401k fees....Do you really know how much you pay?

Now, this topic is often times discussed in the media, but does an average John Q. Public (in our case, JQ Public, MD) know what exactly he/she is paying for a privilege of having  his retirement money to be exposed to the vagaries of the market?
My unscientific poll of my colleagues shows that 99%  of them are oblivious. Seeing the outrage on my face when I spoke about those fees, they politely  nodded their heads, but that was it.
To me, the asset-based fee of 0.33% PLUS monthly maintenance fees (that's what our 401k plan extracts-if not expropriates) amount to nothing less than a highway robbery.
Given the market projected return (risk premium, on top of risk free rate of 2.5% delivered by Treasuries), the asset based fee alone amounts to at least 10% of return!!
And we are not even talking about the expense ratios f the funds contained in 401k (average expense ratio is about 1-1.3%).
So right there, we're giving up close to 50% of potential return, while owning the 100% of risk.
But what else is there for retirement vehicles for middle class? (gasp)

Hospital charges vary among the US hospitals

in our MBA class we have to write our own blog posts, and since this post (mine) is related to doctors' finances, I decided to repost it here, with some additional commentary:

LA Times from 5/8/13 published the article reporting on the  newly-released government data on hospital charges. As it was expected, they range widely for the same type of conditions even within the same city or a region.  (for example , charges for treating a pneumonia without complications can range from $17,000 to a whopping $70,000 in the L.A. area.

Sure thing, for us hard-nosed business statisticians it's not enough to know this. What we need to know if the patients those hospitals treated( and billed...) are comparable. For example, are they more or less the same age? Weight? Number and severity of other health conditions? Also, are costs comparable? (healthcare labor force in, say, New York City is very expensive for a variety of reasons. Also- operating costs of running a hospital. Etc.) Then, there's this pesky question: are those people who were charged more did better or worse (or same?) in terms of their health outcomes- that is, maybe people who were charged less ended up in the hospital again soon after discharge because they got substandard treatment

If they are equal, then, ("Twilight Zone" theme music)... we can ask "Why?" And, even better question is: what are the less expensive hospitals doing (or not doing) to keep their charges low?

Now, here's a very good question: are doctors' charges for those hospital stays the same? I have a feeling that all this differences are NOT due to doctors charges(in fact, they constitute a small proportion of the total bill).

However, the ARE a proverbial low-hanging fruit for the insurers and other payers for.. rightsizing.

Obamacare vis-a-vis doctors' finances

Now that the Supreme Court let the Obamacare stand, one burning question that I have is this: what does it all mean for the doctors' bottom line?
Many currently uninsured people will get coverage- I guess, that's a good thing for that bottom line? (it would be in a free economy, since there're millions of consumers of goods/services appear out of a thin air)

The only trouble is that these new consumers will be paying their 'bills" with OPM (others' people money), representing a tax on those who do pay them ( about half of the US population, incl. most doctors). This tax can take different shapes/forms(overt increase in taxation or creating newer taxes/covert taxation by increasing inflation etc), but will have to be paid neveretheless. From my MBA course I know that taxes are beneficial only if they create more wealth that the actual tax extracted from the economy ( does it ever?).
It seems unlikely to me that with all the governmental inefficiencies and outright fraud we're witnessing now within government plans that  it would truly create more wealth for the economy than it would extract from it.( just my half-educated guess).

Your salary. Your life.

I'm sure most of us met quite a few burnt-out, disenchanted and disinterested docs. All that makes them go through their clinical routine is their paycheck.
They (and a lot of their more cheerful colleagues) are trapped in what we can call a high wage trap: despite of being utterly dissatisfied with their current situation they make a decent salary, and to start something new and (possibly) exciting, which may or may not lead to a higher income, is outright scary, since we all developed a high dependency of this paycheck. Most of us would never go for it, because the more you earn, the more you have to loose. However, in a great scheme of things it's your life experience that matters (or should matter).

It's much easier to start something new when you really have nothing...

Salaried position vs. your own business

The deeper I am into my MBA course, the clearer I understand for myself that starting and running a business is... well, a serious business ( I am waiting for those "doh"s..)
No, seriously, if , in perfect or near-perfect competition all you can count on is so called "normal" profit (by definition, it's enough profit to attract capital investment to your business), i.e. NO economic (that is, real in lay terms) profit, all this means to you is that you're just trying to keep your business running without slipping way into the red/bankruptcy etc.
That's it. (and, by the way, that's most small- and medium-size businesses, incl. doctor's practices). And all this comes at a great expense in terms of time/effort investments. ( and, obviously, money). It's a rat race , too, just a different kind. ( and I skip all this silliness about "being your own boss" because you are always under some sort of constraint- most of the time, financial, so it's not like you can do whatever you feel like). Becoming a near-monopolist (FedEx or UPS) has a bit of an entry barrier, like $2 bln.
So one needs to be truly passionate about it to start it and continue doing it.
On the other hand, if you have what you think is a brilliant idea (Facebook?), I would probably just go for it. Because I see it as one of the few (if not only) chances of making it big.
So... what do you think?

More money and a managerial paradox

I blogged some time ago that I switched jobs and now it is 50% clinical and 50% administrative (or "leadership"). Now, what they call in business world the "economical profit" (i.e., my current salary minus the "opportunity cost", or what I could've been making at my old job) is pretty good. However, the added hassle/more time spent dealing with staffing/patient complaints/organizational etc. headaches (not even mentioning political undercurrents and interdepartmental "bad blood"), the need to be constantly (i.e. 24/7) available to resove petty/small/medium-size/large issues... Is this"economical profit' worth it?
On one hand, sure- it's more money in real terms. Also a potential to earn more money thru advancement at later stages of your career. More interesting ,too, I guess, at least the level of the problems I'm supposed to solve. More flattering for your ego, yeah! ( you are "da boss" after all, you've made it!)
But all this leads to almost no ( and I mean it) free time- even when you're "not working" you still are- trying to figure out solutions to issues/schedules/research ideas/fend off hostile attacks etc. (Speaking of solutions, I found that most of them are only temporary). So kids get no attention. So is your spouse. So is your other small piece of life outside your working realm which is supposed to be used to enjoy the fruits of your bigger piece of life consumed by work. Add to this a tremendous increase in stress levels. An lack of attention (due to lack of time) to management of your investments ( I think it's possible to assign a sort of "negative cash flow' numbers to all of the above if nothing else, as a crude denominator)
At the end that "economic profit" shrinks, the question is by how much.

Living happily... and simply?

There was a good article in NY Times today about people discovering their true happiness through simple living and spending most of their money on what makes THEM happy.

As in my previous post about "liquid life", it seems that the tide has turned and more and more people discover that "stuff" doesn't make them happy.

The whole notion, once a very underground and "subculture" type is now getting traction in such well-know publications as NYT. Corporate America is also taking notice and is adapting their sell pitches accordingly.

The only "stuff" that might contribute to your happiness is actually sports equipment - golf clubs ( I don't play golf, but I do know Costco sells them!), fishing rods and surf boards (can get one used for not so much money). What really makes us happy is money spent on our experiences, be it around the world tour or a backyard "staycation"

What I hope will start happening to us is that we start asking ourselves this trivial, but hard-to-really-answer question "what truly makes me happy?". For a lot of us, it will be "vacation".

So what's a point of getting that shiny Bimmer and paying for it through the nose?

http://www.nytimes.com/2010/08/08/business/08consume.html?src=me&ref=business

Taxes and doctors

Today there was a very good op ed in the Wall Street Journal about actual observed drop in tax receipts while raising taxes on the wealthiest. ( one of the examples being John Kerry who bought a $7 mln. yacht not in his own state of Massachussetts, but in RI whereby saving in exsess of $500,000 in taxes). The reason being that wealthy people have so many "advisors" that they won't pay those taxes anyway.
I was thinking about the doctors, who , by enlarge, make just enough money to be fleeced by uncle Sam because they are "rich", but usually not nearly enough to do the "creative" tax reporting by using those financial/tax/legal/estate etc. advisors. In the end, they probably end up paying for the poor, who completely depend on the government (i.e. taxes) and the truly rich who are smart/savvy/well connected enough to avoid paying those taxes...

401k pains, part 2

At my (almost) new job, 401k is handled by a private company. Not that their mutual funds are atrociously expensive (they are, average expense ratio is about0.4%), but these guys also charge 0.1% management fee on all the money under management.

Most doctors will be fast asleep if your start talking "expense ratios" to them. No wonder they are oblivious to the fact that, if you believe the Wall St. gurus, the market returns are about 8% a year in a very long run, they are loosing 6 to 7% of these money- no, much more if you counting compound interest- it'll be close to 10%.

The other thing worth mentioning is that even those doctors who were entrusted to make decisions for the whole group about their 401k know very little about money in general let alone investing.

I heard one of the "seasoned" members of the fringe benefits committee seriously suggesting to "just select the best mutual funds out there and just invest in them" My humble statement that, in the long run, statistically speaking, half of the mutual funds' money managers will fail to keep up even with the average market returns, and it's close to impossible to predict which funds they are, was met with dead silence. When doctors have nothing to say....

401k pains, part 1.

Now, what I wanted to write about for a long while but didn't have time to do:the 401k for those lucky (or unlucky) enough to have one (unlucky because it usually means working for a paycheck).

Anyways, I was once ( in a very recent past) a member of the fringe benefits committee for our small group. As it turned out, you always need a broker between you (i.e. , doctors' group) and a 401k provider ( Vanguard, T.Rowe Price, Principal etc.). Always. Now, this broker (obviously!) has to be paid, even though he/she doesn't do ANYTHING for your group other than being on record.

As it turned out, our broker did not produce a single piece of paper or a statement or a letter or a recommendation to add or drop a mutual fund in 10 years of being our broker, all the while being paid $70,000/yr.

Once we discovered it, they were immediately fired while a new group recruited. Bye-bye $ 700,000....

Liquid life

Recently I saw this wonderful presentation on ted.com about the new economic reality and new business and consumer trends. Although business in nature, this presentation really struck cord in me, especially when it came to a concept of a "liquid life" ( no, it's not a liquid lunch for you college frats)

This new emerging phenomenon has something to do with people realizing that there's no intrinsic value in "things" ( i.e. houses/cars/that new set of golf clubs etc.), and choose to lead the things-free life, being ready to move to new, better and bigger... not things, but opportunities unencumbered by huge mortgages and deep entrenchment in your particular place of work or residence. This emerging class of people believe in liquidity of their life and money.

And (I would add ) it would be increasingly difficult to sell these people the good old Wall St. notion of giving someone all of their actual hard-earned "retirement" money for 30 years for the promise to be "prepared" for the old age.

Most doctors I know are far from any kind of unconventional thinking, so I won't expect this idea to grasp most of us any time soon.

Time will tell..

Will be happy to know your thoughts on that.

More on traditional to Roth IRA conversions

So, Happy New Year to everyone! It's 2010 now, which means we can start converting our traditional IRA's to Roth!

Now, one more thing I found on these conversions- you may be able to "re-characterize" your newly converted Roth IRA back to traditional within the year after the original conversion.

Why to do that?

Suppose you had $10,000 in your traditional IRA, which you funded tax-free. Upon conversion, you'll owe your going rate (28-32% or whatever your tax bracket is) on this converted amount.

Suppose now, that within a year your original 10k dropped in value to 8k. Then you can do "re-characterization" of your Roth back into traditional IRA to avoid paying taxes on already depreciated asset.

Some authors even advise to create several Roth IRA's and transfer each kind of assets

( US large, US small, emerging markets, bonds, etc) into a separate Roth IRA. That way, you can see what depreciates ( hopefully none, but you never know), and "re-characterize" it, leaving appreciated assets in their respective Roths.

Madoff fallout

Mr. Madoff, as we already know, might have ran a criminal enterprise. I don't believe, though, that he started his fund in the 60's having a Ponzi scheme in mind. It's just when the things started to get bad, he wanted to keep up the play.
What is interesting, though, that people were lining up to give him their money without questioning his investment strategy. It was the "in" thing, only for well-connected. On the other side, however, Mr. Madoff was almost as Alan Greenspan as far as his reputation ( before the collapse, of course) and credentials were concerned-who could possibly question him? This is what we called "eminence-based practice"!

Yet another confirmation of the fact that few financial advisers keep their clients' interest at heart. The issue is that of financial education. Yet again!
I wonder how many doctors were among Mr. Madoff's unfortunate investors....

What we thought we know about financial safe haven

There's an interesting article on Marketwatch.com about municipal bond funds once considered to be a safe haven for people who don't want to take too much risk and yet enjoy tax-free dividends. Municipal bonds once were this safe haven, benefiting people in higher tax brackets(doctors?)
No more, no more... Munis took a whopping hit- 30% decline this year.

http://www.marketwatch.com/news/story/Muni-bond-fund-investors-face/story.aspx?guid=%7B72B8F338%2D452A%2D4DE0%2D891C%2DF683B8DF213B%7D

Safe heaven... Does one truly exist these days?

Market troubles: part 2

Now that the Dow took a bit of a nose dive, and panic is widespread, the question is: what is an average investor to do? Convert all your holdings in cash? Withdraw all the cash and keep it in a safe deposit box, knowing that, as banks start to fail en masse, FDIC will not be able to cover all the deposits(it's my uneducated guess) and will have to impose a withdrawal limit on your deposits? I certainly felt this way yesterday.

Nevertheless, despite all this doom and gloom and threats from the Wall Street that economy will collapse if they are not given those $700 bln, I thought to myself: where would all global investors invest their money if not in the US? Will it be China? China is a rising giant, but still almost completely dependent on exports. The rest of the emergent markets are very volatile, unpredictable, and subject to political turmoil( Eastern Europe)).What about Western Europe? Economically speaking, they don't have the same prowess as American economy due to over regulation and big shadow of their governments cast on their economy.
So it seems that the American economy is something those investors cannot live without.
And after that bloodletting on Wall St. on 09/29, they flocked to... US Treasury bills!

Besides, even there will be a massive collapse of the current financial institutions, there will be fast growth of the new type of financial industry, which is not burdened by the collective "sins" of the old good boys. That will happen just because the American economy is the most flexible and resilient in the world, and no banker would want to pass the opportunity of a lifetime.

Therefore, we probably should continue staying the course and even consider getting into a buying mode (I can't believe I'm saying this..). But will see in, say, 5 years, what will be going on

Market troubles. What next?

After recent tumultuous days of bankruptcies, forced sales, mergers and nationalizations I have 2 questions: first, what does this all mean for a long term market outlook (this is a question from an amateur investor in me), and, second, is it possible that health insurance companies are facing the same grim prospective as their cousin AIG?
I suspect that the answer to my first question is that , eventually (maybe after years of trouble and stagnant growth) market will rectify itself. Then again, after so much governmental intervention, would government play a much, much larger role in the market?
Now, the second question: is it possible that at least some health insurance companies which had a misfortune of investing their collected premiums into anything that is mortgage-related are also on the brink of insolvency? Would then they be bailed out, effectively bringing us to a one-payer model? And what would that mean for doctors?

Do you have 401k?

Most of us who work for a salary have (or should have) 401k's. Now, obviously, the old advise was to contribute to it as much as you can. And I think it's still a valid advise. The problem I always had with my 401k is that is so overpriced. Even index mutual funds in it had an expense ratio of at least 0.25%, while the same can be had for 0.17% if you would go to, say, Vanguard. Oh well, I thought, that's a price of having a 401k with the 401k provider (which is one of the bigger ones, too).
However, recently several big players started offering( gulp..) ETF-based 401k. ShareBuilder, for example (which merged with ING not long ago). With ETF-based 401k potential savings on expense ratios, 12b-1 fees etc. etc. are just mind-boggling.
So if switching from traditional mutual fund-based 401k provider to ETF-based one is a possibility, I would grab it!

End of conspicuous consumption?

I could not believe my eyes when I saw this article about people becoming frugal all of a sudden. There was even a mention of a Great Depression mentality of extreme frugality (rhyme unintended)
http://www.chicagotribune.com/business/sns-ap-consumers-changing-habits,0,5126139.story

People trying to get rid of their gas-guzzlers. Discounters see brisk business. Bicycling to work. Will we see the death of conspicuous consumption and see the dawn of ...living within one's means( and maybe even below those means)?
It was 30 years overdue but better late than never.

Lessons of IndyMac

Now that the big banks started to fold, the word FDIC came up. It is a federal entity insuring your bank deposits. Insurance is up to $100k PER DEPOSITOR. That is , if you had multiple accounts within the same bank, only $100k out of all of them will be returned to you ( the limit for bank IRA is $250k- I guess, some people still have those). By the way, it is said that by bailing out IndyMac depositors, FDIC used 10% of its reserves. Is it possible for FDIC to run out of money while bailing out banks that will be folding in the near future?

Now, with some brokerage houses potential to fold, I did some investigation about their insurance. They don't have FDIC, but they are insured by SIPC (Securities Investor Protection Corporation) It has a website www.SIPC.org Brokerage accounts are protected for up to $500k in case of a broker-dealer insolvency( limited to $100k for claims for cash) Also, a brokerage might have some extra insurance from private sources (say, Lloyd of London)
That, to me, means you shouldn't really hold more than $500k( hats off to those who have that much in retirement funds) at any particular broker-dealer, no matter how reputable and old that broker is.
Market forces have no regard to reputation

Morningstar study: Do fund managers invest their own money in the funds they manage?

Another interesting article from Marketwatch.com:

http://www.marketwatch.com/news/story/most-funds-managers-have-none/story.aspx?guid=%7B907D8FC0%2DA948%2D415A%2D8133%2DF57A365CC367%7D

Yep, those fund managers won't invest their own money into the funds they manage. And that's taking into consideration life-cycle funds ( suppose, those managers are very young and they happen to manage the fund designed for people about to retire) and state-specific bond funds.
I can think of only 2 reasons: either they have an access to much better investment options (such us private equity) than the people investing in their funds, or they know something about the funds they manage the rest of the investing public don't know.
I won't eat at a restaurant where its chef doesn't want to eat its famous entree.