Money Never Sleeps - Why Mutual Funds May Be Hurting Your Employee 401k Returns...

Think all funds in 401k's are created equal?  Think again.  Under the premise that HR people are a lot like the general population, I've been meaning to get out a post to encourage all my HR peers who have anything to do with a 401k to push for more Index Funds and less Actively Managed funds.  You don't have to be Gordon Gecko to have a firm grasp of the impact.  First up, let's get a definition of what these types of mutual funds are:

Index Fund - A passively managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.

Actively Managed Fund -Most mutual funds are "actively managed," meaning the mutual fund shareholders, through a yearly fee, pay a mutual fund manager to actively buy and sell stocks or bonds within the fund. Though you would think that mutual funds provide benefits to shareholders by hiring alleged "expert" stock pickers, the sad truth of the matter is that the vast majority of mutual funds under perform the average return of the stock market. Over time, because of their costs, approximately 80% of mutual funds will under perform the stock market's returns. Currently, most mutual funds do not make their fees very easy for shareholders to understand.

Expense Ratio - A mutual fund's total annual operating expenses (including management fees, distribution fees, and other expenses) revealed as a percentage of the fund's average net assets. High expense ratios decrease investors' returns. An example would be two funds that both earned an 10% return before fees. If the first fund has an expense ratio that is 2 percent higher than second fund, you lose an extra 20 percent of your expected returns each year when your money is in the first fund. High expense ratios doesn't mean better results.

So, with those definitions in mind, if your mutual fund selection doesn't include multiple index funds with expense ratios of .50% and below, you can likely do better for your employees.  The average expense ratio for mutual funds in company 401K is said to be in the 1.50% range.

How's that hurt employees?  Over time and with the magic of compounding, that seemingly small difference in expense ratios can end up hurting overall returns.  Here's a calculation I ran at Moneychip.com:

Scenario - Investing $100,000 for 20 years, Expected Annual Rate of Return - 10%

Fund A - Expense Ratio of .4%, Transaction Costs of .1
Fund B - Expense Ratio of 1.5%, Transaction Costs of .8

Results

Cost-Adjusted Return Rate - Fund A, 9.0%.  Fund B, 6.2%
Final Balance - Fund A - $560,441.  Fund B - $333,035
Difference - Index Fund outperforms Actively Managed Fund by $227,406 over 20 years...

All the more reason to rethink your 401k.  If you don't have at least 4 index funds in your 401K, you aren't providing all the tools available to enable employees to maximize their returns.

Like Gecko says - Money Never Sleeps.....

Legal Considerations - Before you start swapping funds in your plan, make sure you get full disclosure on expenses associated with employees moving money out of a fund with a high expense ratio.  Sales fees associated with funds with high expense ratios are common and a type of poison pill designed to discourage change...

HR Capitalist Announces Contest Winners - "Most Fly" HR Intro Music Submissions...

And the winner is....

I feel like Jimmy Kimmel on the stage at the ESPY's a couple of weeks ago... Or Bill Crystal hosting one of the seemingly 5,672 award shows he did while basking in the "When Harry Met Sally" or "City Slickers" glow...

Wow, did that just cheapen the contest that I created.. Great submissions from all to our "Name Your HR Intro Music contest" (see all submissions in the comments to the post), designed to show that HR players can groove, rock and whatever other adjective is appropriate in this space.   Here are the winners:

Best Overall Submissions - Bruce.  Sealed the deal with "Damn it Feels Good to Be a Gangster" by the Ghetto Boys for his intro music and "Who Sucked Out the Feeling" for the music for the arch rival designed to deflate.  Simply strong, A-game stuff with originality.  By the way Bruce, I thought about the Ghetto Boys and would have been there, but I have to be clean since I am running the site.  Great Picks. 

Best Intro Music Designed to Celebrate HR pros - 1) Bruce, see the above, 2) Laurie R., for her overall strength including Fatboy Slim, Dee-Lite, Rage Against The Machine and Cake!  Great strength, Bruce got the overall with the Ghetto Boys plug.

Best Music Designed to Deflate Arch Rival - 1) Bruce, see reference to Superdrag cut.  Tied for #1 - Michael and Lisa, Wham's "Wake me up before you Go-Go"  Strong pick.  Ever wonder what happened to the Andrew guy who used to be in Wham with George Michael?   I'm guessing government worker in the UK.  Or a real-life Austin Powers.. Your guess?

Thanks to all who played, we'll mix it up more in the weeks to come.  Finally, here's the only video I could find to feature that didn't include objectionable content (nice choices, closet HR crazies).  Cake's "Short Skirt, Long Jacket" (I think they took a camera out to Santa Monica and spent $379.18 on this video) submitted by Laurie R. in her rotation for intro music...

Keep it real, my gritty HR brothers and sisters...

Fire, Suspend or Wait and See?... Version 2.0 - NBA Official Betting on Games....

Recently we started what is sure to become an recurring feature on The Capitalist - "Fire, Suspend or Wait and See?".  The goal?  To make the right call with an employee facing legal issues, maximizing the company's interest while being an advocate (to the extent you can) for the employee. 

A few days ago, we profiled the Michael Vick saga in our first installment of Fire, Suspend or Wait and See.  My take was that suspension was the way to go for a variety of reasons, with the commenters to the post agreeing with me.

As luck would have it, a new situation worthy of a Fire, Suspend or Wait and See installment has emerged.   The NBA (pro basketball, National Basketball Association) acknowledged Friday the FBI is investigating game official Tim Donaghy for betting on games, including ones in which he officiated.  From a recent ABC news article:

"According to a law enforcement official, authorities are examining whether the referee made calls to affect the point spread in games on which he or associates had wagered thousands of dollars over the past two seasons.

The referee had a gambling problem and was approached by low-level mob associates through an acquaintance, said the official, who spoke to the AP on condition of anonymity because he wasn't authorized to discuss the ongoing investigation."

With that in mind, what's your HR call?  Fire, Suspend or Wait and See?

My call on this one is pretty simple.  The NBA office issued a statement where they acknowledged they were cooperating with an ongoing FBI investigation on the matter.  With this in mind, they undoubtedly have visibility to the activities leading to the investigation.  If there's any smoke at all, they should probably move to fire, with a resignation from Donaghy being preferred.

Why fire on this one instead of suspending similar to the Capitalist recommendation on Michael Vick?  The main reason is that the charges involved (the official hasn't been charged yet, but all indications are that he will be shortly) involve the integrity of the game/company product.  Michael Vick's charges, however outlandish and unacceptable, are for activity outside the game.  The NBA official will be charged for actions that call into question the integrity of every game result in the NBA. 

When a criminal action by an employee threatens the whole enterprise and causes customers to question anything that comes from the company in question, termination is the required course, the earlier the better.

Fire, Suspend or Wait and See?... The Michael Vick Dilemma for the NFL....

If you follow sports even from a distance, by now you're aware that NFL superstar Michael Vick is in deep trouble.  The Atlanta Falcons star and three others are facing federal charges stemming from an alleged dog fighting operation that includes the allegation when the dogs performed badly either in the ring or in test fights, they'd be executed, by being shot, hanged, drowned or electrocuted.

Vick's got issues to work through.  So does his employer, the Atlanta Falcons.

Based on what's in front of them, do the Falcons fire or suspend Vick, or wait and see what happens? What would you push for as the lead HR executive for this organization?   Here are your choices:

1.  Fire Vick- Pros - Decisive action by an organization wanting to send a clear message on what the standards are for continued employment.  Public opinion would be positive to the move based on what's known at this point.  Cons - The Falcons might be on the hook for some or all of his remaining contract, which means they pay and get no value in return.  Legal exposure exists for terming based on the allegation rather than a conviction.  Additionally, Vick's not replaceable from a skills perspective in the NFL.

2.  Suspend Vick - Pros - Allows you to effectively hedge your bets, in case a not guilty verdict is returned or Vick effectively plea bargains the charges down.  Additionally, since Vick can't be effectively replaced (ever!), suspending helps you protect the downside of losing the asset.  Suspending also helps you create the stance that you are tough on crime without judging the person before his day in court.  Cons - Not many.  You lose his services for the year.  Some stakeholders will fault you for not going all the way and firing him.

3.  Wait and See (no firing or suspension) - Pros - You get to use him for this year, maybe win the whole thing.  Cons - Everyone thinks you're soft on crime.  Distractions to the rest of the organization may result in worse results than available if you would have fired or suspended him.  Media circus ensues.  PETA and other groups demonstrate at every practice and every game.

The only choice that seems off the table to me is the wait and see approach.  Remember, the charges are in FEDERAL Court.  Last time I checked, the Feds don't miss often.  With that in mind, the picket lines are already getting warmed up, and would create way too much heat for an organization in the entertainment business to bear.  Wait and see doesn't seem viable.

My choice would be to suspend him until the charges are cleared or settled.  From an employer's perspective, this allows you to show you care to the public (and to your employees who are watching), but also allows you to hedge against your own legal exposure and protect the asset if cleared, etc.  I would take the time the suspension bought me to come up with a clear plan of what I was going to do if Vick was convicted, plead to a lessor charge, or was cleared.  Heck, I might even publish the If/Then to end the speculation if I was solid in what my approach would be.

Of course, suspension without pay - often an option for normal employees with legal issues - is probably not an option in the NFL.  That's life in the show - where this type of decision can cost millions instead of the thousands we are used to if you get it wrong.   

Office Politics - You Are Where You Sit at the Table...

True conversation between a younger HR Capitalist and a HR Capitalist mentor/boss:

Young HR Capitalist - (Sitting down for a meeting at a chair on the wall away from the  conference room table)

Boss - What are you doing?

Young HR Capitalist - Huh?

Boss - Why aren't you sitting at the table?

Young HR Capitalist  - I know we are having a lot of people here and I'm not really involved in this one, so I was going to sit off to the side where I could work a little, ya know?

Boss - Sit at the table.  Like a player, cause you are one.

Young HR Capitalist - Did you always sit at the table coming up through the ranks?

Boss - When I was an analyst at (Name of Company deleted), I got to meetings early, sat right at the middle of the table.  The VP's came in late, I dared them to call me out in front of the team.  (expletive deleted) them, get to the meeting earlier.  Like you now, moving up to the table (motions me up and stops talking and goes back to blackberry).

Young HR Capitalist - (Moving my work up to the table, turning off Blackberry to avoid temptation to check it and the resulting public humiliation.  VP's filing in see no open seats, glare at me in my non-VP-ness, then take seat on wall, making mental note to make life difficult for me moving forward.)

And so it goes in corporate America, where the type of office, the type of laptop, the type of phone and now, where you sit is all a part of your status and identity in the pack.  Business Week has a nice breakdown of the importance of where you sit at the table, including the following intro: 

"The client was a senior female executive at a major global company. She was hardworking, bright, and well-liked, but she had one big frustration: People often ignored her ideas at meetings.

After watching the woman interact with colleagues, executive consultant Constance Derick offered several suggestions. One of the most important: "I told her to stop sitting against the wall and sit around the table instead." Within six months, co-workers were commenting that she had more "executive presence and spoke with greater conviction," says Derick.

The moral of the story: Where you sit influences where you stand. If you take away their Brooks Brothers suits, Manolo Blank shoes, and BlackBerrys, managers are little more than naked apes--social mammals with primal methods of expressing group power hierarchies. Over the past few years, psychologists and consultants have begun to decode the secret meaning of office behavior and to understand one of the business world's deepest mysteries: Why do people tend to sit in the same place at routine meetings?"

Me?  I prefer the seat at the middle of the table.  If you believe the chart above from BW, that's in line with the HRness of the Capitalist.  Paid to mediate, using powers for good, not bad. 

Or maybe it's the best seat to stir things up from.  I can never tell....

Where do you sit?

Cool Culture Death Watch - Southwest Airlines

You're a HR pro, so you realize that a lot of the brands you love have cool workplace cultures behind them.  All together now!!   Let's name the brands we love with reported cool cultures!!

--Starbucks
--Google
--Apple
--Starbucks (I like coffee, and it's my blog, so I'm listing it twice)
--Whole Foods (except for the whole CEO spy blogging thing - check out the John Hollon blog for more)
--The Cable Company (Joking! Just seeing if you were still there!)
--Southwest Airlines...

Oops.  Apparently one of the giants in the workplace culture biz is stumbling.  Wire reports indicate that Southwest is doing what many never thought they would have to - offering voluntary buyout packages to trim their workforce.  Notes from the NY Times:

"Southwest Airlines is offering buyouts to about one-fourth of its employees in an effort to cut costs as the discount carrier heads into a period of expected slower growth.

Southwest, based in Dallas, said Tuesday it is offering $25,000 in cash as well as health and dental benefits to 8,700 flight attendants, baggage handlers and other employees. The offer was not extended to pilots and mechanics.

The workers have until Aug. 10 to accept the offers, which began showing up in their mailboxes on Monday, said Brandy King, a Southwest spokeswoman. She said the company did not have a target number of job or cost reductions it hoped to achieve.

Southwest — which reports second-quarter financial results today — faces rising fuel costs and contract negotiations that could increase its labor costs."

That stinks.  I've long been a SW flier, and my loyalty and love for the brand has continued even though the savings you get by flying SW really ceased 2-3 years ago when the other carriers woke up and slashed their fares to generate more volume.  The main reason for my loyalty?  The flight attendants and gate workers have always been about 90% happier and more enthusiastic than their peers at other airlines.

Normally, I would question voluntary packages over layoffs.  Don't your best end up taking the cash and leaving with voluntary packages?  I hope that kinder, gentler approach allows Southwest employees to maintain their enthusiasm, content with the knowledge the company opted to go with the most friendly approach.

May we all continue to hear flight attendants from SW get on the loudspeaker with limericks....

Should You Fire a Laggard to Give Your Stars More Than A 5% Increase?

First up, let me disclose - I'm not a big forced ranking "up or out" guy.  What works for GE has painfully failed at other places, most notably Ford.   I would prefer to institutionalize coaching tools and systematically try to raise the performance of all employees.

Of course, the painful reality for most companies is that we deal with limited resources.  With 3% to 4% budgeted across the board for merit increases, our choices are limited.  Either give merit increases with little variability for low vs. high performers, or take the tough medicine - giving no or very limited increases for your lowest performers so you can pump up the available funds for the stars.

Last week I riffed on projected 2008 merit increase budgets, then asked Ann Barnes of Compensation Force to pitch in with some data about how the same companies polled on their merit budget expectations might distribute the funds to low and high performers.  The highlights from one of Ann's links:

--The typical salary increase for low performers (employees who only partially met expectations) is 1.5%

--The typical salary increase for high performers (employees who far exceeded expectations) is 5.0%

As Ann concluded, these findings do expose a general unwillingness - or inability - to truly differentiate pay at most organizations.

So now for the tough love logic check.  Let's say you had 100 employees, earning an average of $50,000.   Knowing that your top 10 employees out of this group (highest rated at an overall "Exceeds" rating) were heavy contributors, you would do your best to give them 5% or a $2,500 annualized increase.  If given the power, would you trim one position you couldn't backfill (savings of $50,000) to redistribute that income to your top 10 performers, giving them an overall increase of $7,500 or 15%?

Yes?  Heck Yeah?  Then why aren't you doing that?  Simple answer - we don't really know who the best performers are or can't prove it.  That's why we are constrained by the merit budget and can't bear to give less than a 2% increase to a low performer.  We can't prove it and even if we could, most of us don't want to deal with the conflict of telling someone they aren't getting an increase.

Denial - not just a river in Egypt.  Time to work on your Performance Management system.   

When Personal Chefs Get Pregnant and Get Fired....

My domestic issues - Get the grass cut.  Get the Kids fed and to bed.  When do the windows need replaced?  How much is that going to cost?

Domestic Issues of Sting (from The Police) and his wife Trudy - Our personal chef of 8 years is pregnant and needs some time off.  Time to get a new personal chef!

See the difference?  Another difference - I didn't get sued for discriminating against pregnant domestic workers and directed to pay $51,000 to close the claim.  From the AP:

"An employment tribunal ordered Sting and his wife, Trudie Styler, on Tuesday to pay a former chef $51,000 in compensation after she won a sexual-discrimination claim against them.

Jane Martin, 41, won her claim in May. She said she was fired after she became pregnant.

At a hearing earlier this year, Martin said she had worked for the 55-year-old pop star and his wife for eight years, cooking meals for them and guests including Madonna and Elton John.

She said Styler grew unhappy with her after she became pregnant in 2005, making her work long hours and growing angry when she took time off work because of illness.

Martin, who accused Styler of having a "grandiose ego," left her job under disputed circumstances in April 2006."

I'm in the wrong business.  You know you have made it when your have personal chefs suing you and you lose...

Which all begs how they delivered the news once they decided to let her go.  Did they deliver the news face to face?  Or was it a Message in a Bottle?

The HR Capitalist: Building HR Egos via the "Name Your Intro Music" game...

As a general rule, HR people aren't very egotistical.  Gotta play it by the book, check the policy, etc.  Safe.  Fuzzy.  Paid to mediate.  When's the last time you saw a mediator (or HR Generalist) pull into the parking lot with Mettalica on "10" on their Sanyo system?  Never! (disclosure - I turn mine down at the same time I hit the blinker into the parking lot - but it's Soundgarden).

Well, it's a new day here at the HR Capitalist.  In my first installment of HR/Talent Professional Tag, I am challenging the profession paid to play it safe (that's you, HR and Talent Management Professionals) to list your "Top 3 Songs You'd Want For Your Intro Music".

What the ____ is the Capitalist talking about?  We had our annual corporate baseball outing last Friday, and I was refreshed with one of my favorite baseball traditions - the members of the home team in the minors and majors get to pick the music that plays as they approach the plate - usually a 20-30 second clip of a popular, but rocking, tune.   As a result, we played my favorite game - everyone got to come up with 2 or 3 tunes they would blast if they were the ones approaching the plate.  Team building at its best...  See notes on the intro songs used by players in the big leagues and the story behind their selections here...

Very Cool...  So, what would your song be if you could blast music over the intercom as you were entering the conference room, getting ready to do a disciplinary action or simply walking down the hallway?  Bring your "A" game, my HR brothers and sisters...

The rules for this version of HR/Talent Professional Tag:

1.  Any type of music can be used - but it has to rock and pump up the blood of the people around you and let them know a little something about how you like to rock/jam/line dance...

2.  Leave your Top 3 on the comments to this blog entry along with an explanation of why it rocks and is representative of how you rock...

3.  If you feel so inclined, email this link to at least 2 larger than life HR/Talent Management people and tell them to "bring it" in a similar fashion...

4.  Bonus points - if your arch rival was walking into the same conference room after your entrance and you wanted to deflate them, what would you play? (note - visiting players in baseball generally don't get to pick their music, it's provided for them with an intent to embarrass - think "Air Supply", etc.) 

I'll get the party started by inviting the usual cast of characters at the Carnival of HR to chip in and tag others.  This contest is OPEN, so if you are reading this, hit the comments and give us your anthem!!!

I'll rank them in a closing post in a few days.  To get it started, I'll give you a glimpse of where I am going - Dee Snider and Twisted Sister's "We're Not Gonna Take It" anyone?  Perhaps Nirvana's "In Bloom"?.....

Connecting with Co-Workers - They Don't Care If You Have Kids...

One of the biggest traps to work/life balance at any company is the subtle pressure between those who have kids and those who don't.  Not everyone with kids plays it totally cool like Will Smith in the Pursuit of Happyness.  Stop me when you haven't heard one of these scenarios:

-Boss without kids exerts subtle pressure on those with kids to miss kid's events, putting premium  on face time...

-Boss with kids dumps the after 5 work on those without kids...

-Co-worker brings kids to office for built-in babysitting WAY too much... Or talks about them WAY too much..

-Co-worker with no kids and no spouse breaks down social order of workplace by sleeping around the office, missing work due to hangovers, talking without end about the bars they are going to hit after work...

-Wait, that last one applies to co-workers who are married with kids as well...

Anyway, you get the general vibe.  What's at play here?  Whether you are single, married, with or without kids, having a sensitivity for the circumstances of others (especially if you are a boss) and what you are projecting (especially to your co-workers and your boss) is key to making relationships positive in the workplace.

Case in point - this rant by a blogger named The Gal at Fast Company:

"I am not saying that you cannot talk about things that are important to you. In fact, by doing so, you can bring people closer. But be mindful - it takes two to make a conversation. You can have all the creds in the world to do a particular job, but you might be sabotaging yourself from real success just by one small detail in the what you're unwittingly putting out. Bit like having awful BO but being a brilliant hairdresser. You might find yourself relegated to clipping poodles, at least they'll love you to death.

So spare us childless wonders your kiddie talk, and I promise I'll spare you the tedium of eating guinea pig in Peru or slumming it in 4-star converted fortresses while biking across Italy."

Wow... That rant is OFFICIAL... That would make me think twice about using the assumptive close on her as my boss with the old standard, "I'm cutting out at 4:30 so I can make my son's baseball game, but I'll be back online later tonight..."  But then again, that's probably all she would hear about my kids, and that's probably the point from a balance standpoint....