This morning I had the opportunity to give a forty-minute presentation about personal finance basics to a Penn State freshman seminar class.  One of my (many) long-term goals is to fix the lack of personal finance education at the high school and college level, so I jumped at the chance and dragged myself out of bed at 3AM to prepare a presentation.

I gave and recorded the presentation using Google Hangouts On Air:


The presentation is here and the spreadsheets referenced in the video are available here.

Unfortunately the audio on the other end wasn't working, so I was not able to do the question-and-answer session that I had planned.  In lieu of that, I'll follow up with the students using a Google Form to collect their questions and I'll post the answers here.

I have been subscribing to a lot more YouTube content lately, and I like the concept of preparing a series of short personal finance videos to add at the top of my posts here.  These videos could give the tl;dr version for people who prefer the sound of my voice to my writing style (what a choice!).

My public speaking needs work, but to be fair this was 6AM my time...

It's apparently 401(k) season over here at AHS, which is interesting considering:

1.  I don't personally have access to a 401(k) (Berkeley offers a 403(b) and a 457(b) instead, the latter of which I'm contributing to), and
2. I haven't written a comprehensive article on 401(k) plans.

But wait! That's not entirely true.  The AHS Wiki has a very large page on 401(k)s.  It's not super-organized or 100% comprehensive, but it will probably answer your questions.


As a general note, the AHS Wiki has a lot of information on topics that I haven't yet published articles on.  I use it as a low-pressure drafting space to make my research immediately accessible to other people.  Some pages are just a link collection, while others are in an advanced state of development.  Feel free to create an account and contribute!

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A Bad Plan Can Cost You A Lot

 Lately I've written about how states like CA and PA are divesting from overpriced, underperforming actively-managed mutual funds in their state pensions.  As I've repeated endlessly (and upon which John Bogle has written many books), index mutual funds are the best way to keep your fees down and get your fair share of financial market returns.

A 2014 study by Bloomberg classified some of the best and worst 401(k)s in the business, but they primarily focused on company matching, not cost.  Investment cost—the annual fee, or 'expense ratio', that you pay to hold a stock, plus any other management fees—is extremely important too: a high-priced 401(k) plan could cost you $100,000 over your lifetime.

What if your company only offers high-priced garbage?

Maybe your company isn't big enough to attract Jerry Schlichter's attention to start a lawsuit.  How can you talk to your boss about improving the retirement plan?

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Campaigning For Improvement

The Bogleheads, an online forum for investing enthusiasts, have prepared an article addressing this topic.  The punchline is that, under the Employee Retirement Income Security Act (ERISA), your company has a legal obligation (called "fiduciary duty") to make retirement account decisions that benefit employees.  This duty includes "paying only reasonable expenses of administering the plan and investing its assets" and "diversifying plan investments".  If your plan lacks low-cost index fund options, it fails both of these criteria!

So: carefully document this noncompliance, draft a friendly letter to your company's fiduciary (listed in your 401(k) Summary Plan Document), express your concerns for employee welfare and the potential for corporate liability under ERISA (Mr. Schlichter...), quote some Warren Buffett, and you have a shot!

Have you or anyone you know ever tried this?  Were they successful?  I'd love to hear about it!

Pennsylvania Governor Tom Wolf announced his budget proposal today, which included reversing the nasty cuts inflicted to public education by former Governor Ed Rendell.


On the finance front, PA is joining the ranks of states instituting pension reforms:

We need a new approach - and we need to question the decisions that got us to where we are today.  For example, why are we paying Wall Street managers hundreds of millions of dollars to manage our pension fund?

That doesn't help our middle class, it doesn't help our seniors, and it needs to change.
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Believe it or not, as I mentioned earlier: our state has been wasting hundreds of millions of taxpayer dollars on Wall Street managers to handle state pension accounts.

But studies have shown that simply investing this money in a safe, conservative account would produce a similar return over the long term while eliminating these excessive management fees.

So, here's what we are going to do:

We are going to stop excessive fees to Wall Street managers.
We're going to improve retirement security for state workers.

With these and other improvements, we are going to save taxpayers nearly 1.3 billion dollars over the next five years while creating savings of 10 billion dollars in the unfunded liability.

In September, the state of California announced it was pulling its public pension money out of hedge funds and replacing many actively-managed funds with index mutual funds to save the state money while improving returns for investors.

Paying high fees to active fund managers who consistently fail to beat the market is a loser's game.

Read my series on index investing to find out how you can hold the entire market, cut your fees to nothing, and get your fair share of market returns.  Contact me if you need help getting started!

An attorney, Jerome  'Jerry' J. Schlichter,  has begun suing companies that only offer high-cost investments in their 401(k) plans.


Wall Street Journal: Supreme Court Hears Case on 401(k) Plans

From the video:

"He did a lot of research into big company 401(k) plans and found... he had a lot of questions about, 'why are they picking these mutual funds versus these mutual funds? These mutual funds are higher cost than these... maybe there's a better way that we can do this.'  So he started more than a dozen lawsuits. ... The companies that he's reached settlements with have changed the mutual fund options in their plans, gone to lower-cost options, and agreed to disclose a lot more about what they're doing.

The broader implication is that fees are going to go down in plans. ... more index funds, more ETFs, that kind of thing."

He's arguing that only offering expensive investments is a breach of the plan manager's fiduciary duty as defined in the Employee Retirement Income Security Act (ERISA).  Go Jerry!

I've talked extensively about the importance of selecting low-cost investments.  The 401(k) is an important piece of the investing puzzle (after the IRA), but some 401(k)s lock you into lousy, expensive investments for the duration of your employment.  It's good to see that someone's doing something about this.

CalPERS, the California Public Employees' Retirement System, manages a cool $300 billion for the state's 1.6 million eligible employees.  This is the second largest public pension fund next to the federal government's CSRS, the Civil Service Retirement System.  In the ~$13 trillion US mutual fund industry, this positions CalPERS as a heavyweight institutional investor.

This serious amount of money adds weight to the announcement that CalPERS is pulling out of its $4 billion investment in hedge funds and replacing the actively managed mutual funds in its $2 billion defined contribution plans with index funds.  This will decrease the annual expenses associated with holding these funds by 89% (0.06%, from 0.52%).

CalPERS headquarters in Sacramento, CA

This is in line with the announcement in October 2013 that the CalPERS board had adopted the following as one of its ten "investment beliefs":

Calpers will take risk only where we have a strong belief we will be rewarded for it.  Sub-beliefs:

• An expectation of a return premium is required to take risk; Calpers aims to maximize return for the risk taken
• Markets aren’t perfectly efficient, but inefficiencies are difficult to exploit after costs
• Calpers will use index tracking strategies where we lack conviction or demonstrable evidence that we can add value through active management
• Calpers should measure its investment performance relative to a reference portfolio of public, passively managed assets to ensure that active risk is being compensated at the Total Fund level over the long-term

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Sea Change (for the better)

Eight out of every $10 invested in mutual funds and exchange traded funds (ETFs) has gone into low-cost passively managed funds, according to the Morningstar Fund Flows reports.  This makes sense, because active funds charge higher fees and don't consistently beat passive funds even before fees—over the past five years, 73% of actively-managed domestic large-cap mutual funds failed to match the S&P500.

If CalPERS and they Harvard MBA's they pay to manage their active funds can't do it, what chance do you think you have at beating the markets?

The evidence is clear: spending your own time or paying someone else money to pick stocks for you is a losing game.  Lining your nest with index funds is your best (and simplest, and cheapest) bet.

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In The News

Time: The Triumph of Index Funds
Chicago Tribune: CalPERS dumps hedge funds citing cost, to pull $4 billion stake
NY Times: With Pension Fund Giant CalPERS Quitting Hedge Funds, Other Investors Reflect
Marketwatch: Pensioners: CalPERS embraces indexing
Investment News: CalPERS switches to all-passive DC plans
Forbes: Why CalPERS Tired of Vampire Hedge Funds
Forbes: Nation's Largest Pension Considers More Indexing (2013)

Over and over again, I've stressed the importance of building the core of your portfolio out of low-cost, passively-managed index mutual funds.  This is important enough that I wrote a seven-part series on it.

I've been telling you to do this and do that all month long, so in the spirit of full transparency I think it's only fair that I share what I actually do with my own money.

Put the money... there!  Definitely over there.

This is an article about how I follow my own advice.

In an earlier article on nontraditional investments, I mentioned Mosaic.


When you join Mosaic, you join a group of investors that are lending money for solar power installation projects.  As the loan is paid back, you receive principal and interest.  Because of the sustainability theme, Mosaic may be popular among those who would consider a Socially Responsible Investing (SRI) strategy.

I joined Mosaic in September 2013, and so far I have invested $500.

In an earlier article on nontraditional investments, I mentioned Lending Club.
Lending Club is the leader of the pack of a new breed of peer-to-peer lending platforms.  You can join Lending Club as a borrower or as a lender; for investment purposes, we're interested in the latter.

Like most things in life, it's best to be proactive about tax return errors.  If you've made an error, correct it before Uncle Sam comes knocking with additional fees and interest.  You can file an amended return to correct tax errors up to three years ago.

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Back in the day, your parents, grandparents, or some other random person might have chosen to express their financial affection by depositing money in a qualified account under the Universal Transfer to Minors Act (UTMA).  The UTMA, itself an extension of the Universal Gifts to Minors Act (UGMA), was originally proposed in 1986 and was ratified as law in most states shortly thereafter.  This law provided a mechanism to transfer ownership of securities, such as stocks, bonds, and mutual funds, to a minor without the complexity of establishing a trust fund.  They were quite popular throughout the 90's, and many young adults today find themselves approaching, or having recently surpassed, the age at which they assume custodianship of these account (18 or 21, depending on the state).

In 2001, things got more complicated: with the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), there was now another option to pass some cash on to the next generation: the USC 26 Section 529 Education Savings Plan (529 Plan).


The 529 Plan is designed to be an improvement over a UTMA account in most situations, but like most things in life, you can't get something for nothing.

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In the previous article, I discussed how an estate planner could potentially use a 529 Education Savings Plan to unload a significant sum of money without tax consequences.  But what are the consequences if you find yourself or your children on the receiving end of a 529 Plan?

How 529 Plan assets and withdrawals affect the beneficiary's student financial aid eligibility depends on who owns the Plan.

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We've discussed the 529 Education Savings Plan before: it's by far the best way to save for future education expenses, and it's even useful for graduate students looking to invest when they can't contribute to an IRA.


There's one other group of people that really love 529 Plans: estate planners.

While you'll encounter all sorts of acronyms in the wild, there are really only two flavors of financial advisors: those bound by the fiduciary standard and those not bound by the fiduciary standard. The definition of the term: "from the Latin fiducia, meaning 'trust,' a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty." Basically, a fiduciary is legally obligated to act in your best interests.

Sounds like that should apply to all financial advisors, right? Unfortunately, it does not.

When set up correctly, your investments should require very little maintenance.  There's no need to check on your account regularly, but it's a good idea to rebalance your portfolio and reevaluate your contribution rate every now and then.

Nearly time for a rebalancing?

At this point, hopefully I've convinced you that index mutual funds are a good idea, and maybe even that you should be investing in them at Vanguard.  But when your money hits that account, what, exactly, should you invest in?  This is the question of 'Asset Allocation', which this article will address.

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Keep It Simple

In an earlier post in this series, I gave the completely unsupported recommendation to allocate "'your age in bonds' (i.e. 40% bonds for a 40-year-old) and the remainder split 3:1 between domestic and international stocks."  But why?  What are the considerations?

In the previous articles in this series, I described the origin and nature of index mutual funds, why you should invest in them, and why investing with Vanguard is your best bet.  But what if you already have some investments at another company?  That's what this article is all about.

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Should I Stay Or Should I Go?

The Clash weren't sure either.

The Vanguard Group is the investment management company started by John Bogle, inventor of the index mutual fund.  As I mentioned in the previous articles in this series, Bogle's big idea, thoroughly derided by the financial establishment of the day, eventually took off: index mutual funds now account for 28% of the $13 trillion invested in mutual funds, and Vanguard manages over $2 trillion as the largest investment management company in the world.  Bogle rejected speculation, short-termism, and high fees, and believed that the investor's best chance of getting their fair share of market returns was to buy and hold a little bit of everything as inexpensively as possible.  History has shown him to be correct.

(If I sound like a Vanguard shill, let me assure you: I'm not getting a dime for this.  I've invested with Vanguard for years, and this article is entirely based on extensive research and the experiences of myself and others with which I've worked.)

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Why Vanguard?

In the financial world, bigger is obviously not necessarily better, so Vanguard's advantages must have to do with more than its size.  Why is Vanguard broadly considered to be the best company to invest with?

Amidst all of this 'high finance' dreck, one innovation stands out as an obvious win for the investing Everyman: John Bogle's invention of the index mutual fund.  Far from being met with universal praise, Bogle's big idea was roundly derided by the financial establishment.

38 years later, investments in index mutual funds make up 28% of the $13 billion in US mutual funds.  Well done, Mr. Bogle.

If attempting to choose a handful of specific companies to invest in is a losing strategy, what is the alternative?  Own a tiny slice of everything.

To accomplish this, you won't be trading in individual stocks; instead, you'l be investing in index mutual funds.  Investing in this way is much easier than you probably ever would have thought.  This article outlines the what, the why, and the how of investing with index mutual funds.

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What is a Mutual Fund?

If you wanted to buy a single share each of Google, Apple, IBM, GE, Dow Chemical, Proctor & Gamble, Exxon Mobil, and Walmart today, it would cost you $1825, and because Google is currently trading at $870 per share, Google alone would make up nearly 50% of your portfolio.  As you can probably see, assembling a well-balanced, sufficiently diversified portfolio from individual stocks of well-known companies is massively expensive.  This is to say nothing of the difficulty and expense of rebalancing your portfolio as the values of these individual stocks go up and down.

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The financial markets provide investors with the opportunity to grow their money by buying tiny pieces of company equity (the stock market) or corporate and government debt (the bond market).  As the economy grows and companies turn a profit, these investors are rewarded for their participation with debt payments (interest), payouts of corporate profits (dividends), and increases in the value of their investments (capital appreciation).