Monthly Archives: February 2015

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Case Study: 401(k) Plans Under the Microscope

The recent news that the Supreme Court will be taking on a lawsuit involving a company’s 401(k) plan is sending shockwaves through the investment field.

Let’s start with the basics first.  A 401(k) plan, also known as a defined contribution plan, is a retirement plan administered by companies on behalf of their employees.  The employer selects the menu of investment options available to employees and also may offer to match an employee’s contribution to the plan.  The employee sets aside a certain percentage of their pay to contribute to their plan and selects investments.

As company pensions have declined, the 401(k) has become the primary retirement vehicle, with over $4.5 trillion in assets, as this chart indicates:

401kgrowth

So, what is the lawsuit the Supreme Court is considering?  From the Wall Street Journal:

The court will focus on a narrow issue concerning the statute of limitations in the case, called Tibble v. Edison International . A ruling against Edison could trigger a wave of lawsuits against companies over the way they set up and manage 401(k) retirement accounts and similar plans, according to lawyers not involved with the case.

Tibble is one

By |February 27th, 2015|Current Events, Investing|

Chart of the Week: What Do Credit Card Perks Tell Us About Credit Card Industry?

From the Economist:

CreditCards

Credit Cards often provide perks to convince cardholders to sign up with them.  Two common incentives are balance transfer offers which allow new cardholders to transfer existing credit card balances over and not pay interest for a period of time.  The other perk is the bonus airline miles offered for signing up.

The Economist noted that this chart indicates the stresses being felt by the card companies as they compete for customers: 

Other woes are a function of broader forces within the industry. Americans are not as willing to carry a balance on their credit cards as they were before the crisis: the economy is now growing much faster than revolving credit, a category composed chiefly of credit-card debt. That may be partly because banks are still leery of lending to poorer Americans; instead they are competing to offer cards to the rich.

As a result, card issuers are providing bigger rebates on purchases, more frequent-flyer miles as a sign-up bonus and longer interest-free periods for those who transfer balances from other cards (see chart). Mercator Advisory Group, a consultancy, estimates that the amount of revenue from each

By |February 27th, 2015|Chart of the Week, Credit Cards, Current Events, Research|

Question: Can Credit Card Companies Change The Interest Rate You Pay?

Answer:  Yes.

A good reminder today that they can. American Express announced that it will be raising interest rates by an average of 2.5% on over 1 million of their customers (Bloomberg):

AmEx told more than a million customers this month that their annual rates will climb an average of 2.5 percentage points, following a review last year, said people briefed on the move. The firm sent letters saying it’s making adjustments after finding their rates were below those for rival cards held by borrowers “with similar credit profiles,” according to a copy obtained by Bloomberg News.

If their explanation sounds a little fishy to you, in this era of Big Data, you are not alone.  Recall last week’s news that AMEX was losing their exclusive agreement with Costco and suddenly this looks like a strategy to plug that hole.

How frequently do credit card companies increase rates on their customers?

Such moves have become uncommon at major U.S. lenders. Banks typically make large-scale changes in response to broader shifts in interest rates or risk, said Oliver Ireland, a former Federal Reserve lawyer who monitored industry practices there…

How much notice do credit card companies need to provide?

A 2009

By |February 25th, 2015|Credit Cards, Current Events|

New Products: Making Savings More Automatic

Plenty of start-ups working on ways to make saving even more automatic.  From American Banker:

The Digit product’s debut comes as consumer advocates are encouraging the financial sector to develop technologies that help people save. American Express, for example, has created an initiative to reimagine savings for its reloadable prepaid card Serve. Even, which is in pilot mode, will automate deposits to savings accounts on weeks when users have earned more money than they do on average. SmartyPig, in Iowa, lets people create goal-based savings accounts. Qapital, which partners with Lincoln Savings Bank and targets millenials, is readying to launch its savings app in March. And prize-linked savings are now legal for banks in some states.

Might be fun to have students research one of these products (Digit, AMEX’s Serve, Even, SmartyPig, Qapital and prize-linked savings accounts) and report back to the class on:

  • How does it work to encourage saving?
  • How do the companies make money on these products?
  • What are the fees with the product?
  • What are the pros/cons of using the product?
  • Would you use it?  Why or why not?

By |February 25th, 2015|Checking Accounts, Current Events, New Products, Savings|

What Can SchoolHouse Rock Teach Us About Money?

I am going “retro” on you with this post.

Hat tip to my good friend, Andy Kavulich, who has a better memory than me recalling the School House Rock series, which had a few videos pertaining to money (I only remembered “I am a Bill” and “Conjunction Junction”).  While these videos may seem targeted to a younger audience, I think that they can be used at the high school level too by asking students to watch them more critically, apply the advice given to their own situation and even make recommendations based on their knowledge.

The videos below cover budgeting, investing and banking/saving.  I have also listed questions to prime students as they are watching:

Dollars and Sense would be appropriate for your banking/checking/savings unit:

  • In the video, the banker explains interest to the country singer wannabe.  Describe in your own words how interest can work for and against you.
  • What are two elements of this video that don’t seem reasonable in your view?
    • Potential answers:
      • Would a bank really lend money to her since she doesn’t appear to have a steady job?
      • Rather than get a bank loan, most people would buy that new guitar and amps using a credit card which would have an interest
By |February 25th, 2015|Budgeting, Investing, Savings, Video Resource|

Chart: What is the Value of A College and Graduate Degree By Major?

This is going to take some explaining (from Georgetown’s Center on Education and the Workforce)…

Majors

First, let’s provide some context for the chart:

  • Measures average earnings based on college major, degree attainment (high school, college, graduate) and level of experience.
    • Examples:
      • The average earnings for recent high school graduate is $24,000 (about $12/hour) and for an experienced high school graduate is $36,000 (dotted lines on the chart).
      • For engineering majors, the average pay for a recent college graduate is $57,000; for an experienced college grad, the figure rises to  $93,000.  For a student with a graduate degree (Masters) in engineering the comparable figures for a recent graduate student is $78,000 and with experience that rises to $114,000.
    • Recent college graduate = ages between 22 and 26 with college degree
    • Experienced college graduate = ages between 35 and 43
  • Based on data from American Community Survey for 2011-2012

Here are a few questions to get the conversation started.  I created Value of College Degree and Experience spreadsheet which presents this data in tabular format to make these calculations easier:

  • What is the value of experience by major, which can be calculated by comparing average starting pay of recent college graduates with average pay
By |February 23rd, 2015|Career, Chart of the Week, Paying for College, Question of the Day|

NGPF Featured Activity: How To Open A Checking Account

We continue to add to our growing list of engaging activities in the Next Gen Personal Finance’s Activity Bank.  In this post, I want to highlight “How To Open A Checking Account.”  In this activity, students proceed through a five step process:

  • Identify checking accounts with the best features (e.g., low/no fees, convenience, ATM locations)
  • Select a checking account after analyzing these features
  • Identify forms of identification and other items needed to open a checking account
  • Develop a list of questions to should ask when opening the account
  • Create a dialogue anticipating how the bank representative will answer questions

This activity places a high premium on students’ ability to drive their own learning through online research, including several Google searches, a checklist for identifying reputable information sources and a link to a popular checking account comparison website.  Given the fast moving nature of the financial services industry, it is critical that students develop these critical thinking and online research skills so they can make decisions based on the latest trends and information.  Finally, the activity doesn’t stop after the student’s checking account decision. Instead, it walks them through the steps required to implement their decision by identifying what they will need to open the account

By |February 23rd, 2015|Activity, Checking Accounts, Featured NGPF Lesson, Lesson Idea|

Question of the Day: What is the Average Annual Cost of a Checking Account (and Other Trends in Bank Fees)?

Answer (from Bank Fees Survey EOY 2014):  Over $154

Headline for this survey could be “Bank Fees Continue Rise to Record Levels.”  Assign this reading to your students during your banking/checking unit to help familiarize them with checking terminology, the fee structure of checking accounts and the importance of comparison shopping.

Survey background:

  • Banks in survey set:  “A sampling that includes the 50 biggest retail banks by deposits, plus an equal number of smaller financial institutions…”
  • Fees analyzed (good proxy for what is important in selecting a checking account):  “…monthly maintenance fees, overdraft fees and ATM fees, and also tracks the account minimums necessary to open an account and avoid a monthly maintenance charge.”

Fee trends:  

  • Maintenance fees:  “Monthly maintenance fees are up by 18 cents, to an average of $12.87.”
    • Minimum balance required to avoid maintenance fees also continued to climb:  “The average such requirement increased by $268.76 over the past six months to $5,708.76.”
    • Only 26% of banks surveyed were free of maintenance fees; down from 28% six months ago.
    • Note that as a student, many banks will offer low or no-fee checking accounts as an enticement.  These deals typically end once you are no longer a student.
  • ATM fees:  ‘The average fee charged to customers who
By |February 23rd, 2015|Checking Accounts, Current Events, Question of the Day, Research|