Oct. 17, 2006 - A Better Idea at Ford (Almost)

Did someone over in the "Glass House" at Ford Motor Company catch my recent comment about their 401(k) plan?  Probably not, but the timing looks good so let's run with it anyway.

Here is what I wrote on August 2 in my post Gambling with Retirement regarding the Ford 401(k) plan:

"Off topic note to Ford execs -- It has always puzzled me that a company as large as Ford does not have access to some of Fidelity's top mutual funds.  You can and should bargain for better choices."

So imagine my delight to read in today's Wall Street Journal ($ subscription only) that Ford has decided to slim down its 401(k) by eliminating three mediocre mutual funds:  Fidelity Magellan, Domini Social Equity, Morgan Stanley Global Value Equity A.

A fourth fund that is pretty good was also inexplicably dropped: Vanguard Explorer.  This fund merits a 4-star rating from Morningstar (out of 5 possible) and has performed in the top third of its investment category for at least the past 15 years with an excellent expense ratio of 0.41%.  This is puzzling but perhaps there were other reasons it was dropped.  No matter, it's water under the bridge now. 

Dropping some mutual funds, however, is only half a solution.  The fact remains that Ford's 401(k) plan, which is administered by Fidelity, continues to offer some less than desirable mutual fund options.  Even more incredible is that despite Ford employees having socked away nearly $12 billion in this plan, the company has not been able to add some of Fidelity's better mutual funds to the menu of options.

Isn't there even one executive or honcho in HR that can get this issue resolved and give employees the best options available?  This is low hanging fruit folks.  I can't imagine that Fidelity would not balk at such a request when there's $12 billion on the line.

Removing underperforming mutual funds is a good first step but there's a lot more that can be done.  Ford needs to replace the bad with the best.  If they're going to clean house, then go all the way.

Aug. 4, 2006 - Baby Boomer Retirement Bust?

The Government Accountability Office (GAO) released an interesting study about the impact of retiring baby boomers on the stock market.  It caught my eye because the study contradicts some crazy ideas that have been floating around about what will happen when that fabled generation hits retirement.

Some background.

A few self-appointed gurus, like Robert Kiyosaki, have made quite a bit of money selling their "prophecies" of doom and gloom for the stock market when baby boomers retire and begin to withdraw money from retirement accounts.  These theories are not backed up with any data, but are based on simplistic notions and fairytales, just like the original Rich Dad Poor Dad book.

Oops!  The gurus forgot about logic and reality.

As the GAO study points out, most baby boomers don't have much money for retirement to begin with.  In fact, the wealthiest 5% of baby boomers own over 50% of the assets!

The wealthy ones aren't going to sell all of their assets all at once.  If you think about it, neither will the other 95%.  It's just not how retirees normally behave.

No matter how much money a person has at the start of retirement, he isn't likely to go out and blow it all in one fell swoop.  Most people carefully avoid dipping into their savings, especially if it's a small amount, because they know it has to last a long time.  Rather, they try to stretch it out for as long as possible.

The GAO study cites two logical reasons in support of this behavior.  First, people are living longer and will need to stretch out their retirement asset sales over a longer period of time.  Second, baby boomers are delaying retirement and working longer because they aren't prepared for retirement.

Aug. 2, 2006 - Gambling with Retirement

I admire devotion to a job and the company, but this story by Susan Tompor of the Detroit Free Press drives me nuts.

"Worker's Gamble with Ford Stock"

Here's the lead:

"From day one, Brian Pannebecker decided to put his 401(k) money into Ford Motor Co. stock.  Only Ford stock.  Now, the red ink at Ford has left his 401(k) in the red, too.  Pannebecker, 47, an hourly worker at the Ford Sterling Plant in Sterling Heights, has set money aside out of each paycheck for the past 10 years.  Ultimately, he put $72,000 into his 401(k).  Now, he's got roughly $36,000 in his 401(k) -- and all in the Ford stock fund.  And he's still buying Ford stock.  'I know it's a gamble,' he said."

It's more than a gamble.  Nothing personal against Brian Pannebecker, but it's a stupid idea.

Even if Ford stock triples or quadruples in value (an unlikely outcome at this point), this man's 401(k) balance will only be about where it should have been if he had originally created a well-diversified portfolio.

Pannebecker is not alone.  The article goes on to point out:

"The overall Ford 401(k) had nearly 40% of the assets invested in Ford stock as recently as 2004.  The percentage has fallen with the stock price, down to 22.5%."

What an incredible stat -- 40%!  The sad reality is that the percentage has fallen to 22.5% not because Ford workers are getting smart and baling on the stock.  The decline is most likely due to simple mathematics -- a shrinking numerator (Ford stock has continued to tank) and a growing denominator (Ford workers continue to contribute money to the 401k plan plus the stock market has been up since 2004).

It's not like Ford workers don't have choices.  I know the Ford 401(k) plan inside and out since I am based in the Detroit area and have several Ford clients.  The plan is run by Fidelity and has many good investment choices even if not all of them are Fidelity's best.  (Off topic note to Ford execs -- It has always puzzled me that a company as large as Ford does not have access to some of Fidelity's top mutual funds.  You can and should bargain for better choices.)

It's not the stock.  It's the risk.

The point is not whether Ford stock is a good investment, but rather it's a question of risk and how to manage it properly.

Let's use Pannebecker as an illustration.  We know from the article that he is an hourly worker at a Ford plant and he is age 47.  This information means that Pannebecker faces several enormous risks tied directly to his employer's fortunes:

1.  Pannebecker's job is at risk.  Ford is not a growing, vibrant, or financially sound company.  It is just the opposite.  Job security is not working in Pannebecker's favor, despite being a UAW member.

 

2.  Pannebecker's pension is at risk.  In a worst case scenario, Ford collapses and the pension plan is eliminated.  Yes, the Pension Benefit Guaranty Board provides a back up, but it may be at a substantially reduced amount from what Pannebecker is expecting or could have otherwise earned.  In a more likely scenario, Ford could simply freeze the pension plan where it is today with no further benefits accrued.  The UAW wouldn't like it but what happens if that's the key to saving the company and future jobs?

Add to this mix Pannebecker's 401(k) investments in Ford stock and you have an insane recipe for the perfect storm -- he loses his job, his pension, and his 401(k) investments all in one shot.

That's probably NOT the retirement trifecta he's hoping for.  

At age 47, with a short road to retirement, there aren't too many prospects for Pannebecker to recover.

That's why it's not about the stock.  It's about the risk.

Don't get me wrong.  I want Ford to succeed.  I hope these investors all realize great gains on their Ford stock.

But it's a huge risk and a gamble that may ruin many retirement plans.

Related Tags: Ford 401(k), Ford stock, retirement, gambling, gamble, investments

Jul. 17, 2006 - The Marlboro Man & Retirement

I am not a smoker.  Never have been and never will be.  My dad was a 2+ packs per day addict for 27 years so I grew up watching the devastation cigarettes cause.  Thankfully, he quit 23 years ago cold turkey by God's grace or he probably wouldn't be alive today to enjoy his grandchildren.

Needless to say, I don't normally pay attention to the price of cigarettes.

The other day, however, I noticed a large banner outside the corner gas station advertising a special deal on Marlboros for $4.50 per pack.  I was shocked.  I'd hate to see the normal price.  I also know that others pay even more due to their state's tax structure.

That got me to thinking about the financial impact of smoking because it's usually the little, seemingly inconsequential expenses that can make or break us over time.  I wondered what would happen if that money were put away for retirement instead of being consumed by cigarettes.

Retirement Up in Smoke

Let's assume the Marlboro Man goes through one pack per day.  That means in a typical month he will spend an average of $135 on cigarettes, or $1,620 per year.  Imagine if that same amount of money were saved in a Roth IRA every year (assuming the price of cigarettes doesn't change).  After 30 years of growth at an 8% annualized rate of return the Roth IRA would be worth $198,200!  That's a lot of tax-free retirement money to send up in smoke.

If you're a Marlboro Man, I guess the choice is to "kick the habit" now or "kick yourself" later when you retire.   

On the other hand, the Marlboro Man does have one advantage when it comes to retirement planning -- he probably doesn't have to worry about outliving his assets. 

Aug. 24, 2005 - The Coming Retirement Crunch

Check this out for a retirement prognosis.

"The typical American household is on course to take a significant cut in income when its breadwinners go into retirement."

That's the conclusion of a study by Fidelity Investments as reported in the July 2005 issue of the trade publication Financial Advisor (scroll down to the bottom of the page under Frontline News to see the full article).

And just what does "significant cut" mean?  Try living on less than 60% of your pre-retirement income!

Let's put this in perspective.  Imagine your income today.  Now take a 40% cut and try to make ends meet on the remainder.  Not a pretty thought is it?  That's what it will feel like.

Millions of Americans will have to accept that "signficant cut" in retirement because they failed to plan and save.

To avoid this fate, you must be realistic about retirement.  Expenses don't magically evaporate just because you retire.  The truth is that you are likely to need the same income level for quite some time after you retire, depending on your age at retirement.

How will you pay for retirement?  Here are your choices:

1.  Social Security - Benefits today are small and will only get smaller.

2.  Company Pension - These are going the way of the dinosaurs.

3.  Your Own Savings - Better get started!

4.  God - But He will tell you that His provision can be found in #3.

The point is that it's up to you and how much you save.

The earlier you start saving, the better off you'll be in retirement and the less painful it will be to your budget while you are working.  If you don't plan and save, then you may as well start rehearsing for your fifth choice for retirement income:

"Hello!  Welcome to Wal-Mart.  How may I help you?"