Beware of Outrageous 401K and Mutual Fund Fees (Expense Ratios)

If you are like most people saving for retirement may not be the first thing on your mind. Stocks, bonds, mutual funds, expense ratios, index funds, actively managed funds are all probably terms you’ve heard before.

Generally speaking you don’t have to be a Wall Street whiz to save for retirement and start to build up a nest egg. One of the best ways to have a reasonable chance at reasonable stock market returns is to create a lazy portfolio that merely seeks to keep up with the gains of the overall stock and bond markets. That’s what an index fund is. It doesn’t try to outsmart or beat the overall stock market; it just aims to stay with it. Most actively managed funds (where the portfolio manager trades stocks and bonds more frequently cost you more money in trading fees and commissions and result in sub-par returns for you over the long haul.

On the subject of expenses or expense ratios (the percentage of the money you have invested in a mutual fund that the mutual fund company charges to manage the fund), Vanguard is the most well known mutual fund company for helping investors keep more of their money by keeping fund expenses low.

When you signed up for your company 401K, did you happen to pay much attention to the fees associated with your account? Some 401K providers offer retirement plans for businesses in which the company providing the plan harvests a FORTUNE in fees which greatly diminishes your overall returns.

When you buy funds through a company like Vanguard, the expense ratios are typically much less than 1%, sometimes as low as 0.1%. If you have a 401K plan through some other 401K custodians, you will have a selection of funds to choose from, each with what are often higher than average expense ratios. Often times, since the 401K custodians send business to those mutual funds by administering 401K plans, the custodian is likely to get a referral fee from the fund company. Sometimes buying through a 401K custodian can benefit you buy eliminating the loads some fund charge. A load is a fee you pay to buy (front end load) or to sell a fund (back end load).

In addition to a 401K custodian getting a (reasonable) kickback from the fund company, they also tack on another fee in many cases. This fee can be at least as high as 1.45%, which mean that each and every year, they take up to 1.45% of your total assets to administer your 401K plans.

So what does that mean to you in plain English?

Lets say you’ve been a 401K participant for a while, your investment choices have done reasonable well and your balance is $100,000. At the end of the year or maybe with each contribution you make when you get paid, your employer gives you some kind of matching contribution. Lets say the match ends up being $1,500 for the year. Well, if you have a balance of $100,000 and your 401K provider charges an additional 1.45% annually of your assets to administer your 401K, they will take $1,450 for administering your account each year. It was nice of your employer to give you a match; to bad the fund company took it all to pad their pockets. If the funds available in your 401K plan are not Vanguard funds with really low expense ratios, you may pay another 1% or more so that annually on a $100,000 balance you pay $2,500 to have your 401K.

Unfortunately unless you can get your company to switch 401K providers, there isn’t much you can do about this if you want to max out your tax deferred retirement accounts. If you are not maxxing out the total amount you can save between a 401K and an IRA and your 401K plan has outrageous expenses like this, you should consider putting in just enough to get the employer match and the starting a traditional IRA or a ROTH IRA. Companies like Vanguard are great for no transaction fee, very low expense ratio funds. E*Trade Brokerage is great for ETFs or individual stocks. Vanguard has a great variety of stock and bond index funds to track various benchmarks and indices and target retirement date funds that adjust your asst allocation for you as you get older.
401K plans 401K Retirement Plans mutual fund expense ratios Retirement Planning & Investing retirement plans retirement savings ROTH IRAs SEP IRAs Traditional IRA Investment Plans401K plans 401K Retirement Plans mutual fund expense ratios Retirement Planning & Investing retirement plans retirement savings ROTH IRAs SEP IRAs Traditional IRA Investment Plans

Beware of Outrageous 401K and Mutual Fund Fees (Expense Ratios)

If you are like most people saving for retirement may not be the first thing on your mind. Stocks, bonds, mutual funds, expense ratios, index funds, actively managed funds are all probably terms you’ve heard before.

Generally speaking you don’t have to be a Wall Street whiz to save for retirement and start to build up a nest egg. One of the best ways to have a reasonable chance at reasonable stock market returns is to create a lazy portfolio that merely seeks to keep up with the gains of the overall stock and bond markets. That’s what an index fund is. It doesn’t try to outsmart or beat the overall stock market; it just aims to stay with it. Most actively managed funds (where the portfolio manager trades stocks and bonds more frequently cost you more money in trading fees and commissions and result in sub-par returns for you over the long haul.

On the subject of expenses or expense ratios (the percentage of the money you have invested in a mutual fund that the mutual fund company charges to manage the fund), Vanguard is the most well known mutual fund company for helping investors keep more of their money by keeping fund expenses low.

When you signed up for your company 401K, did you happen to pay much attention to the fees associated with your account? Some 401K providers offer retirement plans for businesses in which the company providing the plan harvests a FORTUNE in fees which greatly diminishes your overall returns.

When you buy funds through a company like Vanguard, the expense ratios are typically much less than 1%, sometimes as low as 0.1%. If you have a 401K plan through some other 401K custodians, you will have a selection of funds to choose from, each with what are often higher than average expense ratios. Often times, since the 401K custodians send business to those mutual funds by administering 401K plans, the custodian is likely to get a referral fee from the fund company. Sometimes buying through a 401K custodian can benefit you buy eliminating the loads some fund charge. A load is a fee you pay to buy (front end load) or to sell a fund (back end load).

In addition to a 401K custodian getting a (reasonable) kickback from the fund company, they also tack on another fee in many cases. This fee can be at least as high as 1.45%, which mean that each and every year, they take up to 1.45% of your total assets to administer your 401K plans.

So what does that mean to you in plain English?

Lets say you’ve been a 401K participant for a while, your investment choices have done reasonable well and your balance is $100,000. At the end of the year or maybe with each contribution you make when you get paid, your employer gives you some kind of matching contribution. Lets say the match ends up being $1,500 for the year. Well, if you have a balance of $100,000 and your 401K provider charges an additional 1.45% annually of your assets to administer your 401K, they will take $1,450 for administering your account each year. It was nice of your employer to give you a match; to bad the fund company took it all to pad their pockets. If the funds available in your 401K plan are not Vanguard funds with really low expense ratios, you may pay another 1% or more so that annually on a $100,000 balance you pay $2,500 to have your 401K.

Unfortunately unless you can get your company to switch 401K providers, there isn’t much you can do about this if you want to max out your tax deferred retirement accounts. If you are not maxxing out the total amount you can save between a 401K and an IRA and your 401K plan has outrageous expenses like this, you should consider putting in just enough to get the employer match and the starting a traditional IRA or a ROTH IRA. Companies like Vanguard are great for no transaction fee, very low expense ratio funds. E*Trade Brokerage is great for ETFs or individual stocks. Vanguard has a great variety of stock and bond index funds to track various benchmarks and indices and target retirement date funds that adjust your asst allocation for you as you get older.
401K plans 401K Retirement Plans mutual fund expense ratios Retirement Planning & Investing retirement plans retirement savings ROTH IRAs SEP IRAs Traditional IRA Investment Plans401K plans 401K Retirement Plans mutual fund expense ratios Retirement Planning & Investing retirement plans retirement savings ROTH IRAs SEP IRAs Traditional IRA Investment Plans

Rewards Credit Cards

• Do you want free Subaru service and free Subaru parts?

• Do you spend at least $3,333.00 per year on a credit card?
  

If you answered yes to both of these questions then you are in luck! When you get the Subaru MasterCard from Chase Bank, you get 3% of your purchases back in the form of “Subaru Bucks” which can be used for Subaru parts, accessories and service at a Subaru dealer.

Every time your rewards balance reaches $100, you get a Subaru Buck good for $100 towards almost anything Subaru from Subaru. The card has a limit of $500.00 in rewards per year so if you are a big spender and spend more than $16,666.67 per year on your credit card you will want to have a second rewards card that you can continue to accumulate rewards on.

One way to get around the annual limit on the Subaru rewards card is to simply get more than one Subaru Rewards card. Each of the $100 Subaru Bucks coupons is good for 5 years so between a trade in and as much as $2,500 in coupons per card over the course of 5 years, you could fairly easily get a free Subaru when you go to trade yours in for a new one if you get multiple cards. The dealer may or may not go for something like this but in any case you can get up to $2,500 off your new Subaru “playing by the rules” with just one card.

As with any credit card, make sure you pay off the balance in full each and every month. If you don’t you’ll pay the typical credit card interest charges which add up to a ton of cash and will be far in excess of any rewards you will get for using the credit card.

If you don’t have a Subaru, there are other great rewards credit cards including the MBNA (now Bank of America) World Points credit card and the Fidelity World Points card which is an even better deal if you have a Fidelity investment account.

Business Start-Up Killers or How to close your business in five steps!

Having been in business now for nearly eight years, I recently had pause to consider why typical businesses don’t succeed in the local market in Taiwan or anywhere. This list includes some of my observations:

1. Poor Financing

Most business owners here in Taiwan budget enough money to open the business, but they base income projections and the related decisions on the most rosy of circumstances in the first three months. The result is often that the business will close within 3 months because the businesses have run out of cash, and haven’t built up enough customers on a returning basis to pay for the basic costs. If you’re planning to open any business, remember to consider several scenarios and prepare for different results.

When we opened our business, we had very low estimates of income in the first six months; and we were financially comfortable with the idea of paying costs until the business could support itself. Part of that was a realization that salaries for the bosses (the only staff at the time) would be token only.

Solution: Always budget for a period at startup in which income is less (much less) than your expectations. Don’t forget to include unexpected startup costs. Be bullish on these because best-case scenarios rarely occur.

2. Missing the Mark

It’s amazing how many business owners only look at the superficial aspects of running a business. Yesterday my wife and I ate in a coffeeshop that had newly opened. The coffeeshop had a great location, and lots of potential. But when we walked into the store, everything LOOKED fine. It’s only when we ordered the food that we noticed the LOOK of the store was quite different from the reality. The staff were untrained, didn’t know how to greet customers, the drinks we ordered were pricy (for that kind of service) and really didn’t measure upto drinks at half the price in better restaurants (no flair), and the management seemed too busy doing the work to notice what was missing: an atmosphere, good service, and passion for the foodservice business. Oh, well.

The restaurant was called O Sole Mio and had a very pretty facade with a decent counter area, and much of the right equipment, too. Its location was on a major route around the north coast of Taiwan just outside Jingshan. In reality, most people would only stop once as we did.

Solution: Focus hard on the quality of the food or service that you produce. Make sure that they are up to scratch. And be your own harshest critic.

3. Location, Location, Location

That’s right. We’ve seen great businesses with potentially good profit margins killed by their locations. Why? Because the location chosen for the business ate up most of the businesses income. The business owner had chosen a high traffic location to maximize the market exposure. Result: he ended up paying over the odds for rent. When it turned out the product wasn’t that great, initial business interest fell away, and word of mouth didn’t occur.

A bakery opened across the road from our community and fell victim to this situation. Worse: the baked goods were quite unexceptional, and there was little reason for customers to cross the road to shop there, when TWO very good bakeries were less than 100 yards away. It shut in less than three months.

Solution: Choose a cheaper location, and create such a great product that people will go out of their way to find you. Once you have the quality, margins, and cash, then rent a mainstream property.

4. Hiring Staff

This has to be the biggest bugbear of any new business. Why? Finding good staff is an ongoing nightmare for our school from the first year that we opened. We have recruited actively most of the past eight years, but many of the applicants have been less than desirable. Even those we vetted carefully and who came to interview and do demos with us were in most cases unsuitable. We hired the best of those interviewees, but in reality only one or two of those we hired had the passion to be an excellent teacher.

Of course, hiring and training are both essential. When you hire new staff, it’s important they be trained properly. This is an aspect we seriously underestimated as we expected our hires to have the same passion and skill as we shared. This expectations have been tempered by our experience.

Solution: you have to be prepared to hire selectively, manage directly, and fire decisively. Poor staffing and staff who are unmotivated and interested only in their salary both will seriously undermine your business.

5. Freebies, Giveaways and Discounts

Over the years, we have noticed that some promotions work and some promotions look like they work. You have to learn to tell the difference.
Freebies - Giving away products and services for free rarely generates a good client-base. Why? Because you will always attract people who like ‘free’, and who will shrink at the first sign of a bill or invoice. If you are going to do freebies, make sure it is tied to something that is purchased. And clearly state that these are introductory offers only.
Giveaways - Giving away products may work for toothpaste and shampoo. It will likely not work for your business. Why? Because you will have to give away a lot of samples just to get some leads. Be careful with what you give away.
Discounts - Discounts also can be used to attract attention, but you need to be careful in how you manage them. Otherwise you will find that you have to offer permanent discounts to keep customers who ‘thought’ that the discounted price was the regular price. Worse, as we found out, some customers will tell others that that is the pricing.

Solution: Clearly limit the duration, type and extent of your promotions. Make sure that your discounts, freebies and giveaways are closely tied to those you are trying to attract. And manage your cost basis effectively enough that you can still have a decent mark-up after your promotion. Otherwise, you will find it difficult to service those accounts properly.

One of the biggest reasons that you need to avoid these ‘killer promotions’ in the long term is simply that you will end up in a bidding war either with your own pricing or with a competitor’s. You should have confidence in your pricing structure. Aggressive promotions will create initial surges of interest, but may undermine the future of your business, the quality of your products, and your reputation.

These five issues are all issues that I’ve dealt with in different situations. They did not all pertain to my current business, but I’ve seen how the effects of these bad decisions can effectively ruin a nascent business, even one that has passed the first two years. Do let me know if you have any additional suggestions for this list.