Senate Looking To Expose 401(k) Industry Fees

Do you have a right to know what fees you are paying in your 401(k) plan?

Right now, you don’t.

However, the U.S. Senate introduced legislation last week that would require 401(k) plan providers to disclose all fees. This would give employers and employees the information they need to make an informed decision about what plan best suits their needs.

When similar legislation was introduced in the House earlier this year, 401(k) industry groups fiercely opposed the proposed rule changes. One reason being that they claim complying with the new disclosure rules would result in higher fees.

So basically they’re saying they’d have to charge even higher fees to disclose the already high fees that many 401(k) providers currently hide from plan participants.

It would be funny if it weren’t so sad.

(For the record, this legislation would not affect Blue Ocean 401(k), as we already disclose all associated plan fees.)

Here’s an article from PlanSPONSOR.com covering the legislation proposed in the Senate last week:

Senators Introduce 401(k) Fee Disclosure Legislation

December 14, 2007 (PLANSPONSOR.com) - Senator Tom Harkin (D-Iowa) and Senator Herb Kohl (D-Wisconsin) introduced legislation on Thursday designed to protect American workers by ensuring they can access information on the cost of 401(k) plan management fees.

A press release on Senator Harkin's Web site said the Harkin/Kohl Defined Contribution Fee Disclosure Act of 2007 would require 401(k) plan providers to disclose all fees so that workers saving for retirement can make a fully informed decision about which plan is best for them.

The Defined Contribution Fee Disclosure Act would, according to the release:
Increase the information given to employers who sponsor 401(k) plans so they would have a comprehensive list of all of the fees they are paying and reasons for the fees. This information would then be passed on to participants upon request.

Require that participants be given information about the overall levels of fees when they choose investment options and on their quarterly statements. The pre-selection notice also would include information on historical returns, the level of risk, and basic investment guidance. The quarterly statement would help people to understand over time how much they have paid in fees, and help them to compare fees against returns.
Require disclosure of relationships between all parties with financial interest in the plan.

"It is absurd that millions of Americans rely on 401(k) plans for their retirement security and yet they aren't told what fees they are paying to maintain these accounts," said Harkin, in the release. "This bill will shed light on the 401(k) selection process and give Americans more control over their retirement future."

“I believe there is a basic right for consumers to clearly know how much products and services are costing them,” said Kohl, in the release. “Disclosure is especially important in the case of 401(k)s, as the slightest difference in fees can translate into a staggering depletion in savings, greatly affecting one’s ability to build a secure retirement.”

Similar legislation was introduced in the U.S. House by Representative George Miller (D-California) in July (see Representative Miller Introduces Fee Disclosure Legislation).

The House Committee on Ways and Means held a hearing October 30 to determine whether workers’ retirement savings are being eroded by excessive and unnecessary administrative and investment fees assessed by pension plan providers (see Ways and Means Hears Testimony on Appropriateness of Plan Fees) and subsequently issued a call for public comment on the issue (see House Ways and Means Taps Public on Plan Fee Information Use).

In a recent AARP survey, 83% of 401(k) participants responding acknowledged they actually do not know how much they pay in fees and expenses associated with their plan (see Participants Admit to a Lack of 401(k) Fee Knowledge).

Rebecca Moore
editors@plansponsor.com

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How Golf Can Make You a Better Investor

Imagine shooting par every time you play golf.

It doesn't matter whether you're playing Augusta National or your local public course. It doesn't matter whether it's a beautiful, warm sunny day or a cold, blustery, rainy one. You are guaranteed to shoot par.

Do this over the course of your lifetime and your performance will surpass all but the Tiger Woodses of the world. In fact, shoot par day in and day out and you'll probably end up in the Golf Hall of Fame!

This is because par is not average. Par is just the benchmark all golfers use to measure their performance. Most golfers will never beat par in their lives, let alone do it consistently.

For investors, the index (usually the S&P 500) is the benchmark used to measure their performance. And as is the case with par in golf, the index is not average.

Most investors will fail to match (let alone beat) the index. Even the investment "pros" usually fall short of the benchmark. In fact, in any given year approximately 80% of all mutual funds underperform their benchmark index.

How to Shoot Par With Your Investments

The good news for investors is that it's easy to "shoot par" when it comes to investing. By investing in index funds or ETFs, investors can tie their returns to those of the index. No matter what the situation or what the market conditions, index investors will achieve returns that match the index.

Do this over the course of your lifetime and you can increase your odds of a comfortable retirement – which will give you plenty of time to work on that golf game!

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Advice for Employees with Mediocre 401k Plans

Last week we blogged about an article by the St. Louis Post-Dispatch's Jack Naudi encouraging employers to offer low cost, mutual funds in the company 401k plan.

This week Mr. Naudi follows up with an article for employees faced with 401k plans that offer high fee, actively managed investment options (which, unfortunately, is the case for the vast majority of 401k plan participants).

The best piece of advice in the article, however, applies to investors of all stripes. Mr. Naudi writes . . .

"I'm convinced that fees are the primary factor separating the performance of similar investments. I don't think it's possible to defeat the markets over the long term. And if it is possible, I think it's impossible to pick the skilled pros over the lucky ones.

In general, investments will return the market averages, minus the fees of those doing the investing. Study after study has proved that to be true."

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"The Big Investment Lie" Message Spreading Across the World

One of our favorite books is "The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know" by Michael Edesess.

Since his book was published, we have gotten to know Michael Edesess and were thrilled to have him stop in St. Louis yesterday to visit with us. We need more financial industry insiders like Michael out there exposing the deceptive tactics the industry uses to take investors' money.

What's the net effect of these deceptive tactics?

Mr. Edesess claims "What has not been widely accepted yet as an established statistical fact is that professional investment services companies do not increase the growth of their clients' wealth but decrease it."

This is an important message that is starting to spread across the world. Here is a review of the book in the Shanghai Daily, China's largest English daily . . .


A financial advisor confesses: It's all a bunch of lies and hype
Created: 2007-12-1
Author:Wan Lixin


MICHAEL Edesess' book is a warning to all investors, and it is particularly timely for small Chinese investors.

With our historic bull market turning into a rollercoasting dip, some have just awakened to the fact that the unprecedented bull run affords no more than another occasion for wealth redistribution.

In "The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know," Edesess takes an insider's look at the tricks investment managers employ in separating investors from their money. Edesess, who was once a founding partner and chief economist of a financial group, knows what he speaks of.

In a recent television interview, former Morgan Stanley star economist Andy Xie was asked to comment on his success as a wealth manager after being forced to resign due to the leak of a sensitive e-mail from him

"You know, idiots are making money these days," Xie said, beaming inscrutably, clearly unwilling to make much of his accomplishments.

Edesess would have corrected Xie by pointing out that only money managers make money, at the expense of their clients.

Coming as it were from a founder of a financial business, the book is not unlike a confession. The author admits that on numerous occasions he had witnessed how sales people lied to and deceived investors.

Chinese fund managers are fond of talking of common sense and discipline as a sure way to riches.

The legend is told of an elderly woman working at a parking lot for bicycles in front of a brokerage.

Wherever she found there were too few bikes for her to attend to, she began to buy stocks. And whenever she found the parking lot crowded, she dumped her holdings and returned to her old business.

Her homespun wisdom served her so well that after a few years - well, you know how the story ends.

Similarly Edesess' book tells of the US "Beardstown Ladies," a group of senior citizens who formed an investment club in the 1980s, and achieved fabulous success by exercising old-fashioned, American-heartland frugality and investing according to their commonsensical principles.

They were catapulted into national fame after alleging that they had achieved an average annual return of 23.4 percent over the course of the preceding 10 years, about 8.5 percent more than the return on Standard & Poor's 500 Index.

They were wrong.

"Compared with the Beardstown Ladies, whose fraudulent practice was unintended, the fraud of the investment advice industry is studied, refined, Wall Street minted and Madison Avenue packaged," Edesess observes.

The money managers have to lie because this is the only way to persuade their clients to part with their money.

As the author says, while it is not unusual for any money manager to beat the market over a period of time, it is rare for any money manager, professional or amateur, to beat the market consistently.

Thus, the managers' frequently used trick is to attract their clients by lying - trumpeting and exaggerating any winning performance.

This is very similar to the strategy adopted by the lottery agencies in China.

On Thursday, Shanghai Morning Post devoted a whole page to an unknown lucky buyer in Gansu Province who had won 113 million yuan (US$15 million). The lottery authority regularly publicizes winners.

Interestingly, on the same day the Oriental Morning Post gave prominent coverage to an unlucky buyer in Shanghai who had cheated relatives and friends 16 million yuan to buy lottery tickets.

How many frauds and thefts have been triggered by reports of a stroke of good luck?

Money managers are familiar with this selective disclosure of information, because their only aim is to enrich themselves.

"What has not been widely accepted yet as an established statistical fact is that professional investment services companies do not increase the growth of their clients' wealth but decrease it," Edesess claims.

Disciples of scientism

The brokers enrich themselves by charging high brokerage fees, and they have shown great originality in devising other means of robbing investors, for instance through the so-called "loads" and the "wrap fees."

But the author claims none of the charges compares to the hedge fund charges, which can be more than double the returns to an investor.

"Hedge fund management is not just a license to steal; it is a license to steal literally billions," the book says.

So the real challenge for money managers is, rather than pondering on the impossibility of constructing a portfolio that beats the market, to devise the means to lure clients in.

"The investment services business is first and foremost a sales business. It focuses the largest part of its effort on determining what sales pitch the customer will buy," Edesess observes.

Philosopher Friedrich von Hayek called the misguided application of natural science "scientism," and market prognosticators and analysts are all disciples of scientism.

The seemingly scientific techniques and presentations are a sheen, clearly useless in dealing with the market that moves randomly, where past performance will never be a reliable gauge of future performance.

But market analysts seem to have a handy answer for everything.

For instance, when property shares experienced sudden falls this Wednesday, all the analysts knew why.

One identified the new policy on affordable housing as the culprit. The second blamed the rumored collection of property taxes. The third said it was but a technical correction in the run-up to a big rally.

PetroChina share prices have shed over 2000 billion yuan in its market value in a week of steady decline, trapping over one million of small investors.

In one sense the market analysts are also victims, as they have to drastically and steadily lower their former valuation of the share.

As the author claims, investment firms prosper by downplaying the known facts. Their sales representatives often interpret their research findings in a way that suit their purposes. They look respectable, earnest, well-informed, and like to speak in an impenetrable language spiced with technical jargon.

But investors often conspire in their own downfall, as their greed blinds them to the inherent risks of entrusting their money to others.

They should be reminded that whenever they put money in a fund, they do so at "agency risk," which stems from the inherent conflict of interests between the principal and the agent.

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Copyright © 2001-2007 Shanghai Daily Publishing House

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Winning With Index Funds

The video below from Money Talks News compares running a sports team to running a mutual fund.

While it's probably wise to bet on the sports team that has a highly compensated manager calling the shots, that's not the case with mutual funds.

Watch the video to find out why . . .

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401k Fees and Fiduciary Responsibility

Here is a link to an article from business columnist Jack Naudi in our local paper, the St. Louis Post Dispatch.

Asset allocation. Low cost index funds. The cost of active management.

Sound familiar?

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Good Companies, Bad Stocks?

There are many aspects of investing that still remain somewhat mysterious.

William Bernstein, is his book The Intelligent Asset Allocator, made me ponder this when he profoundly stated:

“Good companies are generally bad stocks, and bad companies are generally good stocks.”

You may remember the best selling book back in 1982, In Search of Excellence, by Tom Peters. This book objectively discussed the characteristics of what Peters considered the best companies at the time. Peters cited 40 companies who, by his criteria, were “excellent” companies.

In 1994, a researcher named Michelle Clayman from Oklahoma State took the same criteria and made a list of “unexcellent” companies or, in other words, companies which would have scored the lowest based on the criteria set forth by Tom Peters.

Clayman discovered that if an investor would have bought one portfolio of excellent companies and another portfolio of “unexcellent” companies, the “unexcellent” portfolio would have outperformed the excellent portfolio by an amazing 11% per year over the next five years!

Similar evidence is apparent in the Dogs of the Dow Theory. The dogs, as represented by the ten highest dividend yielding stocks, have generally outperformed the overall Dow 30.

This notion may be at the heart of why so many professional money managers and individual investors under-perform versus their benchmark. As William Bernstein stated:

“No matter how many finance journals they read, they cannot bring themselves to
buy bad companies.”

Indexed-based Exchange Traded Funds do not take a position on whether the companies in the underlying index are good or bad. They have a broad representation of both “excellent” and unexcellent” companies.

The positive stock market move in recent years has made a lot of professional managers look smart. But do not be fooled. Ask the question, “How much of the return generated by a money manager or mutual fund can be directly attributed to the underlying market?”

You may be surprised when you discover that the underlying market actually produced higher returns than most active money managers and mutual funds!

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Never Buy a Bond Fund

Bonds should be purchased to provide certainty. Bond funds
deprive investors of that certainty. Individual bonds enable
investors to plan effectively where the outcomes are known.
Bond funds are designed for the fund sponsor to make a lot of money at the expense of the investors. Blue Ocean Portfolios uses only US Treasury bonds that provide certain and predictable outcomes for investors.

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New Low Cost, Index-Based 401(k) Announced

St Louis, MO October 30, 2007 -- St. Louis-based Blue Ocean Portfolios, an innovation of Huntleigh Capital Management, Inc., is launching Blue Ocean 401(k), one of the lowest cost, full service 401(k) plans in the industry.

Blue Ocean 401(k) utilizes low cost index mutual funds to construct and maintain diversified model portfolios for the participants to choose from. The average total participant cost in the plan is 0.79% of assets annually, including the expense ratios of the underlying index funds.

The Blue Ocean 401(k) platform encourages the plan participants and sponsors to focus on the three aspects of investing that matter the most: allocation/diversification, fees and rebalancing.

Joe Montanaro, Huntleigh Capital Management Investment Advisor Representative and former Executive Director of the TWA Pilot's 401(k) Plan said, "The solution of using index funds to build a low cost, efficiently diversified, strategic asset allocation portfolio that is rebalanced as needed is like finding the Holy Grail of investing for the average 401(k) participant."

Administration of Blue Ocean 401(k) plans is handled through a partnership with St. Louis-based The401kStore.com Inc. Plan sponsors pay a flat $1200 annual administration fee plus $36 per employee.

Huntleigh Capital Management Principal, Jim Winkelmann said, "The mission of Blue Ocean 401(k) is to bring 401(k) investing to the next level of low fees and optimal investment performance for thousands of American workers."

More information about Blue Ocean 401(k) is available at www.BlueOcean401k.com.

About Blue Ocean Portfolios
Blue Ocean Portfolios is an Innovation of Huntleigh Capital Management, Inc., an SEC registered Investment Advisor managing both institutional and individual assets. Blue Ocean Portfolios was developed as a means to share an accumulated wealth of knowledge with clients all over the world and provide these investors with the optimal risk adjusted portfolios, utilizing Exchange Traded Funds and US Government Bonds.

About The401kStore.com, Inc.
The 401kStore.com, Inc is an independent, National Securities Clearing Corporation (NSCC) trading partner providing instantaneous access and transaction processing for the 401(k) industry. It is a wholly owned subsidiary of QBC, Inc., a respected mid-west regional employee benefits firm. QBC and The401kStore.com provide administrative services to several hundred plans with tens of thousands of participants.

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The Upside of a Down Market

The recent market fluctuations have many investors running for the exits. Those who are selling in a panic, however, are missing out on a golden opportunity. How so? One only needs to turn to another dose of wisdom from Warren Buffett to find the answer.

"If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

Investing in a falling market is when savvy investors can really pad their long term returns. Trying to time the market, however, is a losing game.

So how can you stay sane in a tough market and take advantage of it when investments are on sale? Simply stick with these sound investing principles:

1. Take advantage of dollar cost averaging by investing a set amount on a regular basis. You'll automatically buy more shares when prices are low and fewer shares when prices are high.
2. Diversify through asset allocation. Assets classes act differently. While large cap stocks are going up, small caps may lag behind. By using asset allocation to diversify across a number of different asset classes you will minimize the negative impact a drop in any one asset class has on your savings.
3. Regularly rebalance your portfolio. Besides keeping your portfolio in line with your investing goals, rebalancing will also automatically ensure that you buy low and sell high.
   

Following the above tried and true principles, as we do here at Blue Ocean Portfolios using low cost ETFs and index funds, will help you take advantage of the opportunity market volatility creates.

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Par Is Much Better Than Average

Investment performance is like golf, where the underlying benchmark is par. Par does not mean average. The average golfer, like the average mutual fund, does not shoot par. Unlike the pro golfer, the professional money manager often does no better than average and rarely beats par! Indexing enables investors to shoot par every time. Par is much better than average!

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