average person in a 401K buys at the peak and sells at the bottom. On here people like to talk about beating this index or that.
    Most people don’t come anywhere near even matching the indexes let alone make more than an index.

    The only way to get these kinds of people to do the right thing would be to take the choice out of it.

    After all these people are running to the government (or the government going to them to promise them something for their next election) because they were stupid enough to fall for a sales campaign, and are now crying about it, when they could have found tons of lower costs IRAs/investments. That alone tells you what you have to work with. It is like the advice you might give your Grandmother, you know, the one that you think will fall for the scams “Don’t talk to strangers”. Because you can’t really educate such a person on what is and isn’t a scam, so the only thing you can do if make sure they don’t talk to anyone.

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