Admittedly, the Fair Labor Standards Act of 1938 needed to be updated to accommodate a world that is wholly different than the one the bill was written for so many decades ago. Computers have entered the mix as well as the increasingly large amount of workers involved in service industries such as finance. But the law as it stood was still a fully functioning umbrella for workers.
Perhaps a little history would bring the changes recently enacted by the Bush administration into perspective. The Act, often abbreviated to FLSA, sought to regulate overtime and compensation pay, minimum wage, child labor, and while overseeing equal pay and record keeping. In other words, the FLSA is the human resource arm of the federal government. Employing thousands of workers themselves, the government choose not to apply the rules to federal workers until 1976. It was the cost of government that spearheaded this action making the White House action the template for future employer/employee relationships.
The changes enacted will regulate overtime compensation for millions of employees. The questions left unanswered range from who will be affected to will it affect me? In all likelihood, the revisions to the act will have a trickle down effect that will eventually find its way into future union negotiations providing employers with new weaponry in the ongoing battles that take place between labor and management.
It is estimated that 1.3 million workers will now be eligible for overtime. These workers currently earn less than $23,360 will now be able to claim compensation for a longer work week, which is the smiling face the President and Labor Department have applied to the changes. Workers earning in excess of $100,000 would no longer be eligible to receive compensation for hours in excess of forty per week.
According to the administration, the only workers that will feel the effects of the changes, the result of hundreds of pages of rule changes, amount to less than 107,000 workers. But the vagueness of the rules are open to employer interpretation and because of this, the number is far too low.
But the Economic Policy Institute, a liberal think tank disagrees with these low estimates suggesting that the real effect of the changes will be felt by over six million workers. The workers in question are low-level salaried managers who could not easily be categorized as managers or workers. This overhaul seeks to clear that issue and in doing so, unnecessarily opens the door for similar changes on labor contracts in the future.
Union workers who are currently under contract will see no immediate changes. Future negotiations will, however focus on the new rules as a new bargaining tool during the next contract meeting. Expect this change to be tabled by employers looking to expand the amount of low level managers in the workplace, revising how they look at employees who have certain designated responsibilities. Interpretation of the new rules will effect many low level managers who currently are not protected by unions and make the psuedo-promotion of similar workers more prevalent.
At Arm's Length: 08.24.04
Someone called it an intellectual exercise. Some folks have said that the lack of pricing power at the pumps (gas actually has come down) proves that the current move towards $50 a barrel for oil is really not much more than speculation.
In the coming months, there will be added pressure on mutual fund investors both long term and short term. No there isn't another scandal brewing but if there was, the cleansing would be still welcome. In my opinion, each time some law enforcement official from Spitzer to the S.E.C. closes in on the trail of some scoundrel committing legal larceny, I cheer. I only wish that they would use the same protocol awarded all victims, notifying them before the public. While these pursuits are justified and of great concern, what will have the greatest impact on investors in the coming quarters will be valuations.
Valuations are used by the industry to compare their stock picking prowess to similarly invested funds, usually an index fund closely related to their style. If an index such as the S&P 500 is used, it is widely believed that the fund invests primarily, if not solely in large capitalization companies. Capitalization is a word used to explain the worth of a company based on stock outstanding and price of that stock.
But the wary investor should be on the lookout for unfair comparisons. This is nothing new in volatile environments, your fund manager will tell you as they try to explain why their work was sub par. An environment like this, if you think about it, should be to their advantage. How often have you heard the expression "stock picker's market" used when describing the last several weeks? Your fund manager is considered a stock picker, who, albeit governed by charters that restrict some investment moves, should be able to eek out a return even in uncertain market conditions. As many of you have heard on your television, "there are opportunities out there".
So why will your fund managers be backpedaling come the end of the next quarter? To do so would be to admit that the fees they charge are out of line with the job they have done. When an investors does sector wide comparisons, it usually the fees that create the difference between beating the comparative index and not. The argument goes something like this: If an investor buys as large cap growth mutual fund and holds that fund for ten years and in that same year, purchased an index fund, holding on to it for the same decade, the index fund will have outperformed the growth fund by 1.7% according to Standard & Poors. Doesn't sound like much to some of you, but that is a lot of potential gains lost year over year because of fees.
Each year, an actively managed fund is handicapped by the fees they charge. If your fund is charging 1.3% in management fees, the manager must better the index, usually a fund with a bare minimum of fees averaging close to .25%. That puts him down 1.05% to start. Add in a rocky market governed by growing uncertainty and you will have lost before you have begun.
But it doesn't end there. While these fees will prove too heavy a burden to pay if the markets begin to turn into single digit earners, bubbling to the surface during such an event will be all of the other fees not listed under total expenses. That ratio does not include the cost of buying and selling stocks within the fund. The more actively managed the fund, the higher these commission costs, which are taken from the performance side of the equation. The net effect of trading actively, according to Lipper, inc. can cost as much as .40% of the total return.
The domino effect of higher fees continues to weigh against investors chances as old investors cash out as often happens when funds turn in less than expected returns without new investors replacing them. This creates increased turnover and cash sensitive positions.
While questions have arisen regarding the strength of index funds in a bull market, no one sector's averages have been able to beat the indexes over the long term. The tired old mantra of low fees and expenses will pay dividends for investors who have let the stock pickers struggle as they patiently invested through the high and the low.
In other fund news that will be good for all investors concerned, the S.E.C. has made the practice of directed trading illegal. The use of brokers for trades by fund managers was previously a legal transaction. What the Security and Exchange Commission took exception with was the practice of rewarding brokerages for selling their funds as part of their services. Instead of looking for the best price and execution, the practice often led to higher fees for shareholders.
And wouldn't we all like to know more about what our fund managers are doing? Say yes, of course we would.
Recent scandals have uncovered some serious conflicts of interest as fund managers can control other funds for different clients. Managing a hedge fund for wealthy investors as well as a mutual funds for the less wealthy presents ethical questions in terms of trading times, research, and profit taking, often at the expense of the common shareholder. The S.E.C. also required the fund managers to disclose this cross over employment, compensation and whether they have a stake in the stocks of the funds they manage.
While these measures should have been self policing issues, the temptation to create wealth is often centered on the manager first with the investor coming in second. That's too bad and with any luck, these and other regulations will put the investor at ease about the folks who are managing their nest eggs.
The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.
It is the World of Money and Investing Explained.
Our Publication
If you are interested in providing your readers with our syndicated column, you can request it here
