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)

State deferred compensation

For those of us who might be working in any shape of form for the State ( NY/NJ/CT etc..), and not necessarily full time- enough to get a small paycheck, which is often the case if your work for the " XXX State University Hospital" in any capacity:
you might be eligible to contribute to your  State deferred compensation program. No match, of course, by the State- just your own hard-earned, but pretax dollars. And that's on top of your annual limit of  $17,500 for 2014 you might be  already contributing to your private 401(k) through the "private" part of your work, up to the limit of, yes, another $17,500, totaling  $35,000/yr (without counting the match, or contributions by your employer). Now, that's a retirement planning!
(Anecdotally, most people who work for the State never heard of this, by the way)

Most mutual fund there are (relatively) decent, with low expense ratios, and they have my beloved index funds- by the way, yet another study came out showing how "great" active mutual fund managers are performing in the long run..  Will write about it in the next post...

Here's a website for those fortunate ones in NY State:

https://www.nysdcp.com/iApp/tcm/nysdcp/index.jsp

And for NJ:
http://www.state.nj.us/treasury/pensions/njsedcp.shtml

Obamacare is here. Now what?

In  health management class I took last Spring for my  MBA, we were perusing this website our Professor found for us: www.healthsherpa.com , where you can plug in your income numbers, your age/family size , without revealing any of the sensitive info (SS#, real income etc.) required for a real sign up at the now famous health exchanges.
 This is all to see what Obamacare product you can buy, how much it will cost, what kinds of copay/co-insurance you're looking at etc.
Most Obamacare plans are quite restrictive, patients (insureds in insurance parlance) can only use a very narrow HMO style system, copays are high... ( I didn't know it before, but apparently there's an annual out of pocket limit on all of these Obamacare products, the max. being in the range of $12,500 per family/yr). The low-income earners do get some tax subsidies

I think it was a clever trick on the part of the government to "outsource" the uncompensated care costs onto the heads of the medical providers and hospitals, forcing them to chase after unpaid (and large) copays, coinsurances and deductibles.
"Stayin' alive" and afloat for an independent practitioner is becoming even tougher then.

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.

MBA for doctors, part 2

So I'm now well into my 2nd year of the MBA experience. So far, so good, the trouble is that I cannot really imagine what the experience would be had I've been at some renowned school, like Kellog or Wharton.
But the courses are useful- Corp. Finance was the most interesting, and before that -Management was very useful in practical sense ( since now my position is somewhat managerial; I will try to write on the art of managing people some other time).
So far, my understanding of how bonds/stocks are valued improved quite a bit. However, I don't think it will have any influence on how my retirement money are invested. My notion of passive, low-cost investing was strenghthened by seeing just how much time and effort a dilligent professional investor must spend to find suitable investments, and often she or he still picks a loser!

MBA for doctors

Like I said in my previous post, I enrolled into executive MBA a little over a year ago.

Good things:

1.they didn't ask me to take GMAT ( I would've failed miserably),

2.the tuition is not atrocious since it's a relatively obscure albeit real, as opposed to online, school of business ( consider this- the renowned schools like Kellogg and NYU ask for about 120k/2 yrs...)

3. The pace is not frenetic

4. There are several "concentrations", including Marketing, Health Care Administration, and Finance.

5. I'm in "fast track", 48-credit, program

The bad things:

1. You get what you paid for. Sometimes I feel I know more than a certain professor.

2. The new style teaching means asking your students to buy a particular textbook, and then in class use the PowerPoint slides from the same publisher, with identical color scheme and content. Good for teachers- in such case, no need to prepare for the class. Bad for students since the class doesn't add anything beyond a textbook material.

3. Too much reliance on group assignments.

Now, for the reasons to do an MBA... Probably in a different post.

1 year later

Not writing for more than a year deserves serious "splaining". Well, there you have it: I change my old place of employ, having moved a bit up on a food chain.

Also, enrolled in one of those executive MBA programs. Not sure what to select for a concentration, but for a time being thinking of Finance.

And tried to wage an unsuccessful attempt for a change with fringe benefit committee at my new place, failing miserably to show them that they're getting ripped-off with those enormous 401k agent fees.

Also read some good books, one of them by John Bogle "Don't count on it!"

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's auction

More on Mr. Madoff who seemed to become an epiphany of the Wall St. tycoons of late- recent auction of his personal possessions gave us a glance of his hyperexuberant lifestyle. Among other items is his wristwatch worth of $85K.

What I don't understand about all this is why people like him needed to keep on buying these items? He proved that he is "wealthy" many times over to all of his acquaintances and to himself many, many years ago, so no matter how he dressed, where he lived or what wristwatch he wore he still would've been thought of as the financial titan. I can't explain this by any rational means. I guess, it was pure greed...

Recently I visited that part of Europe that never been rich, and just recently became flush with cash. There most of the people would judge the degree of your success purely by the clothes you wear, the car you drive, and... you guessed right, the wristwatch you wear! Stories of your interesting, challenging , accomplished and, overall, happy life matter not to them. And I sort of understand them- they grew up in abject poverty, and now all the external attributes of wealth are perceived as success in life.

But to see the same logic emanating from the educated, albeit criminal, financial tycoons of the modern Western world??

The only saving grace in all of it is that Wall St. is not Main St.

http://www.msnbc.msn.com/id/33917333/ns/business-us_business/

Taxes and Roth IRA

Haven't posted in a long while due to various reasons. And guess what, economy is not better since my last post. In fact, it looks like it might be worse. In addition to California, 9 more states are in trouble
http://features.csmonitor.com/economyrebuild/2009/11/11/pew-report-nine-states-join-california-in-facing-fiscal-crisis/

For all of us, it means only one thing: more taxes. On everything. ( I had to renew my car registration- it's $186 for 2 years, compared to the previous $ 120 !!)
So this change for Roth IRA rules for 2010 becomes more and more attractive- you will be able to roll over your traditional IRAs into Roth IRA regardless of your income, obviously paying taxes on gains( this can be spread over 2011 and 2012). But since a market took such a hit lately (with some latest recovery), it might be that you won't owe anything in taxes, since you pay taxes on the conversion amount.
They can start taxing Roth IRAs too, sometime in the future, however...

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....