Thursday, November 13, 2008

130/30 exchange traded note

I was going through some old starred items in Google Reader and stumbled across an old post from Random Roger about a 130/30 exchange traded note from First Trust. (Roger notes he's skeptical about 130/30 strategies in the post.)

There is a charts of the price history on the First Trust product page for the 130/30 ETN, and it looks like it's fallen from the high 40s in June to the mid 20s in November. The performance of this style of fund/note hasn't turned around since my last post on 130/30 funds.

Wednesday, November 12, 2008

Small businesses cut back on 401(k) matching contributions

Some small businesses are suspending their 401(k) matches (free WSJ Digg link). This is an unfortunate and disturbing trend. A 401(k) is an extremely important benefit to employees, as seen in these numbers:

A 2007 survey of small businesses by Fidelity Investments found the plans were very important to workers. Almost 70% of the employees said a retirement plan "was critical or very important for businesses to attract and retain employees." The study also found that 49% of employees who had retirement plans said they wouldn't move to companies without them.
I can relate to this. My first real job was with a big company with good benefits. I left it to go to a small company, and the small company's retirement plan was an important consideration. The match at the small company wasn't nearly as good (but the job was much more interesting, so I ended up taking it).

I was especially surprised to learn that only 15-20% of small businesses offer 401(k) plans. I'd like to know the definition of 'small business' used in the survey. Every company under 100 people I've worked for has offered a 401(k) plan.

Sunday, November 9, 2008

College endowments predicted to take a big hit

It looks like college endowments, with their bets in alternative assets, aren't escaping bear market that has dealt a hurting to the rest of us. This fact probably doesn't come as a surprise to anyone, but until recently these endowments have seemed invincible, racking up returns that were the envy of everyone. Barron's made some projections on the endowment's losses.

With cash-strapped endowments and other institutional investors looking to sell some of their private-equity funds, an informal secondary market is developing. The going rate is said to be about 50% of stated investment values.

Commodities -- another favored asset class -- have plummeted more than 40% since June 30, with publicly traded oil-and-gas stocks off 50%. Real-estate investment trusts are down 35%. (The S&P 500 is off 28% in that span.)

Contrast this with some endowment's returns over the last decade (these returns are up through June 30.
Harvard's endowment was up an average of 13.8% annually, bringing it to $36.9 billion as of June 30, tops in the academic world. Yale's endowment grew at an average annual pace of 16.3% in the same span, to $22.9 billion, making it second to Harvard in size. Princeton's endowment rose at a 14.9% annual clip, to $16.4 billion. Stanford, in Palo Alto, Calif., also has shined; its endowment rose by 14.2% a year, to $20.4 billion.
The turnaround is staggering. Not entirely unexpected in this market, to be sure, but it goes to show you that even the very best money managers are feeling extraordinary pain.

Resources for renting vacation homes

Renting a vacation home is cheaper than paying for multiple nights at hotel rooms. How can you be sure that you're renting a nice home though? There are many online resources that can help.

Homeaway Inc., the world's largest vacation rental booking company by the number of properties listed, is moving to increase reliable user reviews on its Web sites, so potential renters can have more confidence in their choices. Tripadvisor, a unit of Expedia Inc. that is the market leader in hotel user reviews, plans to add vacation-rental reviews to its site by the end of the year.

Other companies are trying to make the experience of renting a home more like staying in a hotel. Last month, three rental booking companies -- Mountain Reservations, and Mexican Destinations -- joined their inventory and launched the booking Web site The site says customers will get "hotel-like amenities" such as check-in, cleaning services, 24/7 service and maintenance, and the ability to book a rental with a credit card. Late last year, Group RCI, a vacation-rental and time-share-swapping company owned by Wyndham Worldwide, entered the U.S. market with Endless Vacation Rentals. The company says it offers 24-hour help over the telephone, full refunds on canceled reservations, and free over-the-phone concierge service in multiple languages.

The big 3 travel sites (Expedia, Travelocity and Orbitz) are bumping up their activity in the vacation rental space, with Travelocity increasing its condo, B&B and vacation rental inventory by 5 times in the last 2 years.

Solving the bogus vacation property review problem

Being able to trust a review of a vacation property is a problem, right? A small company called FlipKey (which was recently purchased by TripAdvisor) has come up with what I think is a cool a solution. Only solicit and accept reviews from people who have stayed at the property.
Flipkey Chief Executive T.J. Mahony says that only people who have stayed at a property can comment (unlike with hotel reviews on TripAdvisor) because reviews are solicited by an email using booking records. "One of our mantras," to property managers, "are negative reviews are a good thing," because it creates trust with travelers, Mr. Mahony says.
I poked around the site a bit, but couldn't find any places that I have actually stayed to do a comparison, but your mileage may vary.

Friday, November 7, 2008

This rule can limit your 401(k) contribution

(Welcome to those visiting from the Carnival of Personal Finance #178. Read more about the Carnival of Personal Finance. Subscribe to this site.)

There is a little mentioned rule for 401(k) contributions that could limit the contributions (free WSJ Digg link) of the mass affluent or other high earners. The rule is in place to prevent a 401(k) plan from favoring highly compensated employees. Highly compensated is defined as making $105,000 or more in 2008 (this increases to $110,000 in 2009). The basics of the rule are:

higher wage earners can't contribute more than two percentage points more of their salaries than lower wage earners. For example, if highly compensated workers defer 6% of their wages and lower earners save only 2% of their wages, the plan would fail the nondiscrimination test.
This is not a new rule, but it will affect more highly compensated employees as rank-and file employees cut back on contributions to the 401(k) plan to pay other bills. If a 401(k) plan fails this rule, contributions from the high earners in the plan are limited or even returned.

Safe harbor and SIMPLE 401(k) plans not subject to the nondiscrimination test

The IRS has more information on 401(k)s for sponsors and participants at its 401(k) resource guide. Digging through the IRS site you can find that safe harbor and SIMPLE 401(k) plans are not subject to this nondiscrimination rule. A safe harbor 401(k) plan allows employers to make matching contributions or contributions for all eligible employees. The employer contributions are fully vested immediately. A SIMPLE 401(k) plan has different restrictions from the traditional plan, most notably that it's only available for companies with 100 or fewer employees who received at least $5,000 in compensation.

Tuesday, November 4, 2008

Don't break the buck

I recently received an update to the prospectus to a money market mutual fund I own explaining that the fund would be participating in the U.S. Treasury's Temporary Guarantee Program for Money Market Funds. The Treasury is guaranteeing (subject to some fine print, naturally) that if a money market fund breaks the buck (has a net asset value of under $1 per share) and liquidates, investors in that fund will get the full $1 per share value. The big caveat is this only applies to shares the investor held as of September 19, 2009. If an investor adds shares after that date, then the new shares would not be covered and therefore subject to loss. The program runs until December 18, 2009, but can be extended by the Treasury to September 18, 2009. The Treasury published a list of FAQs on the program too.

The program isn't free

For this protection, my fund will have to pay %0.015 of its net asset value (NAV). This cost will be borne by the fund, not the management company. Yeah, that's a great deal for investors. We have to pay for the insurance on so-called "safe" money market funds that are turning out to be crappy. How about the management companies step up and pay the insurance?

The guarantee program was extended until April 30, 2009.

Monday, November 3, 2008

Convert IRAs that have plummeted in value to Roth IRAs

A Traditional IRA whose value has fallen off of a cliff is a good candidates to convert to a Roth IRA. You'll have to pay taxes when you do the conversion, but they'll be less than when (if?) the value of the IRA.

When you convert traditional IRA assets to a Roth, you have to pay the income taxes upfront on the account's value -- and in some cases, those values may be next to nothing at the moment.

Kent Lawson, a 66-year-old AT&T retiree in Bloomington, Ind., signed the paperwork last month to convert a traditional IRA containing a $40,000 Lehman Brothers principal-protected note to a Roth. "It's gone to a zero price, so hopefully we can convert it at no value," says David Hays, his financial planner. "We expect it to be worth something eventually, and then he won't owe any taxes on it."

This smacks of market timing, but I think it's a good move. Making this move is a bet that asset values won't fall further, so it carries some risk, but the tax savings could make it a smart one, since there should be no further taxes on a Roth.

One big caveat is that your income must be $100,000 or less in the year of the conversion. This will change in 2010, assuming the tax laws don't change, when anyone, regardless of income, will be able to convert a traditional IRA to a Roth IRA.