Ouch!

Today was a painful one for investors as well as those in the financial industry.

Lehman Brothers filed for bankruptcy.

Merrill Lynch was bought by Bank of America for a bargain basement price.

The downfall of these supposed financial industry stalwarts sent the markets worldwide plummeting.

There are plenty of lessons to be learned from days like this. The one we'd like to share it this:

Just because a company has been around 100 years, doesn't mean it's going to be around tomorrow.

As an investor, the best thing you can do to protect yourself is diversify.

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WSJ Struggles to Find 401(k) Expenses

If a reporter from the Wall Street Journal has trouble figuring out what she's paying in 401(k) plan expenses, what chance do the rest of us have?

In an interesting article today, WSJ reporter Karen Blumenthal opened up the hood on her 401(k) account to take a look inside. She got some fee information from her plan provider's website, some from a "Summary Plan Description" from her company's HR department, and some from Morningstar. Even after going to three separate places, there was still one fund in her plan that she couldn't get information for.

Hopefully, the new DOL proposal requiring more fee and fund disclosure on 401(k) statements will help reduce, if not eliminate, all the legwork 401(k) plan participants have to do to get fee information.

A few other points of note from the article:

1. This paragraph toward the top of the article is about the relationship between fund expenses and performance.

"In almost every study we've run, expenses show up as a very significant predictor of future performance," says Christine Benz, director of personal finance at Morningstar Inc., the investment research firm. In other words, over time, funds with lower fees are likely to outperform those with higher fees in the same category. By contrast, says Ms. Benz, "our data indicates that past performance is a weak indicator" of future results.

2. The reporter's plan is better than most. Her employer covers many of the administrative expenses, there are index fund options, the expense ratio data (for most of the funds) was fairly easy to find, and the funds had no loads.

To read the entire article, click here.

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A Financial Headline You'll Never See

Did you catch this story that made big news last week? The Yahoo! headline read:

"Ex-hedge fund manager ordered to pay $300 million."

It's about former hedge fund manager Paul Eustace who, according to the Commodity Futures Trading Commission, "cheated clients by sending out fake account statements." Evidently Eustace told clients that their portfolios were valued at over $230 million while he "fraudulently operated the funds and lost millions of dollars."

So what's the financial headline I bet you'll never see?

"Ex-index fund manager ordered to pay $300 million"

I wonder how many more millions of dollars Eustace's clients would have in their portfolios right now if they had just put all their money in a low cost index fund or ETF instead of a risky (and evidently fraudulent) hedge fund.

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More 401(k) Problems?

Here's an article from IndexUniverse.com titled "Auditors Finding More 401(k) Problems".

The article talks about the IRS is finding a "substantial" increase in the number of compliance problems in 401(k) plans. Not surprisingly, the problem is especially troublesome for small businesses.

It's a short article, and worth a quick read. We especially agree with the sentiment in it's conclusion:

"So what does this all mean for index investors? It could be another sign that pressure is building to clamp down even more on the use of high-priced actively managed funds."

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Some Disclosure on Disclosure

It seems many 401(k) plan sponsors aren't that sure that the fees associated with their plans have been fully disclosed. This according to a Planadviser.com article about a recent survey of 150 defined benefit plan sponsors.


One item from the article that we're especially interested in is that more sponsors are implementing fee monitoring and benchmarking. Of them, 68% just started this process within the last year. It's clear the recent 401(k) lawsuits and proposed regulations in Congress and the Department of Labor are making employers pay attention to what their employees are paying in fees.


We're definitely happy to see that.


However, one thing to note about this survey is that 87% of the respondents were from companies that had 1000 or more employees. We wonder how much different the numbers would be if more smaller businesses had been included in the survey.


Here's a link to the full article on the lack of confidence in 401(k) fee disclosure.

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Does the DOL 401(k) Fee Disclosure Proposal Go Far Enough?

The other week, we applauded the Department of Labor's proposed rules that would require that employers to disclose more information on the fees 401(k) participants and do so in a clearer format.



But do the rules go far enough?



No, says Rep. George Miller (D-CA). You may know that Rep. Miller has been pushing legislation in Congress that would require greater disclosure of fees to 401(k) plan participants. Unfortunately, that bill was defeated just a few months ago (though it will likely be brought back again next year).



Rep. Miller says that although the DOL proposal is a step in the right direction, it doesn't go far enough. He believes that under the DOL proposal, financial firms would still be able to hide many of the fees that 401(k) plan participants pay.



According to an article in Pensions and Investments, Rep. Miller's spokesman elaborated by saying that invesment management charges and trading commission charges would not have to be disclosed "in the most important document that workers see — their quarterly benefit statement.”



The spokesman went on to say that ". . . fees that could actually be the largest charge against a participant's account could still be hidden. Administrative charges can also be hidden if they are bundled as part of the management fee.”



Given their history, we have no doubt that financial firms will go do everything in their power to keep their excessive, hidden fees excessive and hidden. We just hope that rules like the DOL proposed and legislation like Rep. Miller is working on get implemented so it's more difficult for financial firms to get away with fleecing the retirement savings of American workers.

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Emotions Harming 401(k) Returns?

401(k) investors are running for the hills. As they see the values of their 401(k) plans plummet, they are pulling their money out of equities (ie. stocks) and putting it into fixed income investments (ie. bonds/stable value). This according the the Hewitt 401(k) Index.

In most cases, this probably isn't the wisest decision. It's not easy watching your retirement funds, and the hopes and dreams they represent, as they seem to melt away. But the stock market is a roller coaster. It has it's ups and downs. Fortunately for investors, historically the ups have far outweighed the downs.

Unfortunately for investors, emotions take over when it comes to investing and their money. This usually makes investors buy when things are soaring and sell when things are tanking - the exact opposite of what they probably should be doing.

As Warren Buffett once pointed out, if you were going to buy a hamburger or a car, would you hope the prices of hamburgers or cars go up or down? Obviously, you'd want them to go down.

Same for stocks. The only people who should be hoping for higher stock prices are those want to sell them. Everyone else should enjoy the bargain the market is now giving them. When stocks go on sale, those who cast their emotions aside and buy can really pad their long term returns. These are the times savvy investors make their fortunes in the stock market.

As is often the case, no one has said it better than Buffet himself . . .

"Be fearful when others are greedy and greedy when others are fearful."

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Will 401k Plan Participants Finally Get What They Deserve?

Could it be? Are 401k plan participants finally going to get the information they rightly deserve?

A few weeks ago Congress was unable to pass legislation that would provide more information on the fees 401k plan participants are paying. According to an article in USA Today, it looks like the Labor Department may be stepping up to help the 65 million Americans who are invested in 401k, and similar, plans.

The proposal would require employers to disclose more information about the fees in their plans and do so in a clearer format. From the article . . .

Employees would receive details about investment expenses and past performance in a chart or similar format to allow them to easily compare fund options. Retirement plans would also be required to compare funds' investment performance with a benchmark index, such as the S&P 500. Additionally, for the first time, the plan would have to disclose each quarter the dollar amount that each participant pays for administrative services such as accounting and recordkeeping.

This proposal definitely looks like a big step in the right direction. However, it's not a done deal. We'll keep an eye on how this progresses and keep you informed as more details and information about this proposal become available.

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A Blue Ocean Plan for America’s Investors

Big news this week in our town. Our beloved Anheuser-Busch agreed to a buyout by Belgium brewer InBev.

Throughout the merger talks a lot of attention has been focused on AB’s so-called "Blue Ocean" plan which targets savings at the company of $1 billion dollars over the next three years.

We’d like to propose a similar Blue Ocean plan for American investors. It’s estimated that investors are currently shelling out around $100 billion dollars annually in fees to Wall Street. That’s about twice what InBev paid for our beloved AB. And as we've already discussed on this blog, investors are getting worse than nothing in return for this money.

It’s time for investors to get serious about doing some big cost cutting in their investment accounts. As you’re watching your portfolio’s value drop like the level of Bud in kegs at a frat party, take a close look at the fees you’re paying.

Think about what you’re getting in return.

Think about how those fees are further depleting your account balance.

Think about the studies that show the performance of low cost index funds beats 80% of actively managed funds in any given year.

Think about how much more money you could have in your retirement fund, 401(k) plan, endowment, foundation, or child’s education fund if you weren’t paying ridiculously high fees for suspect investment advice.

So investors, we urge you to follow the example of AB-InBev and do some significant cost cutting of your own.

And while the ultimate ramifications of AB’s Blue Ocean plan remain to be seen, we’re confident that implementing your own Blue Ocean plan in your investment portfolio could end up being one of the smartest decisions you ever make.

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401(k) Fee Smoke and Mirror Show Continues

Score another one for those with the deep pockets.

Last month, with very little media attention, H.R. 3185, which would have required greater disclosure of 401(k) fees to plan participants, was defeated. Bill sponsor, Rep. George Miller, D-CA., announced that the bill would not be passed this year.

One of the main arguments from the 401(k) industry and the Department of Labor is that the bill would make disclosure of fees to plan participants more complex and expensive than it needs to be. So, in other words, they're saying it would cost more money to disclose the ridiculously high fees they are already charging (and legally hiding from) plan participants.

Well, the 401(k) industry may be right about this bill being more expensive, but only for them - not plan participants. We believe the bill would result in lower expenses overall for many plan participants. It would finally give participants easier access to the information they need to pressure employers to offer lower cost 401(k) options that don't unneccesarily erode their retirement savings.

We think H.R. 3185 is a very good step in the right direction. We hope the House will take it up again next year and that it will pass. 401(k) plan participants deserve to know exactly what their plans are costing them.

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Focus on Fees: The 12b-1 Fee

The 12b-1 fee has been described as one of the darkest secrets of the mutual fund industry. While we think the industry has much darker secrets, the 12b-1 fee is one investors need to keep a close eye out for.

The 12b-1 fee is an annual fee that generally ranges from 0.25% - 1% and is included in the expense ratio of the fund. It is ostensibly used to cover the marketing and distribution expenses of the fund. In that vain it’s basically a way to collect an additional fee from investors to pay for the TV ads and glossy brochures they produce to attract new money to the fund. However, as we'll discuss in a moment, that's not the only thing mutual funds use this fee for.

The 12b-1 fee is an example of what can happen to the best of intentions. The SEC authorized the creation of this fee in 1980 thinking that it would help investors. The idea was that in marketing a mutual fund, the fund would increase its assets, which in turn would lead to lower annual operational expenses through economies of scale. Investors are still waiting for their lower expenses.

As for the dark secrets about the 12b-1 fee:

• Very little of the 12b-1 fee typically goes toward marketing expenses. It’s more commonly used as a hidden way to pay brokers for using the fund in their clients’ portfolios.
• There are closed funds (funds that no longer are taking money from new investors) that still charge 12b-1 fees. Why would a fund that isn’t accepting new money need to market itself? Good question. However, a closed fund would sure want to keep paying the brokers who’ve invested their clients’ money in the fund happy!
• Some no-load funds charge 12b-1 fees. The fee can be a way of implementing a hidden load that drains money from investors’ returns. There’s a good illustration of how this works here: http://mutualfunds.about.com/od/fundfees/l/bl12b1fees.htm
  

Where to find information about 12b-1 fees

In our last few posts in this series we’ve sent you to Google Finance to see the fees associated with mutual funds. Google Finance, however, does not have information on 12b-1 fees. Morningstar.com does, however. Here’s the fee information on a Franklin Templeton Fund. On the right side of the table, the very first fee listed is the 12b-1 fee. You can see for this fund it is 1%.

This information is also available in a fund’s prospectus.

The Bottom Line

Whether it’s used to market a fund and/or pay a commission to brokers, the 12b-1 fee does nothing good for investors who pay this expense. There are plenty of funds out there that don’t charge this fee. And with no evidence funds that charge 12b-1 fees outperform those that don’t, investors are better off avoiding these fees.

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"401(k): Hidden Fees" Investigative Report on Bloomberg TV

An investigative report on hidden fees in 401(k) plans premiers on Bloomberg TV tomorrow night (Thursday, June 19 at 7PM and 9PM EST).

The report will cover how fees are eating away at 401(k) balances without plan participants even realizing it and how even financial experts have trouble uncovering these fees. If you have a 401(k) plan, and especially if you sponsor one, be sure to tune into what we're sure will be a truly enlightening report.

To get more information go to Bloomberg TV and look for 401(k): Hidden Fees - What's hiding in the fine print of your 401(k).

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Focus On Fees: The Sales Load

When it comes to mutual funds, a load is another name for a sales fee that investors may pay to a mutual fund company for buying or selling shares of a fund. Think of it as a commission that the fund company gives to brokers who sell the fund to investors.

A load mutual fund charges this fee to investors, a no-load fund does not.

Loads usually cost between 4% - 8% which comes directly out of investors’ assets. The Financial Industry Regulatory Authority (FINRA) has capped sales loads for mutual funds at 8.5%.

There are two main types of loads:

Front-end loads are paid when you purchase shares in the fund. If you invest $100,000 in a fund with a 6% front-end load, you will pay $6,000. That means only $94,000 of your money will actually get invested in shares of the mutual fund.

Back-end, or deferred loads, are paid when you sell or redeem shares of a fund. Back-end loads are usually based on either the amount of your initial investment or the value of the investment when you sell shares – whichever is lower. If you invest $100,000 in a fund with a 6% back-end load, the full $100,000 gets invested in the fund. When you sell, however, you will pay $6,000 as long as the value of your investment is still $100,000 or more. If the value of your investment has dropped to $90,000 when you sell, the sales charge will be $5400. This is not always the case, however. You could end up paying a deferred load on the full amount of your investment if it increases in value.

One last note on back-end loads. The amount of the load may be affected by how long you own the fund. For example, the load could be 6% if you sell within the first year then drop to 5% if you sell in the second year and go away completely after some timeframe. To find out how the deferred loads are calculated check a fund’s prospectus. (Or, better yet, just stick with no-load funds so you don’t have to worry about this.)

There is a third, less common type of load - the constant load fund. Constant load funds charge an annual sales fee to investors. The loads on these funds tend to be lower than those of front-end and back-end mutual funds. To offset these “lower” fees, however, these funds will usually have higher expense ratios than those with front or back end loads.

As is the case with expense ratios, it’s pretty easy for investors to find out what the load is for a mutual fund. You can find it in the fund’s prospectus or on your favorite finance site.

Let’s look at the page for the Vanguard Small Cap Index fund on Google Finance. On the right side of the page under “Key Statistics” there is a line item for “Front load” and “Deferred load.” In the case of this fund, there are no sales charges so it is considered a no-load fund.

Next, let’s look at the page for the Fidelity Advisor Small Cap Value A fund. Notice that next to “Front load” in the Key Statistics section this fund has a load of 5.75%.

Lastly, we’ll look at the page for the Fidelity Advisor Small Cap Value B fund. This is a back-end loaded fund, as seen by the 5% listed by “Deferred load” in the statistics.

(Quick side note: funds that are designated as having Class A shares usually have a front-end load, Class B shares usually indicates a fund with a back-end load. In the case of the Fidelity funds above, they are basically the same funds containing the same investments. The only difference is when they charge the load to investors.)

The most important lesson for investors when it comes to loads can be illustrated by looking at this chart. It compares the returns for the funds we looked at above. As you can see, the no-load Vanguard index fund greatly outperformed the two loaded Fidelity funds. In fact, over the past 5 years, if you had invested in the Vanguard fund, you’d have over 3 times as much money in your account than if you owned either of the Fidelity funds.

In all fairness, there are probably some loaded small cap value mutual funds that have outperformed the Vanguard index fund. However, while Wall Street and money managers would like you to believe otherwise, paying a sales load for a mutual fund does not guarantee a higher return. There is no evidence that load funds can outperform no-load funds.

Paying a load does guarantee two things:

1. Your broker will make more money than if you bought a no-load fund.

2. The fund will have to outperform the market – and then some – in order for you to just match the returns of an index fund.

When it comes to sales loads on mutual funds, it’s best to follow the advice most commonly given by everyone except those who sell loaded mutual funds: avoid them and stick to no-load funds.

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Warren Buffett Big Bet Against Hedge Funds

An interesting wager between Warren Buffett and Protégé Partners LLC, a money management firm that runs funds of hedge funds, became public recently.

Buffett has long held that the best investment for most investors in the simple index fund. He believes, as do we at Blue Ocean Portfolios, most investors will achieve better returns over the long haul by NOT paying money managers to actively manage an investment portfolio.

Protégé disagrees.

So Buffett and Protégé each put up about $320,000 on a wager over whether Vanguard's S&P500 index fund will outperform five funds of hedge funds selected by Protégé over the next 10 years. The winner will be decided based on total average returns net of all fees, expenses, and costs. Proceeds of the bet go to the charity of the winner's choice.

The question for you as an investor is: Would you bet against Warren Buffett?

For more details on the wager see the CNN Money article here.

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Focus on Fees: The Expense Ratio

To kick off our “Focus on Fees” series, we’ll take a look at one of the most common fees investors will encounter: the expense ratio.

If you own a mutual fund, you are paying this fee. It’s basically your cost of owning a mutual fund (however, as we’ll see, it doesn’t tell the whole story when it comes to expenses for a mutual fund). The expense ratio reflects the percentage of a fund’s assets that go toward its operating expenses (ie. management fees, distribution fees, etc.).

For example, if a fund’s annual expenses are $1.5 million and its assets under management (all the money that investors have invested in the fund) are $100 million, the fund’s expense ratio is 1.5%.

Expense ratios are taken directly out of the investor’s pocket. Since they eat into your returns, it’s important to know what the expense ratios are for the funds you own. It’s also important to understand that expense ratios can vary widely between funds.

The average mutual fund’s expense ratio is around 1.5%. However they can range from under 0.20% for low cost Vanguard index funds to well over 3% for some actively managed funds.

You might assume that if you pay more, you’ll get better returns. That would be a bad assumption. In fact, in any given year, about 80% of actively managed mutual funds fail to beat their benchmark.

Unlike many fees which can be hidden and difficult for investors to find, it’s easy to find the expense ratio for any mutual fund. Simply go to your favorite finance website and type in the fund’s ticker symbol.

In Google Finance, for example, at the very top of the screen you’ll find an area called “Key Statistics.” The expense ratio for your fund will be listed there. Here’s a link to the Google Finance page for the Vanguard Total Stock Market Fund. You can see that the expense ratio for this fund is a very low 0.19%.

That does it for the basics you need to know about expense ratios. As we mentioned, however, they don’t tell the whole story of what your costs are for owning a mutual fund. More on those costs in future “Focus on Fees” installments.

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Focus on Fees: What Are Your Investments Really Costing You?

We talk a lot about fees at the Blue Ocean Portfolios blog. However, most investors still have no idea what the true fees and expenses associated with their investments are.

In an effort to educate investors and help them make more informed investment decisions, we're starting a series of blog posts we're calling "Focus on Fees." We'll examine some fees and expenses many of you may be familiar with such as expense ratios. We'll also examine some that you may have never heard of before like M&E and wrap fees.

We do not recommend making investment decisions solely on the basis of fees and expenses. There are many factors that you should take into account when building your portfolio (or working with an advisor to do so).

However, fees do matter. And they are arguably the one aspect of your investments that you have the most control over. We hope this series will educate and enlighten so that you can make the most informed investment decisions and make the most of your money.

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It’s Not Just the Size Of the Fees In Your 401(k) Plan, But the Funds It Uses

Add Wal-Mart to the list of companies being sued by employees for breach of fiduciary duties of their company 401(k) plan.

One of the interesting things about the Wal-Mart suit is that employees are not just suing over the alleged unreasonable fees charged by the plan. The suit also claims that participants’ returns were adversely affected because most of the funds offered in Wal-Mart’s 401(k) plan were actively managed funds. An article from Pensions and Investments describes why employees added this to their suit (emphasis ours):

The suit against Wal-Mart alleged the basic fees weren't the only factor that adversely affected workers' 401(k) savings. It stated that most 401(k) plan fund options are actively managed funds, which carry higher management fees. The Wal-Mart plan's actively managed funds, which cost more because they aim to garner better returns than market indexes, often did not meet or exceed their investment benchmarks, according to the suit. This underperformance compounded the effect of the fees, as participants paid more for lower returns, the suit said.

The suit breaks down the fees on many of the actively managed funds in the Wal-Mart 401(k) plan and measures them against funds from Vanguard Group, known for offering relatively low-cost mutual funds. In one example, the suit compares the AIM International Growth Fund — an actively managed retail fund in the Wal-Mart 401(k) plan that has an expense ratio of 1.59% of assets — with Vanguard's International Growth Fund, also an actively managed retail fund with a fee of 0.55% of assets. The difference for Wal-Mart plan participants: $2.8 million less in fees over a six-year period with the Vanguard offering.

We’ve been beating this drum for a long time now. It’s not just the fees that can eat into your 401(k) returns but active management risk (aka the fallacy that fund managers can consistently outperform the market). A 401(k) plan that only uses actively managed funds is doing a huge disservice to plan participants who will often do much better sticking with index funds.

It looks like more 401(k) plan participants (and lawyers) are starting to take notice.

You can see the full version of the P&I article here.

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Want to Know Warren Buffet's Single Best Investment Idea?

Last weekend Berkshire Hathaway shareholders made their annual pilgrimage to the company’s annual meeting to hear the Oracle of Omaha and his partner, Charlie Munger, share their wisdom on investing.

One shareholder asked what is the single best specific investment idea that Mr. Buffet would recommend to an investor in their 30s.

The answer?

“I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought in a very strong bull market, I would feel confident that I would outperform . . . and I could just go back and get on with work.”

Wall Street has spent billions of dollars trying to convince investors that their money managers have special skills, powers or magical abilities that enable them to regularly outperform the market.

And here, the man widely regarded as the Greatest Investor Who Ever Lived, says the low-cost index fund is his best investment idea. Not only that, but he thinks investors who use index funds will “outperform.”

So you have:

• “Low cost”
• “Outperform”
• A strategy that lets you “go back and get on with work” or whatever else you want to do (ie. peace of mind)

So tell me again why investors paying money managers around $100 billion a year to try to beat the market?

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Save the 401(k)! What’s Really At Stake For Plan Participants

The other day we blogged about the House Education and Labor Committee passing H.R. 3185. This is a bill that would require full disclosure of 401(k) fees by plan providers to plan participants.

A recent article in Morningstar examines many of the factors surrounding the legislation and the problems with the current 401(k) plan landscape. Among the topics the article covers:

• The disconnect in the current retirement system where ERISA requires plan sponsors (employers) to fulfill their fiduciary duties by disclosing all fees to plan participants while the plan providers (mainly insurance and mutual fund companies) don’t (won’t?) take fiduciary responsibility for the plans they provide and don’t (won’t) disclose the plans’ expenses.

• A solution proposed by Independent Fiduciary, Matthew Hutcheson, that bridges this disconnect in the current system.

• How the huge profits of the insurance and mutual fund industries rely, in part, to making it as difficult and confusing as possible to figure out exactly what they are charging in fees to 401(k) plan participants.

• What’s at stake: Whether billions of dollars of retirement savings end up in the hands of American workers or those in the financial services industry.

If you are a plan participant or plan sponsor this information is simply too important to ignore. You can read the entire article here.

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401(k) Fair Disclosure for Retirement Security Act Passes US House Labor Committee

We are pleased to see that H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act, was recently passed by the House Education and Labor Committee. We think that plan participants have a right to know exactly how much they are paying in fees to the financial services companies that manage and administer their 401(k) plans.

Says Rep. George Miller, chairman of the Committee, "For too long, companies in the financial services industry have maintained a stranglehold on retirement savings that they didn't earn and that don't belong to them. The purpose of this legislation is to take these hard-earned savings away from the special interests and return them to their rightful place – the retirement accounts of American workers. Workers are entitled to clear and complete information about their own savings."

We couldn't agree more.

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Are You Building Your Own Nest Egg?

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Blue Ocean 401(k) Receives Unsolicited Endorsement from Independent Pension Fiduciary

St. Louis, MO April 16, 2008 --Independent Pension Fiduciary, Matthew D. Hutcheson, officially endorsed the retirement plan services offered by St. Louis-based Blue Ocean 401(k). Blue Ocean is the only firm in Missouri, and one of eight firms nationwide, to receive such an endorsement.

Says Hutcheson, “Over the past few years, a few very special firms have embraced a ‘participant first’ approach to delivering retirement plan services. Such firms are managed by responsible parties, who gladly accept fiduciary responsibility, with the goal of serving the best interests of nearly fifty million individual plan participants.”

“Blue Ocean 401(k) is one of those firms,” adds Hutcheson.

Matthew Hutcheson is recognized as one of the leading advocates of investor and retirement plan participant rights. He has worked with hundreds of plan fiduciaries and conducted many fiduciary and economic plan audits and reviews. He is also a Congressional Expert who has testified before Congress and worked with other regulatory bodies to protect the retirement income security of American workers.

Blue Ocean 401(k) provides full service 401(k) plans that use low cost index mutual funds to develop diversified portfolios for plan participants. The average total participant cost is well under 1.00% annually, including the expense ratios of the underlying index funds, making it one of the lower cost 401(k) platforms available.

“Mr. Hutcheson’s endorsement independently confirms that our innovative 401(k) service is consistent with public policy and Department of Labor initiatives. The American worker deserves a more efficient savings vehicle” says Blue Ocean principal Jim Winkelmann. “It is a wonderful validation of the principles that we practice and so deeply believe in.”


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 index funds, Exchange Traded Funds and US Government Bonds.

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The Recent DOL Ruling That 401(k) Sponsors Need to Know About

The DOL took a relatively unnoticed, but highly significant step last month that could influence the increasing number of 401(k) lawsuits.

The action involves a lawsuit filed by employees at Deere & Co. against both the company and their 401(k) provider, Fidelity Investments. The suit, like others being filed by employees at other companies, alleged that both Deere and Fidelity were in breach of their fiduciary responsibilities due to the plan’s unreasonable and excessive fees and expenses. The suit was dismissed last year by a federal judge.

Last month, however, the DOL stepped into the appeals process by filing a brief requesting that the judge’s ruling be reversed by the appeals court.

This is an interesting action the DOL did not have to take. Regardless of how this turns out, it’s clear that people in influential places are paying close attention to the fees being paid by 401(k) plan participants. And it’s also clear many don’t like what they’re seeing.

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Avoid This $100 Billion Scam

$100 billion dollars.

That’s what investors are collectively paying Wall Street every year in an attempt to beat the stock market. This according to the results of a new study, “The Cost of Active Investing,” by Dartmouth Professor Kenneth R. French.

So what do investors get in return? According to Professor French’s research, worse than nothing. In fact, the study finds that if investors had simply invested in a passive market portfolio (ie. index funds) between 1980 and 2006, they would have boosted their average annual return by 67 basis points.

And as we've written about before, Small Percentages Add Up To Big Money.

There’s an excellent article in the New York Times that examines this study in more detail. The bottom line?

“The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you. “

You can read the New York Times article here.

You can download Professor French's study here.

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More Really Smart Guys Lose Their (Clients') Shirts

Carlyle Capital Corporation was the idea of the hedge fund giant Carlyle Group. Carlyle Group, headed by former IBM Chief Lou Gerstner, brought together some of the top business minds in the world to manage money all over the globe for sophisticated investors.

In 2006 they had a great idea to set up a separate company to buy AAA rated mortgage backed bonds. It sounded safe enough. Unfortunately they thought it would be a brilliant idea to borrow 32 times the capital they invested and raised. Last week Carlyle Capital defaulted on $16 billion worth of loans and their shareholders were left empty handed.

Hey, but they are really smart guys!

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Great Tool for Investors: Mutual Fund Expense Analyzer

Want to find out exactly what your mutual funds will cost you in fees?

Here's a great little tool from the Financial Industry Regulatory Authority (FINRA) to help you do that:

http://apps.finra.org/investor_Information/ea/1/mfetf.aspx

It's a calculator where you select the mutual fund you own from an extensive list (you even enter what share class you own ... A shares, B shares, etc.). Then enter the amount you have invested, the expected annual return, and the holding period (the number of years you plan to own shares).

The calculator then shows you what your investment will grow to and how much you will pay in fees over the timeframe selected.

You can also compare funds. Try entering funds that your investment advisor has bought for you or you selected for your 401k/403b plan. Then compare that to the equivalent Vanguard index fund or ETF. The difference in fees can be eye-opening.

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The Miracle of Compounding Interest and the Disaster of Compounding Costs

Compound Interest.

It’s been called the Eight Wonder of the World. Albert Einstein reportedly deemed it the greatest mathematical concept of our time.

Here’s how it works.

You take some money, say $1000, and put it into an account that earns interest. If you have an annual interest rate of 8%, after the first year you’ve earned $80. This gives you a total of $1080.

The second year, you get 8% interest again. Only this time, you earn 8% on $1080 (your original $1000, plus the $80 in interest you earned the first year). That means you’ll earn $86.40 in interest for year two, bringing your total to $1,166.40.

Do this for 30 years and without adding another penny to your savings you end up with over $10,000. Do it for 50 years and you’re close to $47,000.

If you add money to your original $1000 on a regular basis, then things really get interesting. Adding just $1000 a year (using the same 8% annual return above) will bring your 30 year total to over $132,000 and over $660,000 if you don’t touch it for 50 years.

While many investors are aware of the concept and benefits of compound interest, few give thought to the sinister forces of compounding costs.

An excellent article from the Consumerist shows how costs can add up over time . . .

"A 2006 study by Congress found that increasing fees by 1 percentage point results in you having 17% less money money when you retire.

In their example, put $20,000 in a 401(k) for 20 years and you end up with $58,000 if the fees are 1.5%. But if they were .5%, you would have $70,500. That's a lot of money. Increase the time to 35 years and what would be $220,000 drops to $163,000.

If you invest $1,000 at age 20 with an 8% return and 2.5% expense ratio, and just leave it there like that until you're 85, you will come out with $35,250, while your fund manager rakes in a cool $126,432."

That’s right, you’d be putting about 3.5 times as much money in your fund mangers retirement account than your own!

Two questions for you to ponder:
1. How are those seemingly small percentages you’re paying your 401(k) plan administrator and/or active mutual fund manager going to impact your ability to retire and the lifestyle you lead when you retire?
2. Are you doing more to build your nest egg or your money manager’s nest egg?

You can read the entire article from the Consumerist here.

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The Huge Gap Between Fund Returns and Shareholder Returns

They’re hard to ignore.

Those eye-popping returns featured in the ads for the mutual fund industry are very attractive. Why try to match the market when it looks like you can smash the market by investing in the right mutual fund?

Unfortunately, things are not always as they appear.

At a talk to the Financial Industry Regulatory Authority, John Bogle, the founder of Vanguard, shared some startling data.

Returns for the S&P500 from 1980 – 2005: 12.3%

Returns of the average fund from 1980 – 2005: 10%

And how well did investors do in that time period? No one knows for sure, but it appears they did much worse than 10%.

As an example of how bad investors might have fared in that time period, Bogle looked at the returns of the 200 funds with the largest cash inflows from 1996 – 2005. Those funds reported average returns of 8.9% for the period. The dollar-weighted returns (the returns shareholders actually earned) were an abysmal 2.4% - just 25% of what the funds themselves returned.

Of course the fund industry will say that it’s the investors fault for not staying fully invested during that time. Bogle has a different view however. He sites 3 main reasons that the mutual fund industry plays a big role in the dismal returns actually earned by investors.

1. “It was we in the fund industry who created those new funds that were to create such havoc for investors. As the market soared ever higher, we introduced those 494 brand new “New Economy” funds. Only a precious few of the major fund marketers had the courage to stand firm against the market madness, and forbear from creating and offering such funds.

2. When we had funds whose performance turned “hot,” we marketed them aggressively. Our public relations departments were willing co-conspirators with the press in establishing interviews with our “star” portfolio managers, many of whom, inevitably, turned out to be comets.

3. The higher a fund’s performance soared, the more we advertised our returns. Example: In March 2000, the month the market hit its high, there were 44 equity funds that advertised their performance in MONEY magazine. The average advertised annual return was +86 percent. Imagine! (During the next three years, these funds were to plummet by 39 percent.) Unsurprisingly, after the fall, in the October 2002 issue ofMONEY there were only four funds that did so.”

We have two lessons here:

1. Invest for the long term. Market timing does not work.
2. The “eye-popping” returns featured in the ads for actively managed funds are very misleading. The overwhelming evidence out there indicates that investors would be much better off investing in low cost, passively managed index funds.

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When Does 0.10% Really Equal 3.5%?

You're saving for retirement thinking your company has a great 401k plan.

In fact, the company even sends you a memo saying that they cut the fees on your plan to 0.10%.

Fantastic! You're socking away the savings. Fees aren't eating up your returns. You'll be able to retire in no time!

BUT (you saw that one coming) . . . that's not the whole story. In fact, it's not even close to reality.

A little digging around finds out that 0.10% doesn't account for all the fees you're really paying. You discover undisclosed expenses for management fees, commissions for buying and selling securities in the plan's mutual funds, revenue sharing, advisory services and more.

All of a sudden that 0.10% turns into 3.5%!

Seem farfetched? Well, that's exactly the situation an employee at one engineering company described in a recent Bloomberg article.

The sad fact is that most employees don't know they're paying any fees in their company's 401k. And only a tiny fraction go to the trouble of finding out what they are paying in fees like the employee featured in the article.

We constantly harp on investment fees because we believe there is no reason you should be paying as much as you are probably paying right now. Not only do fees eat up your returns, but there's no evidence the advice you are getting from your money manager(s) justify those fees by helping you beat the market.

The other important issue to note is that the employee in the article has plans to retire this fall but now, in part to the high fees he's been paying all these years, he's not sure he'll be able to. It's easy to get caught up in all the numbers and statistics in investing (in fact, Wall Street's counting on you doing that) but there are serious, real life consequences at stake.

The article reports that an extra 1% in fees can decrease your returns by 15% over 30 years. So say instead of $1 million at retirement, you only have $850,000. What does that lost $150,000 mean to you in real terms?

Having to work longer than you want to/plan to?
Not leaving as much behind to your children/grandchildren as you planned?
Not having enough to leave a bequest to your favorite charities?
Cancelling your plans for that dream vacation you want to take when you retire?

Maybe you feel it's not worth fighting for an extra percentage point here or there - but how about fighting for an earlier retirement, dream house, or dream vacation?

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How To Weather the Recent Stock Market Turmoil: Think Climate Change

Since we posted about investing in down markets last October, things have gotten much uglier in the financial markets.

Listening to the Chicken Little financial pundits scream “The sky is falling, the sky is falling,” it’s tempting to take your money out of the markets and stuff it in your mattress.

It’s not easy to watch the value of your investments sink like lead. However, the advice we gave in October still holds true. Investors who keep investing during a falling market can really pad their long term returns.

Try to remember that what happens from day to day, or even month to month, in the stock market is weather. As a long-term investor you should not be interested in weather, you should be interested in climate change.

And over the long term, investors who don't panic during the inevitable market downturns and stick to their target allocations will be duly rewarded.

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How Small Percentages Add Up To Big Money

Is 1% small percentage?

That's what Wall Street and money managers want you to think.

They count on the phobia most people have of math to get investors to believe the few percentage points they charge for their "expert" money management skills is small potatoes compared to the huge sums of money they can make you (never mind that there's no evidence to show money managers can outperform the market - but that's another blog post!).

But just that little 1% can easily cost an investor tens or hundreds of thousands of dollars in lost savings.

Here's an excellent example from the book "Stop the 401(k) Rip-off!" that shows how (while this example uses a 401(k), other than the employer match in this example, the math holds true whether you have your money in a retirement account or not):

Say you have $75,000 in a 401(k). If you could reduce your 401(k) expenses by just 1% a year, that saves you $750. Not bad, but that probably isn't going to make or break your retirement.

But each year, you're adding to your 401(k) balance (at least you should be!).

So if you're contributing 10% of a $50,000 salary, that's an additional $5000 a year going into your 401(k). Add an employer match of $2500 and that makes it $7500 a year. After adding that $7500 and your portfolio going up 7% (a little below the historical stock market average), a year later you now have $87,750 in your account.

But now your fees have increased from $750 to $877 – an increase of almost 17%!

Add the magic of compounding and ten or twenty years down the line your 401(k) could easily be worth $250,000 to over $1,000,000. That 1% is now costing you $2500 to over $10,000 – every year.

Could losing that much each year make or break your retirement?

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Bond Fund Debacle

A recent article in PLANSPONSOR magazine provides a stunning real world example that illustrates the pitfalls of owning a bond fund.

It involves 2 institutional commingled trust funds offered by State Street Global Advisors (SSgA) that were deemed "conservative" investments managed by an investment firm that is "risk averse."

The investments in question are the SSgA Intermediate Bond Fund and Government Credit Bond Fund.

According to a complaint filed in the District Court for the Southern District of New York against SSgA, that in July and August 2007 the Intermediate Bond Fund lost 12% (while its benchmark index rose 3%) and the Government Credit Bond Fun lost a whopping 25% during those two months (it's benchmark index rose 2%).

A few month ago we wrote about why you should never buy a bond fund.

In a nutshell, a bonds place in a portfolio is to provide certainty. Bond funds deprive investors of that certainty.

The SSgA example shows us that when you need a conservative, safe, risk averse investment that brings some certainty to your portfolio, lay of the bond funds and stick with good old US Treasuries.

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The Real Secret to Making Serious Money on Wall Street - Work There!

Despite shareholders in the securities industry losing $74 billion in equity this year, Wall Street will still be paying out record bonuses to their employees of around $38 billion for 2007. This according to a recent article from Bloomberg.

And those are just the bonuses paid to employees of Wall Street's five biggest securities firms - Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. (The $38 billion doesn't include the bonuses paid to hedge fund managers, mutual fund managers, money managers, etc. in the hundreds of other investment firms investors entrust with their money.)

Where does the bulk of this bonus money come from? The excessive fees charged to the investors who lost $74 billion in equity this year.

It's the Wall Street way. You win, they win bigger. You lose, they still win big.

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