Why Would Anyone Ever Buy a Corporate Bond Again?

Do you find it outrageous that the US Government can come into a Federal Bankruptcy proceeding and start re-organizing the priority claims of secured bond holders in order to save jobs? In the recent Chrysler Bankruptcy the Obama administration did just that! Claiming to save jobs and accusing secured debt holders of being "speculators" President Obama chose to ignore well established law that protects the property rights of the bond holders. But who were these so-called speculators? Would the State of Indiana Pension plan be a "speculator"? The State Treasurer of Indiana is filing a lawsuit calling for a trustee to be appointed in order to liquidate Chrysler so that the secured bond holders can be paid off. "We are simply seeking to enforce our bargained-for rights under well-settled law."- Richard Mourdock, Treasurer - State of Indiana.

Critics of Mourdock are quick to point out that he is a Republican doing this for "political purposes" only. If The State of Indiana is successful then over 4,000 Chrysler jobs will be lost in the liquidation. But isn't the primary purpose of a business to make money or should it be to create and maintain jobs? What is the purpose of your business or organization? If the property rights of these Chrysler bond holders are not secure in the United States then what other fundamental rights are we loosing? Is there anything more valuable than our property rights?

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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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