Sunday, February 17, 2013

Is Today’s Employee Getting the Short End of the Stick?

Remember the 40 hour work week?  How about pay raises and job security – or pension plans and comprehensive medical benefits?  Times have changed – and so has the employer – employee relationship.  Right now we’re grappling with some serious economic challenges; still trying to adjust to the rippling effects of globalization – but have employers gone a little too far?

If you’re fortunate enough to have a stable job you’re probably being asked to do more with less – put in those extra hours.  They use to call this strong work ethic – now it’s expected – the new norm.  So employers are rewarding people for carrying larger work-loads, putting in that extra time – right?  Not so much.  According to the United States Census Bureau, median household income (adjusted for inflation) dropped 1.5 percent – from $50,831 (in 2010) to $50,054 (in 2011).  Even worse – it’s roughly where it was during the mid 90’s. Many employees also find themselves paying a larger portion of their health benefit premium - but still have substantial out-of-pocket medical expenses. Am I missing something here?

What about employer sponsored retirement programs?  Not too long ago, there was a sense of loyalty implicit in pension plans.  If you worked hard, stayed with your employer for x number of years – you were rewarded with annual pension payments when you retired. The message was pretty clear – thanks for contributing to our success.  Somewhere along the way these plans were scrapped for the more cost-effective 401(k) plan.  In this plan, the employer allows the employee to contribute part of their own salary to a taxed advantaged investment plan – the employer is not obligated to make a contribution. The message here is clear as well – you’re on your own.

I’m not suggesting that employers should not find ways to cut costs.  Nor am I suggesting that they shouldn’t continue to “raise the bar,” drive productivity or expect excellence from their employees.  In the past some of the most successful corporations accomplished this through empowering their employees – not driving them into the ground.  They recognized the importance of building strong corporate cultures – and knew how and when to invest back into their people.

You have to wonder what (perhaps) this says about the people “at the top” – the ones setting corporate policy.  From a business perspective, an unwillingness to reinvest in the people that have made you successful is truly perplexing – it’s also short-sighted and a poor way to conduct business – just my opinion.  Maybe it’s about being more competitive, about becoming global – or just maybe it’s the times we live in.

Friday, February 15, 2013

Sensible Investing – Become Cost Conscious

Would you ever consider buying something without knowing exactly what it was going to cost?  As much as I dread that total at the supermarket checkout line, hearing that final tally catches my attention and forces me to think a little more about what I’m about to buy.  Lately my frugal side’s been kicking in a bit and I find myself asking more questions about these food prices.

Investing has costs as well and they come in many different forms.  The good news is they can be controlled – the bad news is they can be very difficult to get your hands around. In fact very often they go completely unnoticed.  The problem is there are no “price tags” that capture our attentionand many times investment costs are not communicated directly or in a way that’s easy to understand.  You have to know they exist (it’s the people who don’t know that may inadvertently surrender thousands overtime) – more on this in a moment.

So what are some examples?  Mutual funds, a popular type of investment, include expenses which arededucted from your account annually. Year after year they are used to pay for the management and administration of the fund along with marketing and advertising. Exchange traded funds, another popular investment, have annual fees as well - albeit generally on a smaller scale.  You won’t find these deductions on your investment account statement because they’re not shown. Mutual fund expenses can vary from fund to fund and are listed in the fund’s prospectus.  They should appear under the “Fees and Expenses” section listed as total annual operating expenses.  There are many good funds with expenses below 1% – so there’s really no reason to pay more.

Variable-deferred annuities, sold by many financial services professionals generally add additionallayers of expenses.  These insurance-based products allow you to invest in mutual funds while offering additional protection features such as future guaranteed income for life. They slap-on an additional annual fee known as a mortality and expense charge, along with charges for any other feature that you choose.  Of course all this gets tacked-on to the mutual fund expenses described above.  By the time you’re finished adding everything up, you can find yourself paying in excess of 3 ½ to 4 percent (of your investment account) annually. 

Make sure you read the product prospectus carefully and tally-up all the costs. Becoming cost conscious with your investments may provide you with a few distinct advantages.  First, it will more than likely make you think more about where (and how) you’re investing your money.  Second, you may find yourself looking for more cost effective alternatives – potentially saving quite a bit over time.  Finally if you’re going to be asked to pay more, you’ll no doubt want to understand exactly what you’re receiving in return for the increased expense - and if it’s worth the additional outlay.  Remember, you won’t see the money being deducted from your investment account each year – out of sight, out of mind. Imagine what it might feel like if instead you had to write a check for that extra 2 or 3 percent of your investment account each year – how many of us would be happy with that?

Getting Advice To Buy a Variable Deferred Annuity? – Not So Fast

Have you recently received advice to buy a variable deferred annuity? Financial services professionals trying to sell these products will use phrases such as “guaranteed income for life” – “won’t outlive your assets” – “a win-win situation.” While on the surface this may sound very appealing, the fact is they’re extremely complex investments that require a great deal of scrutiny. Many times they land up being better deals for the people who sell them (and receive a commission) because so many investors don’t understand what they’re buying! 

If you receive advice to buy one, make sure you take the time to gain a basic understanding of the features and benefits so you can truly decide whether investing in them is worth the cost. That’s right, you pay a price – and you pay it annually (deducted straight from your investment account). Traditionally the tab for these products has been quite high, but there’s nothing wrong with paying more – as long as you’re given a fair chance to understand what it is you’re buying! You should be given what’s called a prospectus. This is the document that describes all the details of the annuity, along with the costs. So if someone tells you that you’re going to get “guaranteed income for life,” - read the prospectus carefully to understand exactly what this means. For instance look for more details that can help answer some of these questions:

How big will the income payments be? How are the payments calculated?

Can I control the size and timing of my income payments?

How much will this feature cost me?

What happens to my investment account once I start receiving these payments?

What happens to the payments when I die?

Thumbing through (and trying to make sense of) a 150 page prospectus may not exactly be your idea of a “fair chance” – but take the time to do it before you decide to sign on the dotted line – it’s that important! Do not rely solely on the explanation provided by the individual trying to sell you the annuityunless they can reference it in the prospectus.  If you still need (or want) some help, then seek a second opinion from a qualified professional (preferably one not in the business of selling these products). Also,if you don’t receive a written list of all the costs (including any applicable surrender charges), refer to the prospectus first and then request written confirmation from the seller. 

Once you start digging and asking some questions (based on the facts detailed in the prospectus) you’ll be in a much better position to decide if a variable deferred annuity is really right for you. Remember, products like these generally come at a high price – although you never see the money coming out of your investment account year-after-year; trust me it does – and it adds up.