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Suze Orman Money Matters

Suze Orman, Money Matters

The High Cost of Poor Disclosure

by Suze Orman

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Posted on Friday, July 25, 2008, 12:00AM

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.

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  • Yahoo! Finance User - Wednesday, July 30, 2008, 10:53PM ET  Report Abuse

    • Overall: 5/5

    Very helpful article! Suze is great.

  • Yahoo! Finance User - Wednesday, July 30, 2008, 12:09PM ET  Report Abuse

    • Overall: 5/5

    Excellent article. Good disclosure regarding the POOR discluse of the 401K industry. I'll bet most of the people saying boo about this article stand to lose money because they are players in the 401K industry.

  • Yahoo! Finance User - Wednesday, July 30, 2008, 11:06AM ET  Report Abuse

    • Overall: 1/5

    a waste of an article...advice benefits 0.01% (actually zero) of those who read it. and out of that 0.01%(who have over 100k in one establishment without additional insurance), 99% already knew the information....at least suzie got paid for the article that her ghost writer wrote....

  • Yahoo! Finance User - Tuesday, July 29, 2008, 11:36PM ET  Report Abuse

    • Overall: 2/5

    There's a major error regarding FDIC coverage: "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." Joint accounts are covered for a TOTAL of $200k, not "[$100k plus] an additional $200k" as suze wrote; IRA accounts for a TOTAL of $250k. More coverage is possible by a couple opening 3 accounts: 2 individual and one joint ($100k $100k $200k) and then with further permutations of "payable on death" and non-payable on death accounts for all three. Banks will help manipulate the rules in your favor (legally) because they want your money deposited with them.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 11:11PM ET  Report Abuse

    • Overall: 1/5

    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. Suze: Could you please disclose your fee for this article and the others you have written for Yahoo.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 11:10AM ET  Report Abuse

    • Overall: 5/5

    This is a good article. The rants against it are primarily to try to separate the commentors from the masses which they are acually are a part of or they would not be reading yahoo finance. Yes there are other options from Suzes advice, usually requiring more risk and more effort. She certainly has more intregrity than most finanacial advisors who mostly want to separate you from a portion of your investments. Suzes intended audience is not the rich, who may want great advice but obviously don't need it as much as the non-rich.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 11:08AM ET  Report Abuse

    • Overall: 3/5

    I am no big Suze Orman fan - I find her ignorance regarding many topics and her one-size-fits-all approach repugnant. However, many of the comments posted so far are way off base. Suze did not claim in this article that the lowest cost fund is the best. Even she would, of course, agree that the highest return is best. However, since no one can predict future performance, the lowest fees are best - all other things being equal. Most people would probably fail miserably if left on their own to pick stocks, so an index fund is a great idea for them. For those who can do it, or have an advisor they trust to do it for them - great. In all, the article's main point gets the right message across - this is a good thing for 401k investors. (And a note to the one who would not invest in a 401k - what if your company gives you a nice match? Won't that take some of the sting out of the presumed future tax increase? Say you currently make $100,000 per year and that goes up 3% per year, which is also how much the 401k limit goes up each year. Cap gains tax is always 60% of your ordinary rate, and the rate goes up after 15 years. Scenario 1: dump the max each year into your 401k. Scenario 2: dump an equivalent after-tax amount into a standard brokerage account. At 7% return, Scenario 1 will be $106,000 ahead after tax after 20 years if the ordinary rate increases to 35%. To break even, the ordinary rate must increase to 50.71% in year 16! Do we really think taxes are going up THAT much?)

  • Yahoo! Finance User - Tuesday, July 29, 2008, 10:56AM ET  Report Abuse

    • Overall: 1/5

    Orman's articles are as dumb as her big oval head.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 10:47AM ET  Report Abuse

    • Overall: 1/5

    ridiculous as usual from this annoying moron.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 9:41AM ET  Report Abuse

    • Overall: 1/5

    Worst.Article.Ever. Seriously, the way to invest profitably is to make sure that your investing account has the highest possible yearly increase attributable to you, not to make sure the plan has the lowest cost. If Vanguard S&P 500 emulator was the best moneymaking way to invest in the stock market then Warren Buffett would do it, and he does not. Low plan costs is one way to help your returns, but if your stock fund gets bond like returns then no amount of low cost plans will help you. Also, its stupid to say risk-averse people put all their money in banks. Risk-averse does not mean the same thing as "stupid". The sentence should say "Stupid people put all their money in bank accounts (even moreso for people that don't even know the rules of bank accounts). Also, you are safe for more than 100k and 50% at one bank, you just have to have more than one account at that bank. You could have one that is just you, one that is just your wife, and one that is a joint account and that's 100k per account. Seriously, I wish people would stop listening to her advice. Raiddinn

  • Yahoo! Finance User - Tuesday, July 29, 2008, 8:09AM ET  Report Abuse

    • Overall: 3/5

    Suze, where did you get the idea that Congress cares about people? BWHAAAAAAAAA ***rolling_on_the_floor_laughing***. The ONLY thing they care about is lining their own pockets with the money lobbyists give them. Thats democracy in action...

  • Yahoo! Finance User - Tuesday, July 29, 2008, 8:08AM ET  Report Abuse

    • Overall: 1/5

    The only good news out of Washington is that George Bush will be leaving in Jan. As far as disclosure..Just another loophole to be found!

  • Yahoo! Finance User - Tuesday, July 29, 2008, 7:56AM ET  Report Abuse

    • Overall: 1/5

    The Queen of Blanket recommendations! christopher.jfw1 A roth IRA only allows 5k for 2008 plus there is a income cap. Most 401k come with company matching...free money. and allow upto 15,500 per year. Tax deferred growth is the best way to go.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 6:46AM ET  Report Abuse

    • Overall: 1/5

    Suzi, don't tell your idiot viewers that they can*t read their prospectus, tell them that it is the greedy banks, funds, credit card companies, other people that are ripping them off. Tell them that they are fine, it is just other people ripping them off and that you are their savior. Create propblems so that you can be the solution. Divide and conquer.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 12:28AM ET  Report Abuse

    • Overall: 1/5

    Decent article with some good information but i wish for just once that people would talk about picking their own stocks and creating their own mutual fund. Its sickening that people think they are at the whims of their 401k plans and the choices they offer. Their not. I wouldnt invest 1 dollar in a 401k plan. The reason? In 30 years the government will raise taxes and time it perfectly with the masses taking distributions. You might as well pay taxes on the money now and then invest it. A roth is a smart idea. Then you can invest the money in whatever you want. Its pathetic that you can only invest like 5 or 6k a year in a roth. How the hell can anyone build wealth like that? In 30 years, a cup of coffee will probably be 20 bucks. What a joke.

  • Yahoo! Finance User - Monday, July 28, 2008, 11:45PM ET  Report Abuse

    • Overall: 1/5

    congress wasnt sitting on thier hands....it was something else and they seem to be stuck in the same position....bush will be living in dubai when everyone gets the bad news

  • Yahoo! Finance User - Monday, July 28, 2008, 11:43PM ET  Report Abuse

    • Overall: 1/5

    Suze, please read the book Capital and make an educated response. Or better yet, please give America's education level a little more credit than your typical rants that help you sell books.

  • Yahoo! Finance User - Monday, July 28, 2008, 10:06PM ET  Report Abuse

    • Overall: 4/5

    There are big problems with 401K.403B disclosures, fraud, HR personnel or higher up staff members may be receiving benefits some way or another or purely incompetence; many Human Resource employees are choosing funds that do not perform well and charge huge fees, and you cannot complain or allowed to move the money, they can fire you. There is a big conflict of interest. 401K/403B - Many employers 401K & 4013B practices are terrible, no one to question the employers. Certainly when employees question, their job could be at risk, I have that problem now and had it in the past. Employers are not responsible for their actions, they can choose poor performing funds, not execute transactions, execute transactions without your knowledge, pick poor performing funds with high expenses, some times expenses are more than the returns, and you are not allowed to move your money to a better place, they lock your money down for as long as you work there. There is a conflict of interest here. In all probability there must be immense fraud. What is motivating employers to choose poor funds at high expenses, are the human resources employees or others up in the ladder getting payouts or benefits from the companies that are providing these funds in 401k/403B?? Most employees have most of their money in 401k/403b plans, their life savings. Employers are put in charge of these huge balances without any responsibility for losses or fees. Employees should have freedom with their money to move to better location for better returns with lower expenses. We need to go back to traditional pension plans that many employees used to have, employers were responsible for their actions with traditional pension plans. Fraud needs to be uncovered and reform is needed as soon as possible.

  • Yahoo! Finance User - Monday, July 28, 2008, 10:01PM ET  Report Abuse

    • Overall: 2/5

    Expecting the masses to take more and more responsibility for their finances will NEVER happen. How many average people have gotten their FREE credit lately. The government could give away FREE financial advice and people wouldn't take advantage of it. We really can't expect people to be amateur financial advisors for themselves. People aren't one sized fits all. These 401K disclosures help people who are interested in their 401K's. People who are not interested in their 401K will not care one bit about full disclosure.

  • Yahoo! Finance User - Monday, July 28, 2008, 9:06PM ET  Report Abuse

    • Overall: 1/5

    Suze, I am amazed that your ignorant shtick still gets so much time. In the financial business your video segments are being shown instead of the "Chris Rock" show; they are they funny to those with some understanding. I understand that your pandering to the lowest common denominator has built you an empire; I am just wondering when some lawyers will tear it down for you. The problem with disclosures is that we have TOO many of them, and nobody reads them, or they lack the skills to actually read them. What we need is better financial education from professionals, not entertainers like you. Shorter, meaningful disclosures would actually get read and understood.a Miike

  • Yahoo! Finance User - Monday, July 28, 2008, 8:48PM ET  Report Abuse

    • Overall: 4/5

    Less than 20% of all actively managed funds beat their bench mark, if you are lucky enough to be in one great. There is goodness in low fees and it's even better when they beat there bench mark. Risk adjust rate of return is everything.

  • Yahoo! Finance User - Monday, July 28, 2008, 8:22PM ET  Report Abuse

    • Overall: 2/5

    What I really want to know is would you rather have a fund (like cgmfx) Ken Heebner that has a 1.27% expense ratio that has virtually blown away all and I mean every "low cost index fund" or would you rather pay 0.18 and say look Im paying such low fees but my returns are terrible? Bottom line-rate of return means everything to me..

  • Yahoo! Finance User - Monday, July 28, 2008, 8:05PM ET  Report Abuse

    • Overall: 5/5

    Keep talking Suze. If all of us that lost send an angry letter we might get some action. Disclosure and regulators with teeth are needed through out the financial service industry

  • Yahoo! Finance User - Monday, July 28, 2008, 6:45PM ET  Report Abuse

    • Overall: 5/5

    What can someone possibly complain about in this article? Everything said in here was right and it is helpful to those idiots that may think there is something wrong with the article. Low fees are good, disclosure on costs and performance of investments is good, disclosure on FDIC insurance levels is also good. Everything about this article is right. Suzie is also right a large majority of the time. Quit being stupid and take the advice for what it is. Get a good low cost, independent, financial advisor and let them take you down the road to financial freedom. Good luck morons!

  • Yahoo! Finance User - Monday, July 28, 2008, 5:27PM ET  Report Abuse

    • Overall: 2/5

    Congress should help us invest, our companies should tell us what investments are good. Blah didy blah. With investing in general for one person to win another has to lose. It's your responsibility to know what you are doing with your money, if you have concerns about your knowledge maybe try reading a book or two (a long lost art) or even hiring a professional (those evil folks that are licensed and trained to give you good advice)? If your company knew what the best investment was they would put all their assets there and lay you off. Adding regulation to the 401k is probably a bad idea, after all, follow the logic a bit further: So 401k's should only be in safe, low cost mutual funds, you think? Well why not mandate that hey all invest in T-Bills or MM funds? That's safe & the fees are low. Now that's not the legislation we want is it, but what some are asking for with their comments is pretty close. Reality is that mutual funds disclose their fees, who cares what each fee is for? All that matters is the final percentage. Buying the S&P500 index is ok, but buying the companies that are on the rise in the Russell 2000 is a much better strategy, hence Acorn Sm Growth and Calamos Mid Cap, both FAR better funds than any index. I'm kind of rambling now, but this article sucks. Don't listen to columnists for advice, and I wouldn't even let Suze Orman balance my checkbook.

  • Yahoo! Finance User - Monday, July 28, 2008, 5:23PM ET  Report Abuse

    • Overall: 2/5

    The disclosure that congress just passed is precisely the information that leads to poor investment decisions. Namely, YOU CANNOT PREDICT FUTURE PERFORMANCE ON PAST PERFORMANCE. There is absolutely NO guarantee that a fund that has previously done well will continue to do well. Investors need to go out and do real research on the companies that make up the funds. The new 1, 5, and 10-year performance graphs will simply make investors lazy and lead them to rely on that data rather than investigating their options. When will Congress stop meddling in the economy???

  • Yahoo! Finance User - Monday, July 28, 2008, 4:52PM ET  Report Abuse

    • Overall: 4/5

    I just hope the figures they give will be accurate.

  • Yahoo! Finance User - Monday, July 28, 2008, 4:51PM ET  Report Abuse

    • Overall: 3/5

    If investors have more than $100K on deposit at a bank, then they really aren't diversified.

  • Yahoo! Finance User - Monday, July 28, 2008, 4:39PM ET  Report Abuse

    • Overall: 2/5

    I just did my own survey/polling at where I live...majority 76% of the people surveyed know that 9-11 was an inside job! WOW...so who are we then to trust...the government? media pundits, corporations? Who can the American people trust? Please advise.

  • Yahoo! Finance User - Monday, July 28, 2008, 4:09PM ET  Report Abuse

    • Overall: 1/5

    *sigh*. Once again, Suze. Off the mark. True, index funds offer a low cost structure but often at the price of lower performance. I would also save a bundle if I ate fast food everydayinstead of a fancier restaurant. But is that the right/healthy choice? You pay for what you get. There are plenty of Mutual Fund Managers that consistantly out-perform the market. It has been proven many times over that following a well-diversified strategy and not timing the market wins out in the end for the average investors with a long time frame. Statistics say that 92% of anyone's investment return is based on strategy and not what you own. Or is that what you meant, Suze? Have an Index Fund as PART of a diversified strategy? Perhaps you should have provided better disclosure on that. Speaking of... At what point do we as a society become responsible for our own actions. Why must I be told that my coffee is hot at the drive through? If I drink coffee, shouldn't I already know that? And if I have hundreds of thousands of dollars sitting in bank deposits, shouldn't I know what I'm protected for and for how much and what against? And if I don't know, shouldn't I be responsible enough to ask? And if I'm chasing rates that are 1-2% (or more)higher at these troubled banks when the larger/stronger banks are consistently offering lower rates, shouldn't I be bright enough to wonder why...?

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