Financial Crisis Officially Over with Dow at 14K

Your Money: Financial crisis officially over, proceed into stocks with caution

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Last Friday, the Dow Jones index passed 14,000 for the first time since 2007.

The Dow Jones index rose above 14,000 Friday, for the first time since October 2007. By itself, the number might not mean much. But portfolio managers and investment strategists believe it does signal one thing: The financial crisis is officially over.

The Dow Jones Industrial Average gained 149.21 points to end last week at 14,009.79 – the highest since that rosy period just before the markets slumped and the Great Recession began. The Standard & Poor’s 500 Index last Friday also jumped 1 percent to return near to a five-year high.

The markets tumbled Monday, possibly because the Dow at 14,000 is an emotional barrier for investors at this point.

How should retail investors be positioning themselves to take advantage of a climate that has been sending the markets higher? James Paulsen, chief investment strategist at Wells Capital Management, rattles off key factors:

U.S. household net worth has been almost entirely restored. Our household debt service has fallen back to levels close to 1994. The U.S. unemployment rate is declining, while the labor force grows. Banks are no longer near collapse, and weekly bank loans have been trending steadily higher. Foreclosures have slowed markedly; housing activity and home prices are finally rising. Consumer confidence is near a five-year high. A massive municipal debt failure no longer appears imminent. Corporate profits are at an all-time high.

“So where’s the crisis?” asks Paulsen. “Despite being in the fourth year of a subpar recovery, the Federal Reserve continues to employ policies never before used and which normally would be reserved only for times of national economic emergencies.”

That could mean the Fed’s accommodative stance on interest rates may stimulate the economy so much that inflation will hit. One sign that might be happening is a big increase in commodity prices.

Commodities last Friday capped the longest run of weekly gains in 17 years, on mounting speculation that the economies in the United States and China will rebound, boosting demand for metals, energy, and crops.

This rising inflation benefits investors in the following sectors: basic industrials, energy commodities such as oil and gas, and precious metals and mining. Long-term, however, those rising prices could eventually crimp corporate profit margins.

Money manager Kyle Bass cited the Federal Reserve’s escalating money-printing as driving the markets. He would not be surprised to see stock prices move higher still, according to an interview he gave CNBC.

So the Dow at 14,000 is just a number to Bass, not a barrier necessarily.

The Fed has been trying to inject enough liquidity into the financial system to keep bond rates low, and push investors toward riskier assets such as stocks – and so far, it has worked. There has been, however, a large divergence of performance within the stock market’s different groups – favoring consumer- and interest-rate sensitive sectors.

Given the overall economic and inflation outlook, this means investors should maintain a favorable bias toward groups that benefit from rising government spending and higher commodity prices, such as oil and gas concerns.

A good case can be made that the Fed will offer continued liquidity injections, adds Wells Capital’s Paulsen. After all, real GDP growth is still quite slow and the unemployment rate is still too high to consider monetary tightening, he contends.

Josh Brown, who founded the blog TheReformedBroker.com, believes the “Great Rotation” out of bonds and back into stocks is still alive.

“Yes, there is curiosity about stocks once again, there is interest,” Brown said. “But there is also dubiousness, apprehension, suspicion, and leeriness.”

Kevin Bannon, chief investment officer at Highmount Capital, which has offices in the United States and Europe, explains that value and price are not the same thing. Investors shouldn’t confuse a Dow 14,000 level with stocks being extremely expensive.

“Fundamentals such as economic growth, inflation, interest rates, and corporate profits determine value in financial markets. Psychology and emotion set price,” he wrote in a note to clients.

So where are we, as the Dow flirts with a new high?

We’re back to where we were five years ago. The financial crisis is over. There still is value to be squeezed from equities. Proceed back into stocks – but with caution.

 

 

Marketfield Fund Manager Betting on Bear Market in Government

 

Earlier this month, we spoke with investors who are avoiding long-term U.S. Treasury bonds. Now we have come across one fund manager who is actually shorting Treasuries – basically, betting they will fall in price – and taking advantage of what he terms is the coming “bear market in government.”

Michael Aronstein is president and portfolio manager of the Marketfield Fund (MFADX), a $4.4 billion mutual fund that returned just over 13 percent in 2012 and 8 percent annually since inception in 2008. Aronstein wants investors to realize governments haven’t cut their debt the way American households have.

And government bond issuers with impaired balance sheets and the weakest underlying fundamentals have fallen first. Greece, Detroit, Egypt, and other government creditors are harbingers of a more widespread problem in the U.S. sovereign debt, Aronstein writes in his latest client letter.

As a result, his Marketfield Fund has “established meaningful short positions in long-duration government bonds during the past six months in response to this risk.” No one knows exactly when, but credit demand in the private sector will begin to crowd out government borrowing and prompt a rise in interest rates, he believes.

Marketfield CEO Michael Shaoul, in an interview, said any retail investor can copy this trade of shorting Treasury bonds, or betting the price will go down. The most popular route is via an exchange-traded fund called iShares Barclays 20+ Year Treasury Bond Fund (TLT). By “shorting” the fund, investors can take the position in their portfolio that U.S. long-term Treasuries will drop in value.

There are more aggressive and much riskier ETFs, such as ProShares UltraShort 20+ Year Treasury (TBT), which uses borrowed money to double up on the same bet. The fund seeks investment results that correspond to twice (200 percent) the inverse, or opposite, return of the daily performance of the Barclays Capital US 20+ Year Treasury Bond Index.

“We started shorting Treasuries in mid-2012, and it’s been comfortable short. It hasn’t put us under any pressure,” Shaoul said. The U.S. business climate is improving, and therefore the biggest risk for Treasury holders “is things going right [with the economy], not wrong,” he claimed.

Investors would likely then flee Treasuries, pushing the bond prices down. “Global economic data could very well surprise to the upside, the bond market misbehaves and overwhelms the Federal Reserve,” Shaoul explained. “The fact that they are targeting inflation and unemployment is very peculiar, and they have been wrong since 2009.”

Sophisticated investors can also buy put options on Treasuries – also wagers that the prices will go down.

From a timing perspective, the danger point for credit markets could be close at hand. Housing activity continues to accelerate, business investment is turning up, the U.S. government is resisting expenditure cuts and the Federal Reserve is continuing with policies that seem appropriate for the summer of 1932, Aronstein contended.

“The only mechanism that might change cavalier attitudes toward spending is the bond market,” Aronstein said. “If government remains on its current heading, fiscal discipline is going to be imposed rather than chosen. When we reach that stage, the volatility now associated with equities may migrate to fixed income markets.”

Marketfield Fund holds plenty of equities as well. Its top holdings as of Dec. 31, 2012, included BASF of Germany, iShares Dow Jones Transportation Average ETF, SPDR S&P Regional Banking ETF, iShares MSCI Mexico Index Fund, Eagle Materials and USG Corp.

 

Time to Avoid Treasuries: Philly Inquirer

If you were lucky or smart enough to buy U.S. Treasuries years ago, when those bonds were yielding high single-digit returns or higher, then there is no reason to sell them now.

However, if you have new money to put to work, should you avoid U.S. Treasuries? Probably, as spelled out in my column for the Philadelphia Inquirer.

Short- and longer-term interest rates essentially didn’t move in 2012. While there were fluctuations, short-term interest rates remained close to a paltry zero level, with longer-term Treasury bonds yielding just 2.5 percent to 3 percent.

America’s fiscal and monetary policy is also less supportive of bond prices, says Columbia Management’s Gene Tannuzzo, a senior portfolio manager. The Federal Reserve props up Treasury prices by acting as one of the biggest buyers, and Congress can’t agree on how to cut deficits, which means we have to issue more Treasuries to pay for all of our entitlement programs.

In descending order of attractiveness, Tannuzzo likes these bonds instead: bank loans, residential mortgage-backed securities, high-yield corporates, emerging market bonds, and investment-grade corporate bonds, which compensate investors for the assumed risk.

However, sovereign bonds, including U.S. Treasuries and what are known as agencies, such as Fannie Mae and Freddie Mac bonds, “no longer pay investors for the risk they take,” he adds.

We asked Ernie Cecilia, chief investment officer at Bryn Mawr Trust, what he would advise a client with, say, $100,000 or more of new money to invest right now.

First off: stocks or bonds? He leans toward equities, since yields on bonds are so low right now. The 10-year U.S. Treasury, for instance, yields just 1.86 percent, which doesn’t even keep up with inflation of about 2 percent to 2.5 percent annually.

Despite improving fundamentals, U.S. capital markets should remain volatile, given America’s continued structural deficits. However, a slow improvement in our domestic economy and in various global economies should result in a relatively more favorable backdrop for equities. Corporate cash coffers are flush and, Cecilia says, “we continue to see strong dividend growth from well-capitalized franchises.”

Domestic stocks, with strong business franchises that can drive earnings growth, plow back retained earnings into their businesses and have attractive valuations, such as T.J. Maxx owner TJX Cos. (symbol: TJX). Cecilia also likes mutual funds such as Lazard International Strategic Equity Portfolio (LISIX), and with developing nations resuming higher growth trajectories, Oppenheimer Developing Markets Fund (ODVIX).

“Given the absolute level of interest rates, we see headwinds in the bond market and below-average returns in 2013,” Cecilia adds. Finally, when interest rates do eventually rise, bond prices, which move inversely, will start to drop.

The Infiltrator

The tiny Swiss bank Wegelin & Co. pleaded guilty this month to conspiring with U.S. taxpayers to evade income taxes. But unlike HSBC, UBS, and other bank giants, three Wegelin officers were charged with criminal offenses.

UBS set up secret accounts for more than 20,000 Americans – hiding more than $20 billion in assets – but paid a fine and kept on doing business. HSBC also just paid a fine without prison terms for officers, after admitting to moving $881 million in laundered drug proceeds for Mexican and Colombian dealers.

Robert Mazur, a former U.S. federal agent who writes about how banks launder billions of dollars, thinks something is fishy about the Department of Justice letting big banks plead guilty to money laundering without anyone going to jail.

Mazur was an undercover agent who infiltrated the Bank of Credit & Commerce (BCCI) as well as Pablo Escobar’s Medellin cartel and the Cali cartel. You can read more about big bank money laundering in his book: The Infiltrator: My Secret Life Inside the Dirty Banks Behind Pablo Escobar’s Medellin Cartel (http://the-infiltrator.com).

Recalibrating the Watt: Barron’s Hedge Fund Profile of Venor Capital

Jeffrey Bersh and Michael Wartell, co-founders of hedge fund Venor Capital Management, know how to invest in energy. I didn’t get a chance to re-post the profile of Venor for Barron’s which I wrote just before year end.

 

Venor Capital’s name is derived from the Latin word for “hunt,” and that’s what the firm’s co-founders, Jeffrey Bersh and Michael Wartell, do: They hunt for value in bonds and occasionally stocks, sometimes in unfamiliar places.

Their hedge fund, with $875 million in assets, covers a lot of ground. It makes investments based on specific events, like improvements at a power plant, but also plays potential credit-rating changes, defaults, and distressed situations. High-yield bonds are another specialty. The firm focuses on middle-market companies with anywhere from $250 million to $2.5 billion in equity-market valuation. Although this represents only about a third of the $1.7 trillion high-yield market, Bersh and Wartell believe competition for smaller deals is less heated than it is for mega-transactions.

“We think of ourselves as a special-situation investor within the credit space,” says Bersh. “We look for asymmetric upside, meaning we feel there’s little to no downside. We also look for hard-asset collateral that offers a margin of safety in the intrinsic value. In other words, we value the company knowing that we would be fine with owning those assets. And we look for a catalyst.”

Bersh, 42, and Wartell, 43, started out working together in the high-yield debt unit of Merrill Lynch in 1993. Bersh had just graduated from Emory University and Wartell from Wharton’s college program at the University of Pennsylvania. They each moved on to other firms, Bersh to Credit Suisse, where he rose to become head of distressed trading, and Wartell to Deutsche Bank, where he eventually was named co-head of distressed research. The two friends kept in touch over the years and joined forces in 2005. New York-based Venor Capital now has 15 employees.

Their partnership has worked out well. Venor’s offshore fund has generated annualized returns of 9.49% since inception, and 10.9% in the three years ended October 2012.

EXTREMELY LOW NATURAL-GAS prices and new power regulations have pointed Venor toward merchant power in the past year. Another important theme is buying companies in “run-off” mode, or winding down their operations. First, the electricity play.

President Obama’s re-election ensured that the Environmental Protection Agency likely will press ahead with regulations forcing coal-powered plants either to “scrub” their operations to meet stricter pollution standards or to shut down. The new measures are expected to lead to a significant number of coal-plant closures by the end of 2015 and potentially higher energy prices.

That’s one of the reasons it’s held on to a stake in Dynegy (ticker: DYN), the Houston electric utility with a tumultuous recent history that’s included management convictions for financial fraud; bankruptcy and near-bankruptcy; and at least a couple of takeover battles. Venor started out as an investor in the company’s debt in early 2012, and is now an equity holder with Dynegy’s re-emergence from bankruptcy in recent weeks. It originally bought the debt at around 60 cents on the dollar. “We viewed it as an inexpensive call option on a power-market recovery,” Wartell explains. “We saw little or no downside, since we valued the power plants at significant discounts to replacement value.”

Wartell and Venor analyst Harlan Cherniak were part of Dynegy’s bankruptcy creditors’ committee, which negotiated conversion of the debt into equity plus some cash. Bondholders ended up with 99% of the equity plus $200 million in cash. The bonds, meanwhile, had risen to around 64 cents on the dollar.

But they decided not to walk away with a profit on the debt. “We view it as an 18-to-24-month investment. Our thesis is that, with its balance sheet cleaned up, Dynegy is much more able to capitalize on the post-EPA regulatory regime,” Wartell says. Dynegy’s plants, including both natural-gas-fired and coal-fired, already comply with the new regulations. As a result, they’ll be more competitive as the EPA closes or mandates expensive upgrades of older coal-powered plants.

Post-reorganization stocks tend to be volatile, and Dynegy is no exception. The share price has been stuck between $17 and $20.75 since they emerged from bankruptcy, less than Venor’s purchase price. But the firm has added to its position, believing that Wall Street misvalues the company’s assets. “The consensus view values merchant power on a cash-flow multiple,” says Wartell. “We view that as unfair, because we take into account EPA regulations that leverage the gas assets.”

Applying its own valuation to five key Dynegy gas plants and ascribing zero value to its coal assets, Venor says the stock is worth $26 a share. Adding leverage from a potential price increase in natural gas translates to $30-to-$35 a share, Venor believes. “We’re getting paid to hold the gas assets and we get coal assets for free,” Wartell adds.

Dynegy management will hold its analyst day in January, and Venor is eager to see what happens. “Some look at the enterprise value and compare Dynegy to traditional multiples of Ebitda [earnings before interest, taxes, depreciation, and amortization],” says analyst Cherniak, “but that’s like comparing GM to Apple. No two megawatts are created equal.”

For some of the same reasons, Venor early in 2012 bought the bonds of Homer City Generation, another merchant power play, for roughly 85 cents on the dollar. Based in Homer City, Pa., the company operates three coal-fired electric-generating units and sells energy to power marketers in the Midwest and on the East Coast. It filed a prepackaged bankruptcy in November, and by that time, the bonds were already trading at $1.10 on the dollar. An affiliate of GE Capital, the finance unit of General Electric, had put up $750 million to scrub the Homer City plants, and that investment helped boost the price of the debt. The company emerged from bankruptcy earlier this month.

Venor held the 8.137% senior secured bonds due in 2019 and the 8.734% senior secured bonds due in 2026, both of which have now been exchanged for new bonds. The issues have an option for payment-in-kind plus a premium, and are callable at $1.15 until Aug. 1, 2013, and at various prices beyond that date. Investors expect that the bonds could be retired, or called, because GE is now the parent of Homer City.

ASIDE FROM MERCHANT-ENERGY plays, Venor targets middle-market liquidations because they typically return 12%-to-15% over the life of the investment, and unlike mega-deals such as Lehman Brothers, they offer higher returns for a fund of Venor’s size. A typical one is Cattles Ltd., a private U.K.-based payday and subprime lender that was forced to wind down its business because of the credit crisis of 2008.

“It’s a fairly low risk relative to return,” says Wartell. “There’s little to no downside, because if things go wrong, it just takes longer for us to collect.” Venor receives monthly payouts on Cattles’ bank debt, which trades at roughly 27 cents on the dollar.

“We also like liquidations because they have low beta [are not correlated] to the market,” Wartell adds. “Headlines don’t move liquidations, and prices aren’t changing because of P/E ratios or enterprise value. It’s all based on cash flows.”

The fund does buy stock, including that of Two Harbors Investment (TWO), a real-estate investment trust focused on residential mortgage-backed securities and related investments. Venor is generally bullish on an anticipated rebound in the U.S. housing market.

“It’s a liquid way to play the theme,” says Wartell, who notes Two Harbors’ 12% dividend yield. “If interest rates stay where they are and housing recovers, it’s attractive.”

Venor bought the stock at a discount to its book value of $10.90, and would buy more if it drops below book again. Currently the stock trades at $11.12 a share.

Most mortgage REITs trade at 1.1 or 1.2 times book value, but have been hit by fears of tax increases on dividends. Venor’s portfolio managers note that Two Harbors’ dividends have always been treated as ordinary income, and therefore any 2013 tax consequences should be minimal. It’s just the kind of investment they hunt for.

Here’s a Handy Calculator for Your 2013 Taxes

Confused about the new tax act? So were we, so we checked in with some money managers and accountants to sort it out.

Practically speaking, all working Americans’ taxes will rise in 2013 because  the payroll tax holiday of the last two years ended. In 2013, the payroll tax  rate returns to its old level and employees will pay 6.2 percent in Social  Security taxes rather than the lower 4.2 percent. This tax break saved a worker  making $50,000 annually about $1,000 last year, according to Edward Kohlhepp of  Kohlhepp Investment Advisors in Doylestown.

So beyond that, how much more or less will we owe in 2013?

Hat tip to the nonpartisan Tax Policy Center in Washington for this handy calculator: http://calculator2.taxpolicycenter.org/index.cfm.  Using this, I got an estimate of what my taxes would be for 2013 versus 2012  based on being married filing jointly and calculated a quick number (It was higher. Loud boo!!).

There will be no new tax on municipal bonds, as was rumored, and that  prompted a sigh of relief among investors in munis.

James Colby, portfolio manager with Market Vectors ETFs, took note of the New  Year’s rally in the equity markets and simultaneous sell-off in Treasuries by  investors who had sought safety in bonds while awaiting the outcome of Congress’  deliberations.

But what needs to happen “is a response from business that reflects both  relief and confidence in the stimulus. Business may need to see how more  revenues will be raised and what programs may be pushed over the cliff before  employment increases and GDP can rise. With higher taxes coming for many  Americans, I believe the tax-free coupon makes munis all the more desirable,”  said Colby, who helps oversee more than $2.1 billion in municipal bond  exchange-traded funds, which includes the Market Vectors High-Yield Municipal  Index ETF (symbol: HYD).

Capital gains

The tax rate on long-term capital gains and qualified dividends for  individuals above the top income tax bracket rises from 15 percent to 20 percent  effective Jan. 1. It applies to those with incomes above $450,000 (joint) or  $400,000 (single). The 15 percent rate is retained for taxpayers in the middle  brackets while the zero rate is preserved for those in the 10 percent and 15  percent brackets.

See a handy table of the new tax rates at the website of accountants Marcum  L.L.P.

Since a picture is worth a thousand words, we’ve included a handy table of the changes (http://www.marcumllp.com/news-and-events/tax-flash-the-american-taxpayer-relief-act-of-2012-fiscal-cliff-disaster-averted ).

Your, or your family’s, Hurricane Sandy hardship may qualify for 401(k) withdrawal

Happy New Year 2013!

There is such a thing as  real hardship – even the tax man recognizes that. So, if you were hurt by Hurricane Sandy, there may be a bright spot for you in 2013.

 

It’s something called the “401(k) hardship distribution.” But you must act by February 1st.

In response to Hurricane Sandy, the IRS liberalized what are known as  “hardship withdrawal” rules for victims who had losses resulting from Sandy.  Under the relief, 401(k) plans allow participants to take out money until  February 2013.

The IRS has said 401(k) plans and similar employer-sponsored retirement plans  allow you to take out loans or hardship distributions if you are a victim of Hurricane Sandy or members of victims’ families.

What isn’t well-known is that even a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent, or other dependent living or  working in a Sandy-affected region.

To qualify, hardship withdrawals must be made by Feb. 1, 2013.

Employees of public schools and tax-exempt organizations with 403(b)  tax-sheltered annuities, as well as state and local government employees with  457(b) deferred-compensation plans, may also be eligible to take advantage of  streamlined loans and liberalized hardship distribution rules, according to  FINRA, the Financial Industry Regulatory Authority (www.finra.org).

Generally, we’re not allowed to take money out of a 401(k) plan while still  employed and before reaching age 59½ years. If we do take money early, we pay a 10 percent penalty. There are, of course, exceptions such as death, divorce, or disability.

However, if your plan provides for hardship distributions, and you can show  that you have an immediate need, you may be entitled to funds. State disaster areas are eligible, and President Obama declared emergencies in certain cities as well.

Read more at the Philly Inquirer’s website:  http://www.philly.com/philly/business/20130101_Your_Money__Sandy_hardships_may_qualify_you_for_401_k__withdrawals.html#ixzz2Gpji8BeC

How to Default (or Not) on Your Student Loans

The biggest investment you, your kids, or your parents may ever make is paying for a college education. And that investment isn’t offering a great return for any of us right now, as my latest for the Philly Inquirer points out.

One out of every nine students with college loans is now in default, according to new federal data. Could this mean student loans are going to be the next bubble, like the subprime mortgage and housing crisis?

The Department of Education in September issued updated default rates, which stand at a stunning 9.1 percent of federal student loans, or roughly $90 billion worth.

Of the 22 million students enrolled at universities now, two thirds attend using loans, either federal or private, with an average total debt balance of $26,000, according to figures from publicly traded lender Sallie Mae (ticker: SLM).

The total for federal plus private loans outstanding just hit $1 trillion, exceeding credit card debt.

If you’re behind on your student loan payments, or on the verge of default, what can you do?

First, ask your lender for an “income-based” repayment plan. Congress is considering overhauling today’s abhorrent debt collector program for student loans, to make income-based repayment the law of the land. Monthly payments would be capped at 15 percent of your income after basic living expenses.

Some lenders are not keen on income-based payments that will keep them from charging exorbitant interest and extra fees. Students and parents “don’t even know they can ask for it,” says Chanel Greene, who oversees financial aid at Peirce College in Philadelphia.

As a servicer on behalf of the Department of Education, Sallie Mae helps “federal loan customers understand their payment options – including income-based repayment – which is available today to anyone whose federal student loan payments exceed 15 percent of their discretionary income,” said spokeswoman Patricia Christel. “Federal loan terms and payment plans are set by Congress, and we, of course, follow the rules in place at the current time and follow new rules whenever Congress makes modifications.”
Second, there are two types of education loans. The most common and more forgiving type is federal student loans, which are available directly from the Department of Education at rates and terms set by Congress. Federal student loans are available regardless of income, assets or credit history. They are designed by government and underwritten by taxpayers as a public program to encourage access to education.

Former Morgan Stanley FA Now Cop on the 401(k) Beat

Mark Mensack used to be a Morgan Stanley foot soldier, a wirehouse financial advisor, until he called attention to hidden fees in 401K plan assets they and the rest of Wall Street oversee. I wrote up his story and how he’s fighting back for the Philly Inquirer…Also pasted below. Enjoy!

 

Your Money: A one-man army against hidden 401(k) fees

You might have invested in your retirement via 401(k) accounts, one of the primary vehicles by which we shoot for financial security after we stop working. We trust our employers to provide these plans at a low cost.

Mark Mensack, a new cop on the 401(k) retirement beat, says we and our corporate plan sponsors might be getting ripped off. And he wants to help: Mensack’s expertise is in the area of 401(k) hidden fees and ethical issues in the retirement-plan marketplace. He has 14 years of experience as a financial adviser with broker-dealers, and three as a registered investment adviser.

Why does Mensack care so much about this? A former Army officer with a master’s degree from the University of Pennsylvania, he has more than a passing interest in ethics and fee conflicts. His final active-duty assignment was on the faculty of the U.S. Military Academy at West Point, N.Y. Then working as a financial adviser at Morgan Stanley, the Cherry Hill resident contended he found wrongdoing involving what he called a “pay-to-play scheme” in $4 billion of 401(k) assets that Morgan Stanley administered.

Mensack reported his ethical and legal concerns through management ranks and, eventually, all the way to Morgan Stanley’s board of directors, and was promptly let go.

Mensack works as an independent reviewer of 401(k) plans and their hidden fees, and he blogs about the issues
(www.PrudentChampion.com). For instance, he says a 2011 AARP study found that 71 percent of the 72 million Americans currently invested in a 401(k) plan don’t realize they are paying 401(k) fees. “This is largely due to the fact that so many 401(k) products bury fees deep within fine print or obscure them in complex formulas or percentages,” he said.

The U.S. Department of Labor is catching on to the game, and found that a 1 percent difference in fees over the average American’s 35-year working career could reduce that person’s retirement nest egg by as much as 28 percent.

One of the best examples in what Mensack calls this 401(k) “witch’s brew” is Vanguard funds within certain group annuity 401(k) products. Vanguard has a respected reputation for low-cost, quality mutual funds, and generally, expenses aren’t an issue with Vanguard funds or Vanguard 401(k) products, he explained.

Standard & Poor’s 500 index funds, like those offered by Fidelity or Vanguard or other low-cost mutual fund firms, generally offer fabulously cheap expense ratios of around 0.18 percent. However, in one 401(k) plan Mensack reviewed, the expense ratio of the S&P 500 fund was 0.53 percent – almost 300 percent higher. Worse, employees were paying an additional 0.50 percent wrap fee, pushing the total cost nearly 600 percent over retail. Unfortunately, the plan sponsor mistakenly thought he or she had chosen a low-cost 401(k) product.

You can read more about Mensack’s contempt for the proposed regulator of registered investment advisers (FINRA) and his fight with Morgan Stanley here ( http://www.bloomberg.com/news/2012-03-18/whistleblower-gets-sham-justice-from-wall-Street-court.html) or at his website.

Elie Wiesel on Losing His Life Savings to Madoff: “We Have Seen Worse”

On the 4th anniversary of Ponzi schemere Bernie Madoff’s arrest, I’m watching Elie Wiesel discuss living with an open heart, what happens when we die and how he and his wife reacted upon losing their life savings and their foundation’s $15 million in assets.

The link is here (http://www.oprah.com/own-super-soul-sunday/Elie-Wiesel-on-Losing-His-Life-Savings-to-Bernie-Madoff-Video) and I can’t say I would be as forgiving. As one friend put it: “The man knows evil.” No matter whether he and the other Madoff investors should have known better, kudos to Elie for living better and beyond…

Donor-advised funds: your own mini-charity starting with just $5,000…

Donor-advised funds are for the rest of us who can’t set up a private foundation–but still want to donate. You can set one up using as little as $5,000 in assets to start.

Eileen Heisman was on her way to New York last week to accept an award for her work at the National Philanthropic Trust, based here in Philadelphia. As president and CEO of the trust, she helped seed the launch of Breast Cancer Deadline 2020 – a campaign to end breast cancer by Jan. 1, 2020. The 2020 campaign is funding testing of vaccines against breast cancer and other cutting-edge research.

But she found time to talk to us about how even ordinary folks can set up what is known as a donor-advised fund for charitable giving.

You don’t have to be a 1-percenter to give charitable gifts and you don’t have to set up a private foundation, she said.

“A private foundation requires a 5 percent distribution every year, and that can include overhead,” she explained.

That means foundations don’t always end up giving the bulk of their donations to causes in need, but to support staff and other operating costs.

Instead, she suggests opening a donor-advised fund. Charles Schwab, for instance, requires just $5,000 as a minimum to set up a donor-advised fund account.

With this account, you can donate cash or securities, realize immediate tax benefits, give when it meets your goals, and even manage your donations online.

National Philanthropic Trust’s minimum is $25,000 to set up a donor-advised fund account, plus fees.

Make sure to check with your broker to find out whether it offers the service, which generally costs 0.25 percent annually or more.
*****

Enjoy the holidays, but remember year-end is fast approaching and it is time to ask yourself and your spouse: Have you taken your minimum required distribution from your retirement accounts?

Most people have not. According to one November 2012 survey by Fidelity, 65 percent of their customers who are retirees had not yet taken their required distributions for the year.

Be warned: This can be a costly mistake and can result in paying out significant tax penalties. So what are you waiting for? It’s easy to set up an automatic withdrawal just by calling your broker or retirement account manager.

Beginning in the calendar year following the year you turn 70½, the Internal Revenue Service requires you to withdraw a minimum amount of money each year from your tax-deferred retirement accounts, such as traditional IRAs and 401(k) plans. Otherwise, you pay penalties of up to 50 percent of what is known as your “required minimum distribution.” This is why it is important to understand how this works and the timing of distributions.

Deadlines. For traditional IRAs, you must begin taking minimum required distributions at the prescribed age. Let’s say you turned 70 1/2 on Nov. 1, 2012. That sets the clock ticking. You must now start taking distributions from your retirement accounts. For your 2012 distribution, the year you turned 70 1/2, the deadline to do so is extended until April 1, 2013. However, for each year after, you must take your distribution by Dec. 31.

Check with your brokerage firm, but most customers must complete distribution transactions by Dec. 31, and allow time for any trades to settle if you are selling securities to raise money and take your distribution.

Tax penalties. Failure to withdraw your required minimum distribution annually by the deadline might result substantial tax penalties. All withdrawals of earnings and pretax contributions are taxed as ordinary income, but if you fail to take the full minimum required distribution, the penalty may be 50 percent of the amount not distributed.

How is your amount determined? Your accountant, financial planner, or broker should help you determine it. Minimum required distributions – required because your savings have appreciated virtually tax free until the mandatory age – are determined by your age, your account balance, and your life expectancy. If you have a spouse more than 10 years younger than you and who is the sole beneficiary for your entire distribution, you can base your minimum on your joint life expectancy.

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