‘Mad Money’s’ Mixed Bag

  Last week a reader brought to my attention an episode of Jim Cramer’s “Mad Money” — an episode wherein he referred to the 401(k) as a “mixed” bag. 

In it, he acknowledged the benefits of tax deferral, the benefit of compounding on returns, and — where it’s found, anyway — the “free” money of an employer match. In that, he was at least more honest about such things than many[i] who make their living offering investment advice (generally accompanied by a subscription fee to their services — which, to be fair, Mr. Cramer has and mentions in this show). 

In point of fact, Mr. Cramer would clearly prefer an IRA option — if the contribution limits were equal to the 401(k) — though they’re not even close (not to worry — he says he’s going to continue to fight to remedy that situation). Indeed, Mr. Cramer counsels that once you’ve gotten the full match in your 401(k), you should just put everything else into an IRA (though he doesn’t get into the “nuances” of contributing to both in the same year). 

But Mr. Cramer is also concerned about the “hidden” fees in a 401(k) — so much so that he counsels folks to “always” roll out of that 401(k) when they change employers. And little wonder — since he appears to think that your typical 401(k) is charging administrative fees in excess of 200 basis points — more than 2%, in other words. I’ve no doubt those can be found but would caution Mr. Cramer that those are not the “norm.”

That said, he told viewers they should be “skeptical” of a 401(k) plan that doesn’t let you buy individual stocks via a self-directed IRA — one that he maintains gives you “control” of your money. As he’s a stock picker (of sorts), it’s not surprising that he has an affinity for individual stocks[ii] rather than mutual funds (though he admitted that those who don’t have the time for the former might be well-served by investing in a low-cost index fund).

Indeed, as do most folks touting mass media investment advice, Mr. Cramer prefers the ability to go beyond the investment menu “constraints” of a 401(k) menu — and surely for individuals like him who have the time and expertise (or think they do) to make and track individual investments, that resonates.

Programs like “Mad Money” are ostensibly positioned for more experienced/engaged investors — though that did NOT seem to be composition of the callers to this particular episode. Just as well, because he wasn’t providing much more than high-level generic wisdom on basic tax deferral, compounding benefits,[iii] and a heavy dose of equities in your portfolio until you get to your 50s. 

The reality for most individuals, of course, is that without a workplace retirement plan, they don’t save for retirement, much less invest. The match may be “free” money for the individual, but it surely has a cost — one borne by their employer in support of their eventual retirement. The mutual funds Cramer rejects are — increasingly — a portfolio not only selected, but managed by professionals, either in a target-date fund or managed account. For most, it’s not “mad” money, after all — it’s about thoughtfully building a secure, reliable financial foundation.   

Those with “mad” money to spare might not need that kind of help — but plenty of “regular” people do.

• Nevin E. Adams, JD

 

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[i] See Is the 401(k) Really a 'Horrible' Retirement Plan?, When You Assume, The 'Plot' Thickens

[ii] He did make an interesting argument for investing in stocks as a way to curb spending. Specifically, he noted that you’d have to sell your favorite stock in order to raise the cash to spend — and that you wouldn’t want to sell that favorite stock — so you wouldn’t spend the money.

[iii] One assumes that he’s more specific in his “investment club,” which came up several times during this program.

The ‘Find’ Print

 In case you hadn’t noticed, Friday is Valentine's Day — and, as usual, there’s been the typical seasonal promotions for flowers, candy, teddy bears (and other stuffed creatures) and even pajamas.

I’ve been pretty good over the years remembering those type events — anniversaries (wedding AND dating), birthdays and, yes — Valentine’s Day. But sometimes the time gap between my remembering the date and actually getting around to doing something to commemorate it has been problematic. With Valentine’s Day that can be particularly painful, if only because so many others are scrambling to do the same thing — and at a time when delivery services (and costs), not to mention growing season(s) can be in short supply, relative to the need.

Several years back, I was running exceptionally late in my preparations — and spotted an email touting a dozen roses for $24.99 (they’re a LOT more expensive now — and apparently caught up in all this tariff stuff). Of course, for that price (even then), you could only get them in red (though it was Valentine’s Day, after all), and you actually got a glass vase included in that price (with options to “upgrade,” of course).

So, at that point I was feeling pretty good about my bargain-hunting “skills” — well, at least until the “other” charges emerged. As the final payment screen popped up, I discovered that “standard” delivery was another $12.99, and — at least at that (late) date, it cost (another) $9.99 to guarantee Valentine’s Day delivery, yet another $14.99 if you want it there in the morning. Oh, and there was a “care & handling charge” of $2.99, regardless of delivery date or time. In fact, by the time you add in taxes, those $24.99 roses will run you… well, quite a bit more than $24.99.

Not that you’ll see that all presented in one place — well, until the very last screen, anyway.

Hardship ‘Shifts’

I wonder sometimes if that isn’t how those who request a hardship withdrawal feel —though, disclosures notwithstanding, it’s not like they can see what it’s actually going to cost at the point they make the request. Those surprises tend to come…later.

Oh, they know the amount they need and presumably request. But then there’s the 20% withholding that comes off the top, but then, come tax time (probably months after the event), they’ll “discover” if that 20% withholding was “enough.” At the same time, they’ll likely discover the 10% early withdrawal penalty (for those who aren’t yet 59½[i]). Less obvious is the retirement savings “ground” they’ve lost to the customary six-month suspension of contributions (and match). And that’s not considering the 401(k) loan they likely had to take first because, after all, we have to make really, really sure that you absolutely have no other way to get to that money.

The good news — of a sort — is that those “surprises” are likely to be lessened with the emergency savings and withdrawal provisions of the SECURE 2.0 Act of 2022.[ii]

Retirement ‘Find’ Print

And then there are the surprises that come WITH retirement. That’s when you “discover” the DIS-advantage of pre-tax savings, as Uncle Sam (and his state and city “cousins”) line up for their postponed “cut.” It’s also when Social Security (and Medicare) look to that as fresh income against which benefits (and the cost of benefits) are now means-tested (a.k.a. reduced/taxed). And remember[iii] that your Medicare premiums are based on INCOME.     

Now, if all that seems like a particularly depressing theme for Valentine’s Day, fear not. The fine print impact of these “hidden” costs — like the hidden costs of that floral arrangement can be muted, if not mitigated, by not waiting until the very last minute to make preparations…

- Nevin E. Adams, JD

 

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[i] There are some other exceptions. See Retirement topics - Exceptions to tax on early distributions | Internal Revenue Service.

[ii] Speaking of “fine print,” while hardship withdrawals are allowed only for "immediate and heavy" financial needs, under this new provision, you can withdraw up to $1,000 per year for unforeseeable emergency needs without the 10% penalty — you can (do not have to) repay that within three years. However, that amount is subject to tax, though not if you repay it. No other emergency distributions can be taken in the following three years — unless the original distribution is repaid, or the aggregate elective deferrals and employee contributions equal the amount distributed.

[iii] See The Biggest Surprise About (My) Retirement.

Could Super Bowl 59 Influence Your 401(k)’s Future?

 Will your 401(k) be chopped by the Chiefs — or soar with the Eagles?

That’s what adherents of the so-called Super Bowl Indicator[1] would likely conclude, after all. It’s a “theory” that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time — for 41 of the 58 Super Bowls, in fact. Not that it hasn’t been tackled short of the goal line.

Portfolio Prognostications

One needs to look back no further than last year’s victory by the (original AFL) Kansas City Chiefs that, according to the Indicator, should have predicated a portfolio predicament for the S&P 500 — but wound up with a 23% gain for the year. Or the year before that when those (same) Kansas City Chiefs prevailed over the original NFL 49ers — but the S&P 500 still rose 25%.

On the other hand, the year before that, the victory by the (old NFL) Los Angeles Rams (over the old AFL) Cincinnati Bengals “should” have been a portent of good times, only to see the S&P 500 slump more than 19% — for its biggest loss since 2008. 

And while the previous year’s blow-out victory by the NFC’s Tampa Bay Buccaneers (over those AFL Kansas City Chiefs) bolstered the premise behind the “theory,” the year before that the win by these same Kansas City Chiefs (who have become something of a regular in the big contest) over the then-NFC Champion San Francisco 49ers undermined its track record (or did your 401(k) miss that 18.4% rise in the S&P 500?).

Or how about the year before THAT when the AFC’s New England Patriots (who once upon a time were the AFL’s Boston Patriots) bested the NFC champion Los Angeles Rams — but the S&P 500 was up more than 30% that year (2019).

Or, looking the other way, the year before that a win by the (old NFL and) NFC champion Philadelphia Eagles against the AFC Champion Patriots turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before, when the epic comeback by those same AFC Champion Patriots against the then-NFC champion Atlanta Falcons failed to forestall a 2017 market surge.

Now, one might think that the real “spoiler” to this market “theory” is the New England Patriots (who not so long ago were perennial Super Bowl participants) — but the year before that, the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.” Now, of course, we might say the same thing about the Chiefs — who, should they prevail on Sunday, would be the first team to win three in a row (though quite a few have managed to take two in a row).

Market Makings

Indeed, one might well wonder why, in view of that consistent string of “exceptions” that we’re still talking about this “theory” — but, as it turns out, that’s an unusual (albeit consistent) break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots (yes, they DO show up a lot – or at least used to) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title.

It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens — who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. This is where things start to get confusing, as the Ravens, who were the Browns moved to Baltimore in 1995 (though the NFL still views them as an expansion team) filling the hole left by the then-Baltimore Colts’ 1984 “dead of night” move to Indianapolis.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — those Ravens and the San Francisco 49ers (yes, they show up a lot also — they just miss Joe Montana) — were, technically, NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on — and took down — one from the old AFL (the New England Patriots — yes, those New England Patriots… again). And, in fact, 2012 was a pretty good year for stocks (and people who like to see the Patriots lose in dramatic fashion).

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference, but an old NFL team) took on the National Football Conference’s Green Bay Packers —two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919.

According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail). But as some may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat (dare we say “deflated”?).

And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts (those old Baltimore Colts) beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals (who had once been the NFL’s St. Louis Cardinals); and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who, as we’ve already remarked, had roots dating back to the NFL legacy Baltimore Colts.

Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots (yes, those Patriots) for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until last year, the year before last — oh, and the year before that — and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year — but the S&P 500 rose — albeit just 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that probably nobody, except Patriots fans and disappointed Panthers advocates, remembers because it was overshadowed by the infamous “wardrobe malfunction”) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, “sacking” the indicator for another loss (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams (that have since returned to the City of Angels) and the Baltimore Ravens (those former “Browns”) did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.[2] And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad?

Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance —and lost — the S&P 500 gained nearly 16%.

Fun Facts to Share About the Game

The Kansas City Chiefs will wear their away white uniforms — that means, of course, that the NFC champion Philadelphia Eagles will be in their home greens — that’s the same colored pairings as in Super Bowl LVII. As it turns out, in all four Super Bowl appearances, the Eagles have worn their home green (with one win in Super Bowl LII).

In the Patrick Mahomes era, the Chiefs have worn their home jerseys in three of their four Super Bowl appearances (LIV, LV, LVIII), winning twice in red. However, Kansas City last wore its white jerseys in the Super Bowl in its first meeting with the Eagles — when the Chiefs beat Philadelphia, 38-35. 

That said, the team wearing white jerseys in the Super Bowl has won 16 of the last 20 Super Bowls. 

Right now, the Chiefs are favored to beat the Eagles — but that’s the first time in their three-year streak of Super Bowl attendance that they’ve been the favorites.

All in all, and particularly in view of the exciting playoff games that have led up to it, it looks like it should be a good game.

And that — whether you are a proponent of the Super Bowl Theory or not — would be one in which regardless of which team wins, we all do!

• Nevin E. Adams, JD

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[1] An alternate theory linking the Super Bowl to stock market performance in reverse fashion postulates that Wall Street’s results can be used to predict the outcome of the game. According to this theory, if the Dow rises from the end of November until Super Bowl game day, the team whose full name appears later in the alphabet will win. Some people have too much time on their hands…

[2] Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

A Red Flag for a ‘Red Flag’ Report

  Did you hear the one about how nearly all U.S. retirement plans have “at least one regulatory or fiduciary ‘red flag’ violation”?

Well, here’s hoping you haven’t. Because this so-called “analysis” of Form 5500 filings claims to have discovered that 84% of all (that’s right ALL) retirement plans in the United States have “at least one likely Employee Retirement Income Security Act (ERISA) red flag from a regulatory and/or fiduciary violation.”

Now, having grabbed your attention, you probably won’t be surprised to find in the fine print of the press release an opportunity to “schedule a cost-free benchmarking audit.” But before you do so, you might want to take a look at the criteria this firm designates as a “red flag.”

From their press release, “Abernathy-Daley defines red flag violations as either ‘infractions, fineable offenses, fiduciary failure, or plan malpractice’ and are separated into two main categories: Regulatory Infraction Red Flags (RIRF) and Egregious Plan Mismanagement Red Flags (EPMRF).” 

As if the industry needed any more acronyms — much less made-up ones. 

With regard to the former, the press release identifies the following “selected RIRF infraction categories”: 1) loss from fraud or dishonesty; 2) not offering qualified default investment alternatives (QDIA); 3) an insufficient fidelity bond; and 4) not 404(c) compliant. With a straight face the firm claims that at least 328,833 retirement plans had at least one of these RIRFs, representing approximately 43% of the total plans. 

We’ve got no numerical breakdown by category, but someone should notify these folks that there’s no legal requirement that a plan be 404(c) compliant nor that they offer a QDIA.  These are safe harbor options available to any plan that desires them and that is willing to take on the conditions that accompany them — but it’s hardly a violation of any kind not to.

As for losses from fraud or dishonesty — well, to the extent such things are actually discoverable on the 5500, it’s likely the plan already knows the issue (and has already resolved the matter). Ditto the allegedly insufficient fidelity bond — and well, considering the categories compiled here, it would be useful to know what they deemed “insufficient.”

And then there’s the “Egregious Plan Mismanagement Red Flags” (EPMRFs). Hope you’re sitting down. Those are defined as “red flags that may not necessarily result in a fine, but represent failure of: The plan administrator in their fiduciary duty to the plan sponsors, and The plan sponsors in their fiduciary duty to their employees.”

More to the point, these “infractions” (their word choice, not mine) were detailed as “1) Not including automatic enrollment; 2) No corrective distribution of excessive contributions; 3) No 404(c) with participant-directed accounts; and 4) Failure to transmit payments on time.” Once again, we don’t have a breakdown of how many in which category, but they claim that at least 584,113 retirement plans had at least one EPMRF, representing approximately 76% of the total plans.

Once again, though — neither automatic enrollment nor 404(c) compliance is legally required (unless it’s a plan adopted after Dec. 29, 2022, and those won’t yet have shown up in the Form 5500 data). And again, if you’re able to find evidence of corrective distributions and/or failure to transmit payments on time on the Form 5500 — well, that’s only because the issue has been found, acknowledged, and likely corrected.

Look, an advisory firm can set out whatever standards it deems appropriate, affix clever (if arguably misleading) names (and acronyms) to practices that fall short of those individual standards, and even issue a press release proclaiming that it has found the vast majority of plans in existence are found “wanting” based on those standards — doubtless in hopes that it will be picked up and shared uncritically by the media (and read by potential clients).

That said, the deliberate choice to position practices that are clearly neither required nor necessary as some kind of “regulatory and/or fiduciary violation” — strikes me as a “red flag” violation of another kind.

• Nevin E. Adams, JD

Missing the Mark

 A recent survey posed an intriguing question: Why are employees not participating in their 401(k)s? The answer(s) were jaw-dropping.

Now, I’ve previously expressed skepticism regarding workers’ perception of things like retirement savings needs, much less retirement savings balances, and over the years there has been plenty of anecdotal evidence to suggest that workers think they have a pension, despite plenty of actual data to indicate that’s a misguided fantasy. In sum, it seems that many, if not most, workers have a pretty distorted view of their financial circumstances, certainly as it relates to retirement.

That said, a recent survey by Principal takes that to a whole new level. 

That survey found that more than half — 59% — of workers who were not saving for retirement — thought they WERE saving for retirement. Nearly half (49%) thought they had been automatically enrolled, but nearly as many (41%) thought they had signed up on their own. And three-quarters (77%) said they had started saving as soon as they were eligible for the plan!

And if that wasn’t enough — turns out that while 83% say that they’d start contributing if they received a match ... 78% of those respondents are actually in plans that DO offer a match. Oh, and 70% of those who thought they were contributing (but weren’t) actually thought money was being deducted from their paychecks for that purpose.

Oy vey!

Some of this confusion might be a consequence of turnover — 40% said they had had more than one job in the past five years, after all. Let’s face it, it’s easy to lose track of things like benefit enrollment when you’ve changed jobs that often (or to assume that just because you were saving at your old job transferred to the new one). Some can doubtless be attributed to the industry’s growing reliance on automatic features — both by plan sponsors and workers — that lessens or eliminates the traditional need to be attentive to such things. Ultimately, a big part of it is likely nothing more than a combination of both the complexity of the process and the “distractions” of daily life.   

Now, I’m not quite sure how to remedy the passivity of those relying on their employer to sign them up, much less the myopia of individuals who aren’t even paying attention to the deductions on their paystubs. Maybe we should start mailing out statements to non-participants that showed a $0.00 balance (in red) that confirms their lack of an account — though my guess is they’d just file it away. 

Whatever the reason(s), this survey suggests that messages about the importance of saving for retirement — much less saving more — are likely going right over the heads of people who seem to think they already are. 

And in that sense, this survey also suggests that OUR assumptions about the efficacy and impact of our communications in inspiring better efforts — could be missing the mark as well.

- Nevin E. Adams, JD