The Float

BrightScope in USA Today

We were pleased to see our friends at BrightScope featured in yesterday's USA Today story on the high and hidden fees that plague so many retirement plans. This marketplace is changing, and very much for the better.

Fiduciary service providers, sponsors, and participants need to work hard to ensure that defined-contribution plans give participants and their beneficiaries the best possible chance of a decent standard of living in retirement. 401(k) and other DC plans aren't the only piece of the retirement puzzle, of course, but they're immensely important, and there's no reason we can't effect lots of positive change over the next few years.

"The New American Dream: Renting"

In this space, we've written on the widespread misunderstanding of the investment value of residential real estate. Whether it's short, anomalous bursts of rapid appreciation that warp people's sense of long-term averages, or gross underestimates of the true costs of ownership, many people have made enormous financial mistakes on the premise that owning (to say nothing of "flipping") a home is a sure path to financial security.

So we were delighted to see last Penn professor Thomas Sugrue's piece on rentership and ownership in last Friday's Wall Street Journal. As usual when we make reading recommendations, the whole thing is worth your time. But this struck us as a key passage, in many ways the key to the entire story:

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It's not the story of the inexorable march of the free market. It's a different kind of American story, of government, financial regulation, and taxation.

We are a nation of homeowners and home-speculators because of Uncle Sam.

...

It's a story riddled with irony--for at the same time that Uncle Sam brought the dream of home ownership to reality--he kept his role mostly hidden, except to the army [of] banking, real-estate and construction lobbyists who rose to protect their industries' newfound gains. Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination--not because they were the beneficiaries of one of the grandest government programs ever. The only housing programs prominently associated with Washington's policy makers were underfunded, unpopular public housing projects. Chicago's bleak, soulless Robert Taylor Homes and their ilk--not New York's vast Levittown or California's sprawling Lakewood--became the symbol of big government.

Then there's the other part of the residential real estate story we've returned to repeatedly. The fallout from the housing bubble is (and will continue to be) especially awful because unlike railroads or telecommunications or the Internet, excessive residential real estate--too many homes that are too big and too far-flung--does nothing to promote future economic productivity. Indeed, it impairs future productivity by diverting public and private resources from other, better uses. Your town could benefit from more solar power? From a more efficient grid or better schools? Sorry. They spent the money on that (largely empty) subdivision out in the fields.

Sugrue's closing lines apply to the U.S. as a country as much as to individuals and families:

If there's one lesson from the real-estate bust of the last few years, it might be time to downsize the dream, to make it a little more realistic. James Truslow Adams, the historian who coined the phrase "the American dream," one that he defined as "a better, richer, and happier life for all our citizens of every rank" also offered a prescient commentary in the midst of the Great Depression. "That dream," he wrote in 1933, "has always meant more than the accumulation of material goods." Home should be a place to build a household and a life, a respite from the heartless world, not a pot of gold.

Source

Thomas J. Sugrue, "The New American Dream: Renting," Wall Street Journal, August 14, 2009

Line of the Day

Heard on yesterday's installment of Fast Money:

Pete Najarian: "Why did Freeport-McMoran today get put on the Conviction Buy List over there at Goldman Sachs?"

Karen Finerman: "Because they were long already."

Good stuff.

Multiple-Employer Plans

Here's our latest (more or less monthly) tribute to Scott Simon's excellent work at on fiduciary issues at Morningstar.com, this time on the under-appreciated potential of multiple-employer retirement plans. Here's a key excerpt:

Some advisors to plan sponsors such as ERISA attorneys believe that many of their clients don't consider a [Multiple-Employer Plan, or] MEP and the use of a fiduciary protocol such as a professional named fiduciary because they perceive it to be too costly and something that only larger retirement plans can afford. Uh, let's see: "too costly"--as compared with what? The kind of investment options--woefully underdiversified with hidden (and therefore high) costs--that populate and plague the 401(k) plans at even many Fortune 500 companies?  

Many independent ERISA section 3(21) named fiduciaries don't depend on the existence of 12(b)-1 fees or other subsidy payments. Instead, they usually choose low-cost, passively managed funds such as index funds and asset class funds for a plan's investment options and eliminate unnecessary services that drive up costs. Retirement plans run by independent fiduciaries are priced differently, and even after the fiduciary's fees are taken into account, the total "all-in" cost is almost always lower.  

Micro-sized retirement plans can enjoy the protections and other advantages of a MEP managed by an ERISA section 3(21) fiduciary and ERISA section 3(38) fiduciary team. That way, the smallest plans can take advantage of the pricing that some of the very largest retirement plans enjoy. Although it may seem counterintuitive, independent fiduciaries are the most affordable method for delivering results-based services to plan participants (and their beneficiaries), while reducing risk to employers more significantly than any other current method offered in the retirement plan marketplace. That's why a MEP or a single employer plan in a MEP-like scenario using an independent fiduciary not only makes practical sense, it also makes real economic sense. 

In our practice, a multiple-employer plan for which we serve as a 3(38) fiduciary is a great example. Due to our breakpoints, our advisory fee is lower for each adopting co-sponsor than it would be for any of them outside of the MEP structure. These are real economies of scale for real participants (and sponsors). Good stuff.

Scott calls multiple-employer plans "the platinum standard" of fiduciary delegation, a concept that builds on his recent series on delegation per se. Read the whole column. It's excellent.

The Square Root Economy (and Market?)

Appearing on CNBC's Squawk Box this morning, Leon Cooperman fired off one of the better lines we've heard in quite a while, arguing that the shape of the recovery won't be a "v" or a "u" or a "w"...but that of a square root sign.

We don't have much to add here. Just thought that was a clever (and more than that, a plausible) way of describing what lies ahead.

Agility Matters

We've long argued (here, here, and here, for example) that most big mutual funds are a rotten deal for individual investors. Due to their size, trading costs, and diversification, many of these funds end up behaving like very expensive index-trackers over full market cycles.

Most of the evidence we've pointed to has focused on big, lumbering laggards. Yesterday's Wall Street Journal featured a story on the best-performing funds in the first half of the year, and the upshot is clear: Small is beautiful.

While their names mightn't be familiar to many investors, there were some stock funds that delivered stellar returns over the past year.

Among the seven best-performing funds in the 12 months to July 31, none is from the 25 largest mutual-fund companies and none of the funds has more than $700 million in assets, according to data from Morningstar Inc.

Despite the market downturn that saw the Standard & Poor's 500 Index lose 22% during the 52-week period, the seven funds, all of which invest in long-only securities and are mostly invested in stocks, have seen double-digit returns.

Six of the funds use "value" strategies, while four have concentrated portfolios and held fewer than 40 stocks, according to the most recent data. The figures suggest investors should take note of smaller funds, if nothing else than for their ability to be more flexible in challenging markets.

Indeed.

Source

Sam Mamudi, "Top Funds' Traits: Strategy and Size," Wall Street Journal, August 6, 2009

BrightScope on 401(k) Legislation

The center of gravity on 401(k) legislation has long been the office of Rep. George Miller (D-CA), who chairs the House Committee on Education and Labor and has taken great interest in issues relating to retirement security in general and defined-contribution plans in particular. 

Miller is the lead sponsor of H.R. 2989, which combines fee disclosure provisions with a requirement that investment professionals providing advice to retirement plan participants be genuinely independent. All of which sounds good to us. And to our friends at BrightScope, where Ryan Alfred has posted a comprehensive assessment of H.R. 2989's investment advice component. Here's Ryan's conclusion:

It should be the intent of the legislation to align the standard of care of financial representatives with the expectations of investors and to strengthen investor protections. If "harmonization" is to occur it needs to be the harmonization of investor expectations with the standard of care of their advisers, regardless of whether that financial firm was heretofore regulated as a broker-dealer or an investment adviser. That means upgrading all providers of investment advice to the existing fiduciary standard for investment advisers, not lowering the fiduciary protection via a new "federal fiduciary" standard. Nowhere is this case more clearly evident than with retirement plans, where a higher percentage of investors are unsophisticated and lack the freedoms they have in non-retirement accounts. These investors deserve to have access to conflict-free advice from fiduciary advisers.

We second that enthusiastically.