Suze Orman Money Matters

Finally, some good news out of Washington that could help investors save a ton of money. And no, it won't require one penny of a taxpayer-financed government bailout. I told you it was good news.

In the Plan

I'm talking about the Department of Labor's late July proposal that will require every 401(k) plan to show participants the performance and annual costs of the funds offered in their plan. As millions of 401(k) participants know, that very basic information is often hard to find or nonexistent in their plans.

The new regulation will require a simple table showing the 1-, 5-, and 10-year annualized performance of funds in a plan, and will also show the comparative performance of a benchmark index. In addition to being able to compare performance, you'll also get a table showing the annual expense ratio for the funds. Hallelujah. As pathetic as it is that it took this long to mandate, 401(k) participants will finally have easy access to data that will tell them if the funds are any good.

The proposal is open for comment through Sept. 8, then the new rule is scheduled to kick into action on Jan. 1, 2009. So starting next year, all 401(k) participants should have a way to figure out if their retirement stash is full of funds that have high fees and poor performance. It'll still be up to you to study the info and figure out your lowest-cost option. And if you discover your plan is full of poor-performing fee hogs (they often go hand in hand), you'll at least have ammunition to lobby your company to get its act together and provide better low-cost options.

What Got Left Out

Sadly, Congressional legislation that would've mandated your plan automatically provide one low-cost index fund in its lineup of investment options failed to gather momentum on the Hill. That's right -- the legislators you elected didn't think it was worthwhile to help you save more for retirement by having a low-cost index fund in your plan. (And just to be clear, the proposed legislation merely called for an index fund to be added to each plan's lineup among all the other existing options.)

What a shame Congress sat on its hands. Access to a low-cost investment in 401(k) plans would've gone a long way toward helping Americans save more for retirement. When did that notion become a political football? Just consider that someone who invests $500 a month for 30 years in a 401(k) fund that shaves off 1.75 percent in annual fees would have about $527,000 in the account at the end of the 30 years, assuming an annualized 8 percent return. If the money were instead invested in a low-cost plan that ate up just 0.50 percent a year, the retirement stash would be worth about $674,000.

That's a big difference, but it could get even better. If your plan was seriously run to help participants and offered a stock index fund with a 0.18 percent expense ratio, you would have more than $720,000 saved up, or nearly $200,000 more than if you had your money stuck in the high-cost fund.

Better Disclosure, Not More

But apparently you're not as important as keeping the financial services lobby happy. After all, they would've been the only losers in a world where consumers have an easy way to save more by opting for lower-cost funds.

So for now we'll just have to settle for the Labor Department rule that will at least lift the veil on performance and fees so you have the means to figure out what your plan offers. It's a nice development, but by no means everything it could've been.

That's true of so many forms of financial disclosure. Consumers have poor access to the information they need. I'm not advocating more disclosure -- what's needed is better disclosure.

The IndyMac Lesson

For instance, banks do a great job of disclosing that they're FDIC insured. I just wish they'd do a better job of flagging accounts that exceed the protections of that insurance.

In the second week of July, the Federal Deposit Insurance Corp. (FDIC) shut down IndyMac bank after deeming it insolvent. As is FDIC policy, all individual bank deposits under $100,000 at this FDIC-insured bank will be made whole -- that is, they're guaranteed to get all their money back. Joint accounts are eligible for an additional $200,000 ($100,000 per account holder) and an IRA account gets another $250,000 in FDIC coverage if the IRA is invested in bank deposits such as CDs. There are also ways to sock away more money at a bank that's fully insured by setting up accounts with designated beneficiaries in Payment on Death (POD) accounts.

But IndyMac depositors with accounts that exceed the insurance limits are going to be paid just 50 cents on the dollar for the money above the FDIC insurance limits. There were plenty of folks chasing after IndyMac's high yields who are now out some serious money. Before you dismiss them as greedy yield chasers, remember that plenty of retirees living on a fixed income are in the tough position of trying to make ends meet in this period of miniscule savings yields.

Punishing the Risk-Averse

I'd love to see a system where the minute you deposit money that exceeds your insurance coverage you're given a clear notice that informs you that not all your money is insured. The point isn't to tell someone not to do something, but merely to clearly inform them of their risk. Something along the lines of:

"Your recent deposit of $150,000 is not fully insured by the FDIC. In the very unlikely event that this bank runs into financial trouble, only $100,000 of your money would be eligible for full payment through the FDIC program. The remaining $50,000 may be subject to less than full coverage."

It's the sort of disclosure that actually helps risk-averse investors stay out of trouble, and the most disturbing part of the IndyMac story is that the people who are going to lose money are in fact the most risk-averse. Why else would they have so much money sitting in the bank?

Spread the Disclosure

In the meantime, I encourage anyone with more than $100,000 on deposit in a single bank to use this online tool at the FDIC website to calculate money at risk.

I'll save the discussion of the high cost of poor disclosure in the credit card and mortgage industries for a future column. As encouraging as the Labor Department's 401(k) disclosure rule is for retirement savers, we all know that lousy disclosure is rampant throughout the financial services industry, and it costs consumers a ton of money.

I'm not pushing for lower fees (though that would be nice), just a level playing field where the fees and risks of every investment are clearly disclosed. If the Labor Department can finally push the 401(k) industry to do just that, maybe there's hope elsewhere.