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Managing 401K Expenses

February 28th, 2010 No comments

In the news today is a proposal by the Labor Department requiring employers to increase disclosure of 401K investment fees. After reading this article, I decided to take a closer look at my own 401K plans, all three of them.

You might ask why I even have (3) plans, and have not yet rolled them over to an IRA. All of them offer two key investments that I require: an S&P500 index fund, and a short term money market fund, or equivalent. These two investments offer a low cost method to split your investments between cash and stocks. At some point these accounts will be moved to an IRA.

First, a word about finding the “cash” investment option in your 401K: be careful not to select a bond fund. Bond funds do not necessarily keep your principal safe, and in fact most bond funds are very much like stock funds in that they can lose and gain value separate from the income that they provide. Find the investment in your plan that indicates in its prospectus something like “invests in stable value contracts”.  Most of these investments also contain the words “stable value” in their name. If not, it may be named something like “money market fund”.

Since I invest in only two vehicles at this time which are presumed to be low cost, I thought that I did not need to consider fees. But as I discovered upon further investigation, there is some room to improve my returns by managing costs a little more. All funds are required to provide a prospectus that gives you detailed information about the fund, including fees. If you cannot find this information on your 401K providers site, contact them to get copies of these documents. First, here is what I found out about the fees for each of my 401K plans:

 Plan A, Expense Rate

    S&P500 Index Fund:   0.15%

    Stable Value Fund:   0.12% 

 Plan B, Expense Rate

    S&P500 Index Fund:   0.24%

    Stable Value Fund:   0.80% 

 Plan C, Expense Rate

    S&P500 Index Fund:   0.27%

    Stable Value Fund:   0.25%

In order to understand your fees completely, find out who manages your funds. If your 401K is a cafeteria style plan (funds from different providers managed by another provider), you may find that there can be two sets of fees. The S&P500 index fund in Plan C is setup that way, and as I discovered only by contacting the 401K manager, there is an extra 2 basis point charge on top of the 0.25% expenses that came along with the fund.

So far so good. All of my current investments charge annual expenses of less than 1%. Not all funds that charge more than 1% fees should be avoided, but investigate them ahead of time before buying them. Don’t unknowingly pay high investment fees particularly since lower cost options are usually available.

 The fund that stands out is the Stable Value fund in Plan B. Given that the expected investment return is about 4-5%/year for typical stable value funds, an expense rate of %0.80 is a real drag. I made the following change: moved all the money out of that fund into the S&P500 Fund in Plan B. An equivalent amount was then moved from the Stable Value Fund into the S&P500 fund in Plan A. This change kept my overall ratio of cash/stock the same, but lowered my costs by more than 1/2% for the portion that is invested in “cash”.

Why Newspapers Are Dying

February 18th, 2010 No comments

There are a lot of reasons why newspapers are dying. I can look no further than all the commuters on the train each day. More of them are carrying BlackBerry’s and fewer are carrying newspapers. When I look at my own habits, the BlackBerry works because it integrates not only my daily news needs but other information such as email, stock quotes, texting, etc.

But there is one small subtle point that really irks me and demonstrates why newspapers won’t last unless they change. A major New Jersey newspaper carries a few financial columns where people write in and ask for financial advice. 

If you read these columns they still smack of the old guard where the writer guards the information and only ‘experts’ can give advice. Any kind of financial advice is going to involve the following topics at a minimum: income, debt, savings, investments.

The most recent article they conveniently forget to mention what the income of the couple was. Is it a secret? I read quite a lot of financial information and their whole take on the couple’s cash flow was in my mind unintelligible. Is this what they intended, to confuse so the average reader will just run to the CFP or CFA?

There is a place for professional advice. As I have indicated elsewhere, this site is not run by a professional CFP. 

There needs to be more transparency in their advice. So, if a reader did want to seek professional help they would have a better understanding of the issues. That’s why I think newer technologies such as blogging will ultimately lead to better advice.

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Get Dividends from your Insurance

February 15th, 2010 No comments

Earn a dividend while holding your insurance policy. If you have ever compared policy rates quotes for auto insurance, home insurance you should take into account the opportunity to earn dividends on your policy. Not all insurance companies pay dividends, and even ones that do may not pay a dividend each year.

I have been earning dividends on my own auto insurance policy for 15 years. It has averaged about 5% per year. 

No Free Lunch

Dividends come out of the premiums that the company collects each year. If the financial performance of the company is good (claims are low, earnings on investment are good), there may be cash leftover at the end of the policy year. One of the ways to use the cash is to pay the policy holders. You should be eligible for a dividend regardless of your claim history.

Another option the company has is to lower premiums by adjusting their underwriting guidelines. 

Companies that Pay Dividends

Some of the companies that pay dividends. Contact the insurance company or broker to find out if dividends are paid.

  • USAA
  • Progressive
  • State Farm Mutual Automobile Insurance Company
  • Texas Mutual Insurance Company
  • New Jersey Manufacturers Insurance Company
  • Amica

What’s in a Stock Price?

February 12th, 2010 No comments

I have been having an on going discussion with one of my friends about stock prices. Tom believes that the stock price itself determines whether or not a company is “expensive” or “cheap”. If you are going to invest in individual stocks, one of the first concepts to learn is that stock price by itself is largely irrelevant when determining the value of the company.  The stock price must be paired with other valuation criteria to determine whether or not a stock is “cheap” or “expensive”.

Unfortunately, some financial writers some of whom should know better try to attract readers with misleading article titles, such as “Bargain $10 Stocks to Buy”, or “The Best Stocks under $20”. There is a small amount of relevance to stock prices in the sense that good quality large companies try to keep their stock price in the range of $30-$50 to appear “affordable” to retail investors. If the stock price of such a company did fall to under $20, this might imply that it was “cheap” because the price fell out of the normal price range.

Not all good quality companies split their stock to maintain a certain price point. There are some companies who have never split their stock. The most famous example of course is Berkshire Hathaway(BRK-A), led by Warren Buffet. Since its public offering over 40 years ago at a price of $15, the stock has never been split.  At a price of $90,000 per share, very few retail investors can afford it so this is an extreme example of how a price can be a barrier (there are “cheaper” class B shares available at a cost of about $2,900). Other newer examples include the insurance company Markel (MKL) at about $300/share, and Google (GOOG) at $400/share.

If you only have $100 to invest, then a $400 stock is indeed expensive.

At the other end, very inexpensive stocks can be cheap due to company problems. The major stock exchanges require companies to maintain a minimum stock price ($1) or face de-listing. Also, stocks priced under $5 may be filtered out by large institutional investors who maintain minimum price levels.

For typical companies that are viable and stable, to determine if a stock is cheap, look at the companies earnings, free cash flow, balance sheet, and other criteria. As an example, compare Google to Bershire Hathaway, which is cheaper on an earnings basis? Even though Berkshire costs about $90,000 per share, that gets you over $7,300 of earnings in the past year. The earnings for a share of Google are only about $15. So, by that comparison Google is actually twice as expensive as Berkshire Hathaway.

Do You Need Rental Car Insurance

February 11th, 2010 No comments

If you have ever rented a car, you will be faced with a dilemma: do you buy the car insurance offered by the rental car agency? After investigating this issue myself, I can understand why the uncertainty may create doubt, which may lead you to buy extra coverage unnecessarily.

Typical Case

For cases where you are renting in the U.S and you have a full coverage insurance policy with a carrier (liability and collision/comprehensive), your liability for damage to the car and others will be the same as if you were driving your own car. When a claim needs to be made, you will need to file it with your insurance carrier and also cover any deductibles that are built into your policy.

Recap: Liability insurance covers damages you cause (or are determined to be responsible for) to other people or property. Collision/Comprehensive insurance covers damages only to the vehicle (the loss limit is the value of the vehicle).

No Collision Coverage

On my own personal car policy, I dropped the collision/comprehensive coverage and self insured. Therefore, there isn’t any coverage to use in the case where there are damages to the vehicle that are not covered by a third party policy. I would be on the hook. However, if you use a Visa/Mastercard to pay for the rental (be sure to use it to pay for the entire bill), you may get a collision/comprehensive policy coverage.

The following cards include the coverage:

  • All Visa Cards.
  • MasterCard Gold and above, the standard card is not included.
  • All AMEX Cards.

The coverage offered by the policy will typically include the following: damages up to the vehicles value, towing costs, and loss of use costs charged by the rental company.

Credit Card Bonus

Even if you use your own personal insurance to pay a claim, you can use the policy offered by your credit card to pay for deductibles. You will need to charge the rental bill on the credit card and file a separate claim.

Buying the LDW

Rental car companies offer their own set of coverages, they would need to at least for people who are licensed but don’t have any insurance. These policies are much more expensive than the equivalent daily rate for your own personal policies.

In the case of the collision/comprehensive policy, the best policy they offer is the Loss Damage Waiver (LDW). This is not insurance because there is no claim to file, when damage occurs you walk away and the coverage takes care of the damage. It is understandable why you might want to buy this coverage since it relieves you of the trouble of filing claims.

Some companies (Hertz, e.g.) offer small policies that only cover the deductible of a damage claim or small damages, up to a typical limit of $500 or $1000. These waivers have the same trait of the LDW, you walk away with no claims to file. Of course, any damage in excess of this amount would require a claim against your other coverage.

International Coverage

If you have a personal insurance policy in the U.S., it very likely isn’t going to be of any benefit when renting abroad. These policies only cover the U.S, including Puerto Rico/Virgin Islands and probably Canada.

If you are travelling abroad and want to rent a car, plan accordingly. Using a major credit card will still get you collision/comprehensive policy as above, subject to some country exclusions. Liability coverage won’t be included. Here are some links that talk about things to look out for: here and here.

Final Tips:

  • When you are on vacation, it doesn’t hurt to buy extra coverage if it gives you some piece of mind. After all, you are there to enjoy your vacation not worry about unforeseen costs.
  • Credit cards policies may limit vehicle value to $50,000 or less. Don’t rent a fancy car. Also, there are limits on the number of rental days: for MC it’s 31 days, for Visa it’s 15 days U.S/30 days international.
  • Credit card coverage will be available if you charge all the rental costs to the same card. Make sure the renter (the person signing the rental contract) and CC owner are the same person.
  • It doesn’t hurt to call your credit card issuer first to verify coverage.
  • Inspect your vehicle before you drive off! You don’t want to be surprised with any damages that you did not know about. The rental company should provide a sheet for you to document any existing damage.

More Information.