BUSINESS
Northwest Herald / NWHerald.com
Thursday, March 21, 2013 • Page D3
Engage employees to increase plan participation Those who fail to maximize their contributions or take advantage of their employer match are missing important opportunities to help ensure they will reach their goals. When combined with target date fund defaults, auto enrollment has helped enormously in getting employees started in their plans and contributing to investments that are aligned with their age and risk tolerance. At the end of 2011, plans featuring auto enrollment boasted an overall participation rate of 82 percent compared with an overall rate of 56 percent for plans without this feature. Beyond auto enrollment, there are other ways to engage employees and increase plan participation. Plans that offer “full employees engagement programs” – i.e., those that engage employees over a period of time through multiple media, including personalized educational messages to drive particular behaviors, online learning, tools and wizards that simplify decision-making processes, one-on-one assistance, etc. – can help drive plan performance by engaging employees to
make healthy planning and investing decisions. It is important that education programs offered by providers and advisers can target individual participants to drive/encourage them to meet their retirement readiness goal. Many of the plan providers we work with employ leverage stateof-the-art technology. Information automatically included in the quarterly reports show current deferral, employer match, age, gender, salary and growth to calculate how much additional savings is needed to achieve 80 percent of preretirement income. We often ask the employer, “Do you know how many of your 40-year-olds are on track to reach retirement readiness?” Why is this important? Because if you know how many are not on track, but could educate them to save more, consider the possibilities. Employees may feel confident they can retire at 62, not 67 to start their dream business or follow their passion. Benefit to employer? Age composition of employees becomes younger (may require a 10- to 15-
BEST PRACTICES Terry and Aaron Maryniw year cycle), thereby reducing cost of health insurance, disability, life and worker’s compensation. It is a win-win situation for employee and employer. When it comes to enrollment, plans adopting engagement programs were twice as likely to increase enrollment rates, as compared to plans with fewer engagement opportunities (54 percent versus 27 percent, respectively). Employees often need help understanding how the decisions they make today can impact their savings in the future. Early intervention matters, as participants in plans that leverage educational communications after enrollment were six times more likely to increase their deferral rates than those in plans without post-enrollment communications (12 percent increase deferrals versus 2
percent, respectively). Proactive engagement and education is critical as more than 60 percent of plans with auto enrollment – small and large alike – set the default deferral rate at only 3 percent, and 59 percent of participants have yet to change their contribution rates after being defaulted. As a result, the average deferral rate among auto-swept auto-enrollment participants is just 4.7 percent – a much lower rate than the average 8.8 percent among all plans. Sponsors also can help ensure that deferral rates grow over time by using an automatic annual increase program, which has proven to be particularly effective for both younger and lower-income participants. In fact, for the youngest participants, more than half of all deferral increases can be attributed to an auto annual increase program. Furthermore, when automatically swept into such a program, only 6.5 percent opt out of it within 12 months. At Maryniw Financial, we make extreme efforts to encourage the employee to increase savings rather
than focus on investing. Emphasis on saving may be a simpler proposition than making investment decisions. Once the savings decision has been made, the investment process becomes easier. For plans sponsors, the introduction of annual increase programs should be carefully considered. Jeffrey Inman, consumer behavior expert and associate dean of Research and Faculty at the Katz School of Business, University of Pittsburg, cautions: “It might be fruitful to examine the nature of annual increase programs that lead to the greatest usage level. If the increases are too large in too short of time frame, opt-outs will probably skyrocket. The key is to make it as “painless” as possible by setting lower, gradual increases.”
• Terry Maryniw and Aaron Maryniw are investment advisers with Maryniw Financial, 901 E. Oak St., Lake in the Hills. Email maryniw@maryniw.com, call 847658-9251 or visit www.maryniwfinancial.com.
Study sheds light on JPMorgan, MF Global trustee reach agreement funds’ hidden costs The Associated Press
By MARK JEWELL AP Personal Finance Writer There is no shame in being cost-conscious. Price is often the critical factor when mutual fund companies compete for business. They want to be able to tout the lowest expense ratios for their funds. That’s the figure that shows how much investors pay to cover operational costs. But it isn’t the only cost you should be thinking about. There’s another significant cost that’s harder to quantify, isn’t disclosed, and remains largely invisible: expenses from the trades that the fund manager makes. Three university professors tried to calculate the impact of trading costs on fund performance, and their conclusion suggests that a fund’s expense ratio doesn’t come close to capturing the full costs that investors pay. The study’s authors found that the typical fund’s tradingrelated expenses take a bigger bite out of investment returns than the separate fund management costs reflected in the expense ratio. They estimate trading costs shave an average 1.44 percent from returns a year. That’s substantially more than the impact from funds’ posted expenses, as the average expense ratio of the funds studied was 1.19 percent. Although the study found trading costs to be more significant, good luck to any investor hoping to calculate the impact they can have on a specific fund and its returns. There’s no practical way to get a decent estimate. In contrast, fund expense ratios are easy to find and precise. “On a practical level, given the current state of affairs, trading costs really are an invisible cost,” says Roger Edelen, an associate professor of finance at the University of California-Davis. The study by Edelen and co-authors Richard Evans of the University of Virginia and Gregory Kadlec of Virginia Tech is published in the current edition of the Financial Analysts Journal.
THE COST ANALYSIS The study analyzed portfolios and trading data from nearly 1,800 stock funds from 1995 through 2006. A cost was estimated for each trade based on three components of trading expenses. The first two are brokerage commissions paid to execute transactions, and bid-ask spreads. The spreads are the time-sensitive gaps between a stock’s asking price and its selling price. A significant mismatch can make a stock more expensive to buy and cheaper to sell, cutting into an investor’s return.
MARKET IMPACT The professors concluded the third component, price impact, is the most significant. When a fund makes a big stock purchase or sale, that trade can affect that stock’s
market price as the transaction is completed, typically to the detriment of the fund’s performance. When a fund buys a large number of shares, the stock’s price is likely to rise as the transaction is carried out, resulting in a higher share purchase price. A stock that a manager considered a good investment at $100 a share might be purchased for an average of $101. Then, when the manager looks to sell later on, the opposite happens. It’s an especially important challenge for funds that specialize in stocks of small companies that aren’t heavily traded. For example, if the market gains 10 percent in a year, a fund that bought stocks that performed that well on average may only generate a 9 percent return, after trading costs. Successful fund managers might be able to offset those costs if their portfolios outperform the market. But high trading costs make that challenge especially difficult, Edelen says.
NEW YORK – JPMorgan Chase has agreed to a deal that will return $546 million to former customers of trading firm MF Global Holdings Ltd., which collapsed in 2011 with $1.6 billion missing from its accounts. MF Global failed in October after a calamitous bet on European debt spooked its investors, partners and clients. The bankruptcy was the eighth-largest in the U.S. and the largest on Wall Street since the 2008 collapse of Lehman Brothers. Much of the missing money belonged to
farmers, ranchers and other business owners who used MF Global to reduce their risks from fluctuating prices of commodities such as corn and wheat. A House panel has said credit rating agencies and federal regulators contributed to MF Global’s collapse. But it pinned most of the blame on risky strategies by ex-CEO Jon Corzine, the former New Jersey governor. JPMorgan Chase & Co. held MF Global funds in several accounts and also processed the firm’s securities trades. The trustee tasked with getting customers’ money back, James W. Giddens,
threatened to sue the New York bank if it didn’t return money that was transferred to the bank from MF Global. By June 2012, JPMorgan had returned $608 million to the firm. Under a settlement agreement filed Tuesday in Manhattan bankruptcy court, JPMorgan Chase has agreed to pay $100 million to reimburse customers and will relinquish claims on $417 million that it previously returned. JPMorgan also will return over $29 million that it is holding as security on an MF Global credit line. The recovered money will eventually be passed along to customers.
INVISIBLE COSTS Trading costs are subtracted from the fund’s assets, but aren’t reflected in the expense ratio. Both types of costs ultimately affect the investment return. But the trading costs aren’t disclosed or easily calculated. The brokerage component of a fund’s trading costs is typically detailed in a disclosure known as a “statement of additional information.” But few investors read them, and there’s no information on costs from bid-ask spreads or price impacts.
WHAT INVESTORS CAN DO Expenses from trading vary widely among funds, and there’s no standard way to calculate the costs. So most investors are stuck with considering a fund’s turnover ratio as a relative gauge to indicate the potential expenses the fund may incur. The turnover ratio shows the percentage of the stocks in the fund that have been traded within the past 12 months. Fifty percent means half of the stocks have changed hands in a year. Edelen and his colleagues have devised an alternative that they believe better reflects a fund’s trading costs, called “position-adjusted turnover,” which takes into an account the relative weightings of the stocks within the fund. For now, it’s best to check the traditional turnover ratio, which is widely available on fund research websites. There’s no rule about what constitutes high turnover. But generally, a ratio of 100 percent is considered a high water-mark, or 50 percent if you’re especially concerned about limiting trading costs. If a fund’s turnover exceeds those levels, you may want to steer clear, unless the fund’s investing style justifies frequent trading.
• Questions? Email investorinsight@ap.org
Join us: Time: Location:
Wednesday, April 17, 2013 8:00 a.m. - 1:00 p.m. Holiday Inn Conference Center , Crystal Lake
Price:
$60 ( includes continental breakfast and lunch) Registration required, seating is limited.
If you are an existing isti b business in you kn know that ha bein being an owner can b be challe challenging and one of the most rewarding experiences of your life. The Northwest Herald and Business Journal Quarterly is offering a half day business session designed to bring successful entrepreneurs and business leaders to the Crystal Lake Holiday Inn. We’ve assembled local business experts that will share their knowledge to help entrepreneurs and owners build successful businesses. A morning panel discussion will address questions on how to strengthen your business plan, improve your operation, how to develop a successful marketing campaign and how to expand your business in other markets. This event also provides networking opportunities for aspiring entrepreneurs and business owners.
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