Briefly Noted

    The Broker Penalty for Load Index Funds: Triple Cost

    Investors who buy index mutual funds through brokers are paying a steep “broker penalty” by being sold funds with much higher operating expense fees even before adding the distribution fees related to the cost of using the broker, according to a study by the Zero Alpha Group (ZAG) and Fund Democracy. The bottom line for investors: The extra operating costs paid over time for broker-sold load index funds are triple those paid by investors in true no-load mutual funds.

    The study found that, on a $10,000 investment earning an annual return of 10% over 20 years, the average investor in no-load, no 12b-1 fee index funds would pay approximately $2,582 in operating expenses, while the average investor holding a no-load fund that charges a 12b-1 fee would pay $3,744, and the average investor holding load index funds would pay $7,600 in operating expenses. The study found that load index funds charged substantially higher fees than true no-load (no 12b-1 fee) funds, even before counting the fees paid to the broker.

    J. Christopher Kerckhoff Jr., vice president of Plancorp, a Chesterfield, Missouri-based member of Zero Alpha Group, said: “Our study is troubling for investors who use brokers to purchase load index funds. We would fully expect such investors to incur distribution costs associated with compensating their broker or advisor. However, there is no valid reason for such investors to have to foot the bill over and above what true no-load investors do for other, non-distribution services. Indeed, if one presumed benefit of distribution services is the selection of lower-cost index funds, one would expect no-load and load funds to have lower—not higher—operating expenses than true no-load funds.”

    Get Active With Your Bond Holdings

    Now may be the time to get active with your bond portfolio. That suggestion comes from Dean Junkans, chief investment officer at Wells Fargo Private Bank. Why now?

    Mr. Junkans points out that the bond market has seen an 83 basis point move in the 10-year market over the past few months, which means that investors who bought 10-year bonds in March have probably suffered a 5% or 6% principal loss. With this in mind, Mr. Junkans suggests investors should consider actively managing their bond portfolio to offset gains in the booming portions of their portfolios, or to generate tax-loss carry forwards for future years.

    Some of the steps Mr. Junkans suggests investors consider taking to maximize their bond portfolios include:

    • Consider taking losses in intermediate bonds, closed-end funds, or open-end bond funds purchased in the last six months as these are short-term losses;
    • Consider taking losses in intermediate bonds, closed-end bond funds, or open-end bond funds purchased more than six months ago that have more than a 5% principal loss;
    • Use proceeds to improve your bond portfolio by buying higher-coupon bonds;
    • Use proceeds to reposition a portion of your bond portfolio to international fixed income.

    Social Security Benefits: Tips for When to Start

    Should you take Social Security benefits early and receive reduced benefits, wait until full retirement age and receive full benefits, or possibly delay even longer to age 70 and receive even higher benefits?

    There is no one right answer, according to the Pennsylvania Institute of Certified Public Accountants (PICPA). However, here is an overview of Social Security payment options and several factors to consider when making a decision that is right for you.

    All three options are designed to eventually pay out roughly the same amount. But there are some instances when one alternative might make more sense than another, depending on your circumstances.

    Health and Life Expectancy: Be sure to take into consideration personal health and family history. If, for example, your health is relatively good and your parents and grandparents lived into their 80s or 90s, you might want to consider delaying benefits until full retirement age or later, if you can afford to do so. On the other hand, if your health is not good, you might opt for early benefits.

    Work Plans: If you plan to continue working after retirement, taking early benefits would be a mistake because of the “earnings cap” penalty on Social Security benefits paid prior to retirement age. If you begin collecting benefits early and your job brings in more than the cap—$12,960 for 2007—you would lose $1 in benefits for every $2 earned over the annual limit. Once you reach the set retirement age, there is no loss of Social Security benefits, regardless of earnings.

    Providing for Survivors: A surviving spouse is entitled to 100% of the primary wage earner’s benefits. To leave the most income for a surviving spouse, one should consider waiting until the established retirement age or later to start receiving benefits.

    Source: Pennsylvania Institute of Certified Public Accountants (PICPA).