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Popular
outrage forced Bank of America Corp. to drop the idea of
a $5-a-month debit card fee.
Now
imagine what that outrage could achieve if it were let
loose across the financial industry.
How many
mutual funds, if faced with that kind of people-power
backlash, could justify the management and marketing
fees they’re charging investors?
How many
banks would find their deposits running out the door if
savers really took the time to shop around for the best
rates?
How many
company 401(k) retirement savings plans would offer
better investment choices if workers took an active role
in monitoring the plans and agitating for improvements?
None of
this is easy — certainly not as easy as posting an
angry comment on a blog trashing Bank of America.
But the
potential savings or added income for investors, savers
and borrowers could far exceed the $60 a year that Bank
of America would have siphoned away with the debit card
fee.
“Far
too many consumers are sloppy with their finances,”
said Greg McBride, senior analyst at Bankrate.com.
And we
aren’t just talking about the poor or uneducated.
Plenty of middle- to upper-income people could do a far
better job with their money. You know who you are.
For
investors and savers, one argument against bothering
with trying to improve their lot is that returns are so
puny it isn’t worth the effort.
How about
turning that around: Lower market returns make it even
more imperative that you try to limit the money that
banks, mutual funds and other financial-services
providers try to hive off from you.
Where to
start? Let’s go from not very difficult and move up
from there.
—Bank
savings. You aren’t going to earn much in cash
accounts no matter where you go, with the Federal
Reserve holding its benchmark short-term interest rate
near zero. Worse for savers, the Fed in August said it
was likely to keep short-term rates at these levels for
at least two more years.
Still,
some financial institutions will treat your money far
better than others.
Among the
top 50 U.S. banks, the average annualized yield on money
market deposit accounts — basic savings — is just
0.29 percent, according to Informa Research Services.
But go to Bankrate.com and you’ll see more than a
dozen banks paying 0.80 percent or more.
For older
people who keep significant sums in bank accounts to
have the safety of federal deposit insurance, the
difference between 0.80 percent and 0.29 percent can be
substantial. On a $50,000 deposit, that’s $400 in
annual interest versus $145.
McBride
has two tips for savers in this dismal environment.
First, avoid the banking titans. “The biggest banks
have the least competitive rates and are swimming in
deposits,” he said.
—Second,
look to credit unions if you can. (They were the
intended beneficiaries of Saturday’s Bank Transfer
Day, a movement to encourage Americans to abandon
banks.)
It
isn’t a myth, McBride said, that credit unions tend to
pay more on deposits than banks. Why? Because credit
unions are not-for-profit organizations. But they offer
exactly the same kind of federal deposit insurance as
banks.
—Money
market mutual funds. The funds are major casualties of
the Fed’s near-zero rates. They can pay out only what
they earn on short-term securities. Because they’re
earning practically nothing, they’re paying
practically nothing.
The
average yield on money funds available to small
investors is 0.01 percent. This could go on for two more
years, if the Fed’s projections are on target. And
unlike bank deposits, money funds aren’t federally
insured.
The funds
are a great place to be in times of rising interest
rates, but for now they make no sense for cash. The
exception: money that you might want to quickly deploy
into stocks or other investments.
—Stock
and bond mutual funds. Americans have $9 trillion in
conventional stock and bond funds. And probably very few
know how much the funds are costing them every year in
management fees and other expenses.
The
discrepancies in the industry are vast. Here’s an
analogy: If you were buying a TV, you’d shop around,
and you certainly would avoid a retailer who charged
three or four times what other retailers charged for the
same TV.
Yet some
mutual funds charge three or four times in expenses what
others charge for the same performance.
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They get
away with it because management fees are paid directly
from fund portfolios (they’re expressed as a
percentage of fund assets). They reduce your return
without you knowing it — unless you pay attention.
The fee
differentials can be particularly egregious among index
funds, such as those that just seek to replicate the
Standard&Poor’s 500 index. Vanguard Group’s 500
Index fund has an annual expense ratio of 0.17 percent.
Many of its rivals charge 0.60 percent or more.
That
should be just as outrageous to investors as a
$5-a-month debit card fee.
The fast
rise of exchange-traded funds, or ETFs, in recent years
shows that more investors are getting serious about
paying lower fees. ETFs, most of which are
index-tracking portfolios, tend to have very low expense
ratios.
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Conventional
mutual fund investors should make time to check their
funds’ expense ratios. They’re easy enough to see on
a fund’s website. Or look up funds on Morningstar.com.
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In
particular, check to see whether your fund charges a
so-called 12b-1 fee. Some fund firms use that fee to
compensate brokers who sell their products. Others use
it for general marketing costs. The question to ask: Is
that fee helping you, the shareholder, in any way?
As a
rough rule of thumb, total stock fund annual expenses
ideally should be 1 percent of assets or lower, and bond
fund expenses should be 0.70 percent or lower, said Russ
Kinnel, Morningstar’s director of fund research in
Chicago.
If
you’re paying more than that, and you aren’t earning
above-average returns, your outrage meter ought to be in
the red zone.
In
evaluating funds, “Make expenses your first screen and
you’ll still find lots of good funds,” Kinnel said.
Investors
in funds that own high-quality bonds should be
especially focused on expenses now. With bond yields so
low (less than 2.1 percent on most U.S. Treasury
securities), above-average expenses will eat away more
of your interest return. Shaving expenses by choosing
lower-cost bond funds “could make a huge difference in
returns” in the next few years, Kinnel said.
—Finally,
if your investments are primarily in a 401(k) retirement
savings plan, don’t just assume that your company has
picked low-cost funds for the plan. Look at the expense
ratios of the funds, including on target-date retirement
funds.
And if
you feel that your plan could offer better funds, or
more diversity of choices, find out who at the company
is the point person for the plan. There may be no
incentive to make changes until participants start
asking questions.
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