Prudent Money

Blog Topics

<-- Back To Main Blog Page
Blog
Only One Reason to Invest into a 401k Plan

By Bob Brooks

July 30, 2015

I had a listener pose a question the other day.  He said, “Is the 401 K plan still a good place to invest?” 

It is a question that is really never asked.  Conventional wisdom has always been to start a 401 K plan and start funding as early in your career as possible.  Is that still good wisdom for today?

Planning for retirement, saving for retirement as early as possible, and managing your investment dollars should always remain good sound advice.  Where you save and manage your investment dollars might need to be revisited.

I can only see one good reason for investing in a 401 K plan – the employer match.  The concept of free money is hard to turn down.  You put money in the 401 K plan and your employer matches it.  Interestingly enough, a new study by Financial Engines shows that 401 K investors aren’t even taking advantage of the one good reason. 

Their study shows that Americans leave 24 billion on the table every year by not taking full advantage of the employer match.  For example, let’s say an employer matches $1 for $1 up to 5% of a person’s income.  The employee only invests up to 3% of their income wasting the other 2%.  That is like saying to your employer “no I don’t want your free money.”

If that is the only reason you should use a 401 K plan, then what are the reasons that you might consider other accounts?

  1. Choice – Most 401 K plans simply don’t provide enough different types of investments for an employee to adequately diversify.  For example, a 401 K plan could offer 24 stock funds and a few bond funds.  That offers no diversification leaving the employee to mostly  invest in stock with limited choice for diversification into bonds.

  2. Expenses - You know I don’t put a lot of weight on expenses.  I think that companies such as Vanguard get it wrong when it comes to their explanation of expenses and investments. Expenses are ok as long as there is value added.  In some 401 K plans, expenses are high and there is not much in the way of value added.

  3. Limited Guidance – For most people, a 401 K plan is their largest asset.  Yet, they are left up to themselves to make decisions. 

  4. Target Date Funds - 401 K providers are starting to rely heavily on target date or lifestyle funds.  They market these funds as a way to just go on autopilot and easily save for retirement.  You just pick the fund that corresponds with your target date for retirement and the fund will adjust the risk level as you age.  Where do I start? First, you never go on autopilot when it comes to saving and investing for retirement.  That is an irresponsible message from the industry.  Second, age is only one factor when it comes to assessing risk.   

So, it might make sense to challenge conventional wisdom and question the 401 K plan.  Anything beyond an employer match might not make as much sense. 

 
The Outdated Beliefs of the Mutual Fund Industry

 

By Bob Brooks

July 27, 2015

 

More and more companies are taking advantage of the 401 K auto-enrollment.  This allows companies to increase the participating rate of their company 401 K plan.  The auto-enrollment will automatically sign new employees up for the 401 K Plan.  Of course, someone has to make the investment selection.  Don’t worry, the company takes care of that important detail.  They just select target date funds for the new employees.

Target date funds are becoming a staple in 401 K plans.  They are advertised as a way to manage for risk.  They encourage the investor to just invest, go on autopilot, and not pay attention.  The target date mutual fund manager invests the money in the fund based on your age.  The closer to retirement you are the less risk that the fund takes.  The further away you are from the more risk you to take.  The fund adjusts for risk as you age.

For example, if you turn 66 in 2040, you would invest in a Target date 2040 fund.  Since you are so far away from retirement, you would take a lot more risk.  This is an investment philosophy preached by the mutual fund industry.  The industry says you are crazy if you are young and you don’t take a lot of risk.  Obviously the more time you have the more risk you can afford to take.  Unfortunately, it is a flawed concept because it disregards a person’s individual risk profile which is more complex than just there age.  What if you are young, and you are conservative?

FinaMetrica, just released a study that shows the younger generation doesn’t have the risk tolerance that the industry claims.  The study also exposes the flaws in this practice of auto-enrolling into target date funds.   

Their study (consistent with other studies) suggests that the millennial generation (those who were born between 1980 and 2000) hoard cash and are very risk averse.  In the U.S., the average risk tolerance score for this generation was 52.3 out of 100.  Said another way, the younger generation is more comfortable having 43 percent to 63 percent of their portfolios in equities and not 90% to 100% invested in stocks as their target date fund would suggest. 

The mutual fund industry needs to wake up and realize that the financial crisis of 2008 has completely shifted how investors of all ages view risk.  Besides, basing a risk level purely on age misses the point.  A person’s Financial DNA is much more complex these days.  It is yet an example of one more outdated philosophy on how to invest. 

 

 
The Next Step into Socialized Medicine - Blue Cross Blue Shield Drops PPO

July 24, 2015

By Bob Brooks

When Obamacare went into existence, you had to know that drastic changes were going to take place with health insurance.  Socialized medicine is not remotely possible without significantly changing the system.  I just would have never dreamed that we would see it this soon.  Already costs have risen dramatically and will continue to do so.

Blue Cross Blue Shield one of the largest writers of individual health insurance announced that they would be dropping their PPO plans.  However, they will be keeping their HMO plans.  What does that mean?  In a PPO, individuals can chose their doctor.  PPO’s are about choice. HMO plans are not about choice.  They are about choices being made for you. 

Doctors have been leaving the HMO networks right and left after Obamacare came into existence because the insurance companies don’t pay hardly anything.  Of course, that is the exact reason why BCBS made the decision.

The bottom line is the bottom line.  They are paying out way more in claims than they are collecting in premiums.  They lost 400 million in Texas. 

Those losses come after large premium increases last year for individual health insurance holders.  Of course, those increases were determined on the income levels of each region. The poorer regions didn’t see increases.  The higher income levels received the biggest increases.

What will all of this mean?  For the 367,000 Texas insureds it means they will be forced to find another plan.  What does it mean for doctors?  It looks like they will be facing a hard choice.  Do they join the HMO network and accept less or do they snub one of the largest writers of health insurance? 

In reality, it only affects 367,000 people in a state whose population is 26 to 27 million. However, that is not the point.  It is the shot across the bow and maybe where all insurance companies will eventually go.  It could be the next step in the socialization of the healthcare industry.   

 

 
LifeLock in Trouble….Again

 

July 23, 2015

By Bob Brooks

 

LifeLock seems to have a tough time staying out of legal trouble.  The story starts with LifeLock’s “innovative” and “state of the art” identity theft protection system.  What was so innovative about the system?  If you wanted to sign up for LifeLock, you call the company and their innovative system was to call the credit reporting agencies on your behalf and place a fraud alert on your credit report and continue to renew it.

A fraud alert will tell anyone trying to issue new credit in your name that there is the possibility that your personal information has been compromised.  Thus before any new credit is issued, they have to verify it is you requesting the new credit. 

So, why in the world would the Federal Trade Commission (FTC) have a problem with their innovation?

First, the Fair Credit Reporting Act says any consumer can place a fraud alert on their account.  So, you can do this yourself for free.

Second, the Fair Credit Reporting Act says a consumer can request a fraud alert be put on their account “whose asserts in good faith a suspicion that the consumer has been or is about to become a victim of fraud or related crime…”  The Fair Credit Reporting Act does not say that you can just request a fraud alert because you want to. There has to be a reason.  Thus, LifeLock was using the system to their advantage.

In 2010, LifeLock agreed to pay 11 million dollars to the FTC and 1 million back to customers to settle deceptive practices charges that they were using false claims to promote their identity theft protection services.   They were also required to take more stringent measures to safeguard the personal information they collected from their subscribers.

As a side note, CEO Todd Davis would give out his social security number on TV and said he was not worried because he was also a customer.  Maybe he should worry since his identity was compromised 13 times.

Fast forward to Tuesday of this week and the FTC is at it again.  The FTC said in court documents that were filed Tuesday that the company is continuing to make misleading claims about its service.

The FTC also alleges that LifeLock failed to fulfill the original settlement in 2010 by not creating and maintaining "a comprehensive information security program" to protect customer data such as credit card, bank account and Social Security numbers.

The FTC also claimed that LifeLock falsely claimed in ads that it provided customers with the same sort of protections used by financial institutions, and that from at least January 2012 through December of last year, the company "falsely claimed it protected consumers' identity 24/7/365 by providing alerts 'as soon as' it received any indication there was a problem."

So, this brings us to a question.  Do you do business with a company who settled for 12 million dollars one time and is being charged a second time by the Federal Trade Commission?  In addition, all charges revolve around deception? 

Although they are not guilty until they settle, there are too many companies with integrity.  Where there is smoke, there is probably fire.  For me, I wouldn’t trust them to be my strategy for protecting my identity.

 

 
Health Insurance is Going to Get Even More Expensive for 2016

By Bob Brooks
July 20, 2015

Health insurance premiums are going up…again.  It shouldn’t be any surprise.  We have a broken system that cannot pay for itself. Thus, someone has to pay for it.  Insurance companies are requesting 20 to 40% increases in insurance premiums for 2016.  Last year, at least in the DFW area, we were soaked for around a 20% increase.  The health insurance companies are discovering that people are sicker than they thought.  In many cases, health insurance costs are exceeding the actual premiums that health insurance companies are taking in.

Blue Cross and Blue Shield is clearly the biggest player in the Affordable Care Act.  They are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee and 54 percent in Minnesota according to a CNBC article.

The article cites President Obama saying that consumers should put pressure on state insurance regulators to scrutinize the proposed rate increases. If commissioners do their job and actively review rates, he said, "my expectation is that they'll come in significantly lower than what's being requested."

Either our President is truly disconnected (which I don’t think he is) or he is having difficulty coming up with a say to spin this situation.   

Then there is this response from Sylvia Mathews Burwell, the secretary of health and human services.  Mrs. Burwell said consumers could also try to find less expensive plans in the open enrollment period that begins in November. "You have a marketplace where there is competition," she said, "and people can shop for the plan that best meets their needs in terms of quality and price."

Reality check is that there is not that big of a difference in costs for these plans. The only way to get a cheaper plan is to go straight with the HMO which is the worst option on the marketplace. Doctors know it which is why they are fleeing HMO’s quicker than you can say lower pay-outs for doctors.

Health insurance companies aren’t out there to give anyone a good deal.  It is about survival.   One insurance company collected premiums of $39.7 million and had claims of $56.3 million in 2014. It has requested rate increases averaging 45 percent for 2016.

It is simple math.  At what point do we reach a tipping point where consumers simply cannot afford the “Affordable Care Act.”   When the ACA became law I felt we would be in a honey moon period for a few years before they started aggressively increasing premiums.  Unfortunately, that is not the case. 

What’s even more unfortunate, they will raise the rates only in the higher income areas and leave alone the rates for the lower income areas.  It is wealth redistribution.  They did it in 2015 and they will do it again.  Welcome to unsustainable socialism!

#becominglikeGreece

 
<< Start < Prev 1 2 3 4 5 6 7 8 9 10 Next > End >>

Page 1 of 56