Insidious 401(k) Fees

Have you ever tried to determine exactly what your 401(k) plan charges in fees? It's nearly impossible. Sure, the plan sponsor will usually provide the investment management fee. That's the fee assessed by the firm managing a particular fund within the 401(k). If the fund is public, then that fee information can also be found at Morningstar or other similar sites, as well. But what about the plan sponsor’s fees?

I have never seen any fee or expense broken out on my 401(k) statement. And based on the statement below by a major financial investment company the fees may never be disclosed!

In a letter to the Department of Labor, Fidelity Investments, the nation's largest plan sponsor, says ample information is available on fees, and additional disclosure will confuse workers and deter participation: "The complexity of the choices presented to participants when deciding to participate in a 401(k) plan already represents a barrier to enrollment. Overwhelming participants with even more information could discourage participation further."

That is an incredibly condescending statement made by an out of control, greedy capitalist. Evidently, their industry would like a little more oversight and government intervention.

What are these fees? Here’s a summary of some of the possible fees and expenses:

Plan Administration Fees - The day-to-day operation of a 401(k) plan - such as plan record keeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole. These fees may be deducted directly from investment returns thus making it very difficult to identify. Or they could be paid directly by the plan. In that case, the fee is either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account.

Investment Fees – this is the largest component of 401(k) plan fees. Fees for investment management are assessed as a percentage of assets invested and are deducted directly from your investment returns. These fees are not specifically identified on investment statements.

Not only are these fees hidden from you, the employee, but in some cases not even your employer knows the fee! The experts say that because the fees are subtracted before investment returns are reported, buried in "bundled services," or not disclosed at all, employers may not be aware of the true costs of their plans.

On the bright side, there are some members of Congress trying to change all of this. Legislation was introduced last month that would require disclosure of all fees to plan participants. Let's hope it passes.

More information on this topic can be found here: The 401(k) Fee Flimflam.

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For all the Money in the World

As much as I enjoy PF and building wealth, I have always placed health and fitness at a higher level. I would rather have my health than money. We have all heard that money is worthless, without your health. Those words are more than a cliché and it's not just talk, I live that statement. From time to time, I plan to write posts about health and fitness and how it can add riches to your life.

A key element to my fitness routine is my bicycle. No bike ride is ever the same, it seems every ride has its memorable events. You just can’t pedal 20 miles and not see something or have something notable happen.

Yesterday as I was riding, a motorist that was behind me slowed to allow a car to pass before he/she passed me on my bike. It only took a moment, but it made the situation much safer for all. As he/she passed, I waved and thanked them. I thanked them for treating me like the human being that they would want to be treated like in the same situation.

Before I say anymore, I know a lot of you get upset when bicycle riders take up the whole lane or ride in large groups and give no consideration to motorists trying to pass them. I don’t like that behavior, either. But, that is no reason to take it out on all riders – some of us are responsible and just want to share the road.

I typically track the outside white line whenever possible, but sometimes I am forced over into the lane. There are lots of reasons to have to take that added risk - potholes, dogs, abandoned vehicles (this is Texas, after all), joggers/walkers, road debris, and trash all pose road hazards to a cyclist. The take away is that no matter what someone else has done to you today, choose the high road and act like the person that you have always wanted to be.

Later in my ride, I was so thrilled with the boost in creativity and energy from exercising outdoors, that I did not even mind when a dog took chase. I noticed he was an Australian shepherd mix and so probably smarter than the average canine. I decided to use a different tactic – instead of shouting for him to back off to show dominance, or squirting him with water, I would use kind words…... As he raced along side me in the grass, barking and occasionally lunging at me, I told him he was a good boy, a good dog. He quickly changed course and shot off straight for a point ahead of us – uh oh. Perhaps he plans to cut me off? And then like most dogs he screeched to an abrupt halt at the boundary edge of his home turf. He barked at me a couple more times for good measure then sent me on my way.

Nothing like a good dog chase to bring you right back in the moment. All of your other problems and worries vanish. Some dogs are relentless, others are just eager to play. I have been fortunate in over 30 years of riding on the road - No dog related crashes, just a scratchy throat from shouting and a racing heart from trying to outrun the chasers. All in all it was another great day on a bicycle!

For more on personal finance check out the Carnival of debt reduction. My article: How I paid off my Home with a HELOC was included this week.

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Gold ETFs – The good, the bad and the taxes

I have a small allocation of my holdings in GLD. It’s an ETF that owns gold bullion. Each share is valued at 1/10 of an ounce of the Gold spot price. It has performed extremely well over the last 3 years that I have held a position in my portfolio.

Gold is often considered a haven in times of crisis. It’s price typically moves in the opposite direction of the dollar. It certainly provides diversification in a stock portfolio.

However, it also tends to attract emotionally driven and speculative investors who can add to its inherent volatility. In addition, it has much less practical use as other precious metals like copper and silver, making it conducive to even more speculation. Consequently, as gold has been reaching all time highs as of late, I have decided to set a target sell price. I plan to sell the ETF when it reaches that target.

Even though I will net a large gain in the sale, I have actually been dreading that sell date. Because, the ETF owns gold, it is considered to be a collectible and is taxed at nearly twice the rate of capital gains. Therefore, I will have to report it as gains from the sale of collectibles and pay a rate of 28% on those gains. There is no way around this – even though some have suggested reporting it as a stock trade and paying only the 15% rate. That's a good try, but when I make the sale, my broker will supply the IRS with that record, so trying to get around this would not be worth the risk.

It’s interesting that if I had sold the shares after holding for less than one year, I would get a lower tax rate. The short-term capital gains rate for gold or silver ETF shares is the same as for other investments: your ordinary income tax rate. The IRS is essentially encouraging short term trading of gold!

Yes, I know it’s a good problem to have. It was a successful investment. Unfortunately, not only do I not want to sell, but because of the extreme tax rate, I do not plan to buy any more shares of GLD. This 28% tax is so onerous that it actually stifles business transactions.
Instead of purchasing gold in the future, I plan to add to my holdings in gold mining stocks, which are taxed like any other stocks.

Now, before I completely eliminate the possibility of ever having gold bullion in my portfolio there is one other way that I could possible buy gold again. This may be surprising to some…..

Even though the IRS considers gold to be a collectible and collectibles are not allowed in an IRA, the IRS has made an exception. As of August 10, 2007, the IRS privately ruled that:

Shares of ETFs in the form of a trust that mirror the price of physical gold and silver do not constitute an acquisition of a collectible if they are acquired in an IRA.

The IRS has created yet another double standard. As a result, a gold ETF in an IRA will not be subject to the 28% long-term tax rate on collectibles. So there’s no reason (at least at this time) to worry about avoiding the collectibles tax rate when holding gold or silver ETF shares in an IRA.

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Releasing stress with a painless, healthy habit

This past week at work turned out to be rather stressful. And today I keep going over and over the events in my mind. I would like to be able to get rid of these thoughts and enjoy my two days away from the office. From previous experience, I know that it usually takes at least a day or so to get past a stressful encounter, but by then the weekend is gone and I am headed right back to work.

I also know that it helps to keep yourself busy. So, I went to happy hour with friends last night, then came home and watched a DVD movie and today I am catching up on reading some favorite PF blogs, but those nagging thoughts are still there. Ugh.

This morning, I found an article at Yahoo Health that caught my attention concerning habits to increase longevity.

For the most part, I already practice 4 of the 5 healthy habits. And since the 5th habit involves reducing stress, why not give it a shot?

The first four summarized:
Eat five small meals a day
Climb the stairs (exercise a little)
Laugh it up
Drink eight glasses of water a day

The fifth healthy habit for increased longevity:
Unwind with meditation.
Stress is the root cause of most of the diseases that shorten our life span. In our modern society stress will continue to increase - unless you find techniques to manage it. Meditation is the best way to release tension and revitalize your being. It teaches you to breath properly, which is critical for eliminating up to 70% of your body's toxins and wastes. It also quiets your mind, lowers your stress hormones, and teaches self-discipline, which is a necessary attribute to achieving your health and longevity goals.

Try this beginning meditation:
Sit comfortably on a chair or the floor. Breathe naturally and close your eyes. Each time a thought appears, put it inside a balloon and let it fly up into the sky and disappear. Do this until the thoughts are exhausted. After a bit, your body will feel very light, and your mind will become still. The first few times it may take a while, but it will get easier and faster with practice.

This is quite different from what I have traditionally considered the path to mitigating problems and ultimately reducing stress. I have always tried to work through the situation, to think about it and work it out. I would try to find a logical answer to something that may not be very logical. Looking back, that approach may have only prolonged the stress!

Depending on what is causing the stress, there may be times when it's best to just eliminate the thought. I kind of like the idea of blowing the thought into a balloon, tying the balloon off so it can’t get out and then releasing it. It does seem to help!

It's truly amazing that tricks or mental exercises like this can be used to essentially override or re-direct the brain. It all points to the fact that we have a lot more control of our thoughts than many of us realize. And with practice, we can improve our thoughts and the actions that they lead to in a powerful way.

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Speculate some, but Diversify more to build Wealth

CNN money has an interesting article on how the experts invest. As you might expect not all of them follow what they preach/teach.

The article presents results from a survey that was conducted of more than 600 finance professors at major U.S. universities to find out how they invest their own money. The survey found that in their classrooms, these professors lecture on complex theories of how markets balance risk and return, while in their portfolios only two-thirds of the professors have diversified the bulk of their assets into index funds.

What about the other one third? They are throwing the theory out the window and chasing stocks based on price growth - not fundamentals.

It seems that a lot of these professors are just like the rest of us. We all know how hard it is to beat the market, but we never stop trying. We are not satisfied with getting anywhere slowly.

The article culminates with some interesting lessons from the survey.

First, whenever anyone tells you that research "proves" a novel method of investing is a market beater, bear in mind that the professor behind the paper is most likely an indexer who has never road-tested his theory in the real world of trading costs, taxes and other expenses.

Second, remember that even many of the people who know best can't resist chasing hot stocks, so you have to control your behavior in advance.

Get rich quick schemes rarely work. Since it is so difficult to control this tendency to chase the latest trend, hot stock, etc, why not strike a compromise? You don’t have to give up completely on trying to beat the market, but you must have a foundation. Just in case you don’t hit it big!

Why not develop a diversified core holding of index funds and then enhance that with a handful of select stocks? This allows for some speculation to feed those "get rich quick" tendencies we all seem to have, while still ensuring that the majority of your funds are working towards "getting rich slowly".