The Float

More Good Stuff from BrightScope

Way back at the start of this wild year, we celebrated the launch of BrightScope, a leading light in the movement for greater (indeed, the greatest possible) transparency in the retirement plan market. We titled that first item "A Great Leap Forward." Today, we're pleased to note another step in the right direction: BrightScope's consolidation and presentation of data from Form 5500 for a huge number of plans--somewhere, we think, in the neighborhood of 500,000.

Here's an example: 5500 data from Boeing.

Now, those 5500s have their shortcomings. They're dated by the time they go public, their categories are funky, and they're only as complete as sponsors make them...so their completeness varies widely.

But for what they're worth, these data are now more clearly presented and more easily available to participants, sponsors, and service providers than they've ever been. Well done, BrightScope.

A Faster Lost Decade?

Is the United States economy headed for a Japan-style lost decade? Evoking our February, 2008, item "Faster Markets," Slate's Daniel Gross suggests that the deep, ongoing recession in the United States may unfold much more quickly than Japan's analogous bubble-bust of the 1990s. This is good stuff:

Why the accelerated pace? It has to do in part with changing global circumstances. Nishimura argues that both crises started because problems in the property and credit markets contributed to an adverse feedback loop between financial distress and economic activity. But information, events, and distress move much more quickly around the globe today than they did in the 1990s. With just-in-time production systems, and with 21^st-century communications technology, bad news travels much more quickly--and farther. In the 1990s, much important exchange of international market information was still done by fax. In addition, traders can now act more quickly on real-time bad news. In the early 1990s, analysts had to wait several months for data. And since the level of financial integration was much less intense in the early 1990s, Japan didn't export its financial problems.

The upshot: In the current crisis, "the velocity of market dysfunction has been much faster and its contagion much more widespread than in Japan's case." And so the damage has been more devastating.

Of course, the duration of the crisis also has something to do with the mentality and action of the first responders. A lesson from both crises, he argues, is that once an adverse feedback loop is established, it's difficult and very expensive to break it and restore confidence. It took a very long time for good news to reach critical mass in Japan in the 1990s, in part due to the slowness of the policy response. But this time, it's different. The Federal Reserve--and, indeed, global central banks and governments--have responded with alacrity. Japan's central banks didn't adopt a zero-percent interest-rate policy until more than eight years after the crisis started; the Fed did so within 20 months. It took Japan nearly eight years to inject funds into troubled banks, compared again with 20 months for the United States to do so. And, Nishimura argues, efforts like the stress tests and TARP exits are bolstering confidence.

Read the whole thing. It's excellent.

Source

Daniel Gross, "A Recession in Dog Years," Slate, June 24, 2009

The Rollover Question Revisited

A little more than two years ago, we opined that for most investors in most circumstances, a cost-conscious IRA rollover would likely be preferable to leaving assets in a former employer's defined-contribution plan. Our primary concerns were (and are) that many 401(k) plans are unnecessarily expensive, feature limited/inferior investment options, and deny participants economies of scale at the individual level.

This morning, we ran across Janet Paskin's SmartMoney piece on the rollover "conundrum." We still lean toward rollovers, but Paskin is absolutely right to point to the mutual fund industry's interest in promoting rollovers. Here's the most interesting passage:

[S]ome companies seem to posit that rolling your balance into an IRA is always the best choice. In fact, they rarely even mention the possibility of keeping your money in your old 401(k). Fidelity's "rollover evaluator" tool, for example, asks four questions, then offers a recommendation--and regardless of the information an investor gives, the answer is always the same: "Roll your 401(k) into a Rollover IRA." (The tool has since been taken off the site "for maintenance," the company says.) Schwab's pros-and-cons grid suggests that there’s little difference between rolling over your balance and leaving it in your employer's plan; T. Rowe Price's Web site highlights the comparison between an IRA and a cash distribution, with little mention of other options.

Now...it's easy to point to others' potential/apparent conflicts of interest. But what about our own? Because we manage assets for individual investors and retirement plan participants, our self-interest in this debate isn't immediately obvious. Though we charge higher fees to investors outside the retirement plan framework (and thus might be inclined to promote the rollover), we have many more clients inside the retirement plan framework, some of whom we will surely lose if/when they elect to roll their assets into IRAs. We have no earthly idea about the probabilities of losing such clients, primarily because that isn't how we think about these things.

When service providers place fiduciary principles at the moral and functional core of their practices, they're more likely to evaluate and present options on the basis of their clients' interests. As well they should.

Is a rollover always and forever the right solution? Of course not. Some retirement plans are wonderfully inexpensive and offer easy access to excellent investment programs. But most don't come close to the fiduciary ideal, which takes us back to our 2007 argument: Generally, plan participants would be well-served by a rollover to a high quality, cost-conscious IRA, either on a self-directed basis or with the guidance of an independent advisor.

Source

Janet Paskin, "The 401(k) Rollover Conundrum," SmartMoney, June 26, 2009