Posted by: Ben Steverman on January 15
It's a sign of the times: The fees you're paying to your tax-free money market fund's managers are likely higher -- a lot higher -- than the mere pennies you're earning from the fund.
A new issue of the Tax Advantaged Investor newsletter by Marilyn Cohen points out the trend. Cohen cites iMoneynet data showing the average tax-free money market fund yielded just 0.71% on Jan. 5.
Bankrate.com tracks non-taxable money market mutual funds. Of the nine funds listed here, five have expense ratios that exceed their most recent yields. Three of the funds have offered an annual return of less than 0.2% for the last seven days.
Investors are always advised to keep an eye on fund fees. Even on riskier and higher-yielding stock or bond funds, management fees can take a big bite out of returns year in and year out. But a negative return on a money market fund? In that case, stashing the money under mattress is looking pretty attractive.
Blame the Federal Reserve's slashing of interest rates.
Cohen writes:
The Fed is really telling investors, "Take more risk because these non-risky assets aren't going to yield much." If you insist on keeping a large municipal money market cash balance, then create your own fund free of all fees.
She gives some advice for how to do so "by buying prerefunded tax free municipal bonds maturing in 2009 thru 2011."
Bankrate notes that "many of the funds are waiving or reducing management fees to continue to provide yield." That's a good sign, though fees would have to go pretty low to beat some of these paltry yields.
Why would investors put up with these returns? "People are worried about getting their money back, rather than making money," Chad Deakins of the RidgeWorth International Equity Fund told me yesterday (for an interview for a different story).
These tax-free money market funds, based on municipal debt, are pretty much as safe an investment as you can find outside U.S. Treasuries (which are taxable). Even if you have the ability to "do-it-yourself" by following Cohen's advice, the funds she suggests buying yield just 0.75% to 1.75%, and much of those earnings will be eaten up by your transaction fees.
The environment today is such that if you want to make almost any money at all, you need to risk losing some of it.
Posted by: Lauren Young on January 15
There's even more evidence that investors are curbing retirement plan contributions.
Consulting Mercer giant says more retirement plan participants are requesting withdrawals compared to last year--requests rose 59% in November and December of 2008, according to a press release from Mercer.
And since July, there has been a steady increase in the number of participants who have cut their retirement contribution rate to zero. Overall, Mercer saw more participants decrease rather than increase their contribution rates throughout 2008--"a trend rarely seen in more stable economic times," Mercer says. These transactions, however, still represent a small fraction of overall plan participants, averaging less than 1% in both cases.
“The small number of people represented in these findings is the good news,” Eric Levy, Retirement Business Leader of Mercer’s outsourcing business, said in the press release. “What should sound the alarm with plan sponsors, however, is the growth trend, not the absolute figures. As most experts would agree, withdrawals from 401(k) type retirement plans and reducing participant contributions to zero are two actions that are completely counter to preparing for retirement. This may point to the dire straits that a small but growing number of participants find themselves in where withdrawals and zero contribution rates are seen as a type of financial last resort.”
Mercer believes that in order to counter these trends, plan sponsors should increase communication to participants regarding the benefit of long-term retirement savings, highlight the availability of educational and planning tools such as websites and seminars, and re-evaluate plan designs based on current participant behavior and trends.
Other Mercer findings:
Some 28% of 401(k) retirement plan participants have seen a 30% or more decrease in their account balances in 2008 through December.
Despite these results and the general economic turmoil, relatively few (14%) retirement plan participants conducted any kind of exchange in their 401(k) accounts in 2008. This group, however, shifted assets dramatically from equity markets into capital preservation funds. In fact, compared to the same time frame last year, balances and plan contributions in stable value and money market funds grew 70% compared to 2007, while equity funds contributions decreased.
Mercer’s findings are based on the January to December 2008 behavior of the 1.2 million participants for whom it administers employer-sponsored defined contribution retirement plans.
Posted by: Matthew Goldstein on January 15
Bank of America reportedly needs billions of dollars in additional federal money to help it complete its acquisition of Merrill Lynch. But before Treasury hands over a single penny, shouldn’t the giant lender be forced to eliminate the hefty dividend it’s still paying shareholders?
There’s no dispute that the nation’s banks are still hurting and need government help. The mess at Citigroup is proof positive that the financial system remains in a state of distress. But the big criticism with the initial $350 billion the Treasury doled out to the banks under the Troubled Asset Relief Program is that there few strings attached to the money. The Treasury handed out money to dozens of banks, including a $25 billion payment to BofA, without demanding much of anything from the banks.
But going forward isn’t it only fair to demand that the nation’s bankers take whatever steps they can to cut cost and preserve precious capital before getting any more government help?
There’s a growing debate now whether the federal government should simply nationalize Citigroup, as opposed to spending any more money to either guarantee or purchase the Citi’s mountain of rotting mortgage-backed securities and ailing consumer loans. In taking over Citi and winding down its operations, the federal government would take possession of all those toxic assets without having to expend much money—allowing the government to direct more money to banks with healthier balance sheets.
So when it comes to BofA, why shouldn’t it be forced to cut its outlays to the bone first? After all, analysts are saying even banks with relatively healthy balance sheets, like Wells Fargo, may have to trim their dividends. As of right now, BofA, even after cutting its dividend in half in October, still boasts a hefty payout of 32 cents a share. Even at that reduced amount, the dividend is equal to the sum the bank was paying shareholders in 2003. When the bank slashed the dividend in October, it said the move would save it about $1.4 billion a quarter in badly-needed capital. By that math, eliminating the dividend altogether would say about $2.8 billion in capital a quarter. The bank declined to comment.
News that BofA may need more government, combined with fear on Wall Street that the dividend could be in jeopardy caused the bank's stock to plunge in morning trading. The stock, as of 10 a.m. ET, was down 20% to $8. Other bank stocks fell in sympathy.
And while BofA is slashing its dividend to ordinary stockholders, what about preferred shareholders? On Jan. 5, the bank announced the payment of dividends of various classes of preferred stock—a class of stock that takes priority over common stockholders when it comes to dividend payouts. What’s a bit disturbing about BofA’s move is that it apparently came at the same time management was asking Treasury for more money to help it digest the Merrill transaction. In other words, at the same time Bofa CEO Ken Lewis was going to the federal government with his hand out, he was reaching into the bank’s coffers and recommending a payout to preferred stockholders. Of course, this action also raises questions for BofA’s board, which approved the dividend payout.
If the federal government really wants to get tough with the banks, it could even demand that bondholders start feeling some pain. If workers across the country are being asked to take unpaid vacations to save their jobs, why shouldn’t bank bondholders take some haircuts on their investments to help save these institutions? The Big Three auto manufacturers were forced to make concessions before receiving some $14 billion in government aid. So Treasury should demand that the banks go to their bondholders and ask for concessions on interest payments—at least until the financial crisis passes.
None of this is to say that the federal government shouldn’t help the banks. But it would appear that a lot more sacrifice is needed from the nation’s banks before they get any more money. After all, the taxpayers are being forced to bailout the banks from a problem that’s largely of their own making.
Posted by: Emily Thornton on January 12
Consumer confidence is shattered. Credit has tightened. And companies are about to be hit with hundreds of billions of dollars of debt maturities scheduled to come by the end of 2009.
So it’s no wonder that most CEOs are feeling a little a gun shy about doing big deals. In 2008, companies announced only $2.9 trillion worth of mergers and acquisitions, a fraction of the $4.2 trillion announced the previous year, according to ThomsonReuters. And most bankers do not expect mergers to come roaring back any time soon.
Nevertheless, as for those CEOs that can put their nerves aside, the chances for snapping up a rival on the cheap have never been better. There are few buyers out there to bid up prices, leaving the field wide open for those who dare to attempt to snap up an asset for a cheap price or even take out their rivals.
In fact, Boon Sim, head of mergers and acquisitions at Credit Suisse, advises executives that they “should aggressively go out and look at companies that have in the past said no to them.” With the overall stress and nervousness about the economy, Sim argues, “shareholders are likely to be more responsive to an unsolicited offer.”
Plus the list of vulnerable players will likely get longer. Many companies are “suffering from a financial crisis, a business model crisis, or both,” says Paul Parker, head of global mergers and acquisitions at Barclays Capital.
Posted by: Lauren Young on January 08
More investors switch financial advisers in down markets than up markets. How do you feel about your financial adviser these days? If your adviser is in the doghouse, he or she has plenty of good company: A new survey of millionaires conducted by the Spectrum Group found that just 36% of respondents are pleased with the performance of their financial adviser.
It’s no wonder so many people are questioning the value of financial advice, thanks to the recent market meltdown as well as the Bernard Madoff scandal. We’d like to hear what you think. We are asking readers to share their experiences and collaborate with us on a story about financial advisers. Your ideas, tips, and comments will influence upcoming BusinessWeek coverage.
To get the ball rolling, here are some things to think about: Did your adviser do a good job of preserving your wealth in 2008? Or, did your financial confidante perform so dismally that you are thinking about breaking it off and finding a new money maven—or, perhaps even managing your money yourself?
Keep in mind that there are some 650,000 people out there who call themselves an adviser and they come bearing many different labels: financial advisers, financial consultants, financial planners, and registered representatives. How did you find your adviser? Did you hire your adviser on the recommendation of a family member or through the financial planning service offered by your employer? Did you do any sleuthing before you forked over your money? If so, how did you size up an adviser’s education, experience, and credentials? Finally, if you’ve switched advisers, let us know why, and how you managed the divorce.
We look forward to hearing from you. If you need some good advice on managing your current financial partnership, check out Finding Somebody to Trust.
