By John W. Schoen
updated 4/26/2004 12:00:14 PM ET 2004-04-26T16:00:14

December 26, 2003

A lot of things in life aren't fair, and this week, Answer Desk readers are wondering why. Mary in California thinks the credit card industry's scoring system doesn't add up. And Bill in Massachusetts is irked by a tax law that doesn't make sense.  

As always, if you'd like to write to us, please include your first name and hometown.

What's the score?

There is a lot of advice out there about how to correct inaccurate information on your credit report. But what if you think your scores are just too low without any of the information being inaccurate? How do you go about checking if your scores really are representative of your credit history?
          Mary K. -- San Clemente, CA

In the good old days, you could go to a banker in person and convince them you were a good credit risk -- even if they'd heard from your neighbors that you were a deadbeat. Unfortunately, credit agencies have developed a scoring system and sold it so well to creditors (banks and credit card companies) that most lenders rely heavily -- make that almost exclusively -- on the numbers. So, while there may be circumstances that the scoring system doesn't fully take into account, you'll have a hard time changing the system.

But you still have the right to tell your side of your credit story. Even if the information in your file is accurate, it may not be complete. And the law requires that information you provide be included in your report.

If you're denied credit, ask why. If you think you have a legitimate explanation that would prompt a lender to reconsider, write it up (the shorter and more concise the better), and send it to the lender with copies to the three major credit agencies. Wait a few weeks and call back. Most lenders stick pretty close to the scoring system, but it's worth a shot.

You never know.

Tax Fairness

The company I work for went bankrupt last year, and took almost all the money I had invested in my 401(k) account with it, as it was mostly invested in the company stock. I've been told that I will not be able to claim a tax loss because it is in a 401(k). However, as I understand it, if I had registered a gain I would be taxed on the gain at the time of withdrawal.

I'm wondering why the gain is taxed in 401(k) accounts, but the losses are not allowed. It seems that if I invest $10,000 in a 401(k) and it appreciates to $20,000 by the time I withdraw it, I pay a tax on that $10,000 gain. But if my initial investment of $10,000 drops to $2,000, I cannot  claim a tax loss of $8,000 to offset other gains.

If this is true, it seems unfair. Am I missing something, or is it just that?
          Bill K. -- Cambridge, MA

Major Market Indices

No one ever said the tax law was fair. But in this case, you are missing an important number you need to consider before you decide just how unfair it is.

The number you’ve overlooked in your example is the tax you would have paid on the income you contributed to your 401(k). If you were in the 25 percent bracket, for example, you saved $2,500 by investing that $10,000 – the tax you didn’t pay on that income, which is also money you won’t have to pay when you retire and begin withdrawing from your account, whether or not your 401(k) investment gained or lost money.

In other words, even if you lose $8,000 of that $10,000 investment, you’ve still gotten a $2,000 tax break – the tax you didn’t pay on the $8,000 of income you contributed, and then lost. The thinking behind the law here (to the extent there is ever any thinking behind our tax laws) is that you shouldn’t be allowed to use that loss for yet another tax break. (And your 401(k) tax break is a better break than you'd get on a capital loss, which would only save you the 15 percent tax on capital gains -- in this case $1,200.)

This assumes, by the way, that you contributed only pre-tax dollars to your account. If, on top of those, you contributed after-tax income and your entire savings were wiped out, you might be able to claim a deduction on the after-tax money you put in  because you didn’t get a tax break on those contributions in the first place. But in your case, you still have some money left over and, you guessed it, the IRS will say those are your after-tax dollars, so you can’t book the loss.

December 19, 2003

With year-end approaching, stock investors look to take their losses in hopes of cutting taxes by offsetting stock gains. But Wallace in New York City wants to know: What do you do if the stock is worth absolutely nothing? Jen in Los Angeles wants to know if it's time to refinance her home mortgage -- even if she just got one that's a few months old.

Worthless stock

Can you salvage anything from a stock that loses all its value and is no longer traded, other than just a pile of worthless paper? Can you use it as a loss on your tax return?
          Wallace W., New York City

You could always frame the certificate and hope that, one day, you’ll have a valuable “collectible.” But yes, the losses you book on a stock can take some of the sting out of your tax return. There are a few things to keep in mind.

First, you can’t claim the loss until you finally throw in the towel and sell your worthless paper. But if it’s truly worth nothing, you'll probably have trouble finding a buyer. If so, you may need a letter from the company’s investor relations department stating that the company is, in fact, kaput.

Once you’ve sold your losers, your loss is whatever you paid for the stock, minus any commissions and any proceeds from the sale. To get a tax break, however, you’ll need to offset gains from other stocks – and you can’t claim those gains until you sell the winning shares and book the profit.

If you think your “worthless” stock may some day rise from the ashes, you can book the loss and then buy the stock back, but you’ll have to wait 31 days to buy it again – otherwise you’ve made what’s known as a “wash sale” and you can’t use those losses to offset gains.

You also can’t mix gains and losses on long-term assets (held more than a year) and short-term assets (held-less than a year).

If you don’t have enough gains to offset your stock losses, you can claim up to $3,000 in stock losses against ordinary income in any year. But you’re allowed to “carry over” losses from prior years and apply them to future taxes.

For details and tax forms, see the IRS Web site.

Seize their assets

If these mutual fund companies made their money illegally, why aren’t the assets frozen? If you’re a drug dealer, you made your money illegally and the government takes everything because you made the money illegally, right? So, tell me the difference between the two? And when these companies are found guilty and fined, what about the people who invested in these companies? Do they get their money back? Where does that money go?
          Cyndy H., — Milwaukee, Wisconsin

I nominate you to be chairman of the Securities and Exchange Commission. Your way of thinking would go a long way to preventing mutual fund managers from ever stealing from their customers again.

Unfortunately, the SEC is run by lawyers, and they have a way of making things a little more complicated.

First of all, the there’s a big difference between the laws currently on the books that cover securities fraud and those governing the sale of drugs on a street corner. Most securities cases handled by the SEC involve civil, not criminal, charges. When the SEC wants to press criminal charges, they refer the case to the U.S. Attorney’s office in New York.

The SEC almost always, however, slaps fines on people who break those civil laws. When a company settles and agrees to pay it (or fights it and loses in court), that money goes directly to Uncle Sam, specifically the U.S. Treasury Dept. The idea is to make it costly for someone to commit fraud.

The SEC can also ask for “disgorgement” of money that was stolen (known in SEC-speak as “ill-gotten gains”) and then try to give it back to the people who were defrauded. Unfortunately, returning the money to people who were bilked is a little more complicated than giving a stolen wallet back to its rightful owner. How do you prove who lost money? And how much should they get back? With stocks and mutual funds, a lot depends on when you bought and sold and how long you held the shares. The cost of accounting for all those transactions can quickly eat up a lot of the money that’s supposed to go to the fraud’s victims.

When the SEC sets up a “restitution” fund to pay back investors who were scammed, each fund is managed separately. Unfortunately, there’s no Restitution Hotline you can call.

You can, however, go to the SEC’s Web site, where you’ll find a list of current claims being paid to investors. If you don’t see your investment there, call the SEC Investor Assistance line at 202-942-7040 or email them at If that doesn’t work, contact the regional SEC office in your area.

Morgan Stanley refunds?

Please advise who I should contact regarding funds I have with Morgan Stanley in Red Bank, N.J. I do not have a lot invested, but the fees I have been charged are not to my understanding.
          Anne P. — Parsippany N.J.

In the case of Morgan Stanley, which paid its brokers bonuses to steer investors to high-priced funds without telling those customers, you may be in luck. The $50 million fine the company agreed to pay to settle charges will go into a so-called Fair Fund — all of which will be paid customers who bought “preferred” fund shares from January 1, 2000 through the present.

These shares were not Morgan Stanley funds; they were part of a “partners” program involving 16 other mutual fund companies. Unfortunately, the SEC won’t name those funds because the companies are still under investigation. So how, then, can you know if you qualify for a refund?

For now, you don’t. The SEC has ordered Morgan Stanley to set up a distribution plan, which will then pay investors who qualify. The odds of collecting are pretty good: some 7 million transactions involving about 2.7 million customers are covered by the plan.

(A smaller group of investors, about 7,000, will be eligible to convert higher-priced B shares for A shares. But you only qualify if you bought $100,000 worth of those shares.)

Merri-Jo Gillette, who oversees enforcement actions in the SEC’s Philadelphia office, says the best you can do for now is to contact Morgan Stanley, make sure they have your current address, and then sit tight until the distribution plan is worked out. Since they’ll be handling the distribution, you’ll want to make sure they know where to find you.

Fund manager paychecks

Is there any way to determine the compensation, direct and indirect, of mutual fund officers and managers of particular funds? That information does not appear in their prospectuses or on their Web pages or any of the annual reports they provide. Does the new House legislation require such disclosures?
          Bill — Albany, GA

No, it doesn’t. As you point out, mutual fund investors are completely in the dark when they try to find out how well their fund’s manager is getting paid.

“To me, the really appalling part is that we can’t find out what the manager’s bonus is based on and how much they have in their funds,” said Russel Kinnel, a mutual fund analyst at Morningstar. “We’ll know Congress and the SEC are serious about reforming funds when they start to require this information.”

Apparently, Congress isn’t there yet. The Mutual Funds Integrity and Fee Transparency Act (H.R. 2420), passed by the House this week, makes a half-hearted attempt to address this issue - by requiring funds to disclose how they decided how much to pay their fund managers. But they don’t have to come clean with the size of those paychecks. The Senate is just getting started on its version of the bill, S.1822, which has similar language which talks only about disclosing the “structure” of fund mangers’ compensation.

And even if Congress hears from all of you Answer Desk readers demanding tougher disclosure requirements, any such law has to get past the mutual fund lobby, one of the nation’s most powerful.

“They will be out in full force,” said Sally Greenburg at Consumers Union, “although they’re running for cover now.”

For more on HR 2420, check out the House Financial Services Committee Web site.

Are my funds ok?

I’d like to know if any of the mutual funds in my 401(k) plan are under investigation. The record keeper for our plan is Prudential. Here is a list of the funds: [fund names deleted].
          Robin D. — Manchester, NH.

At the moment, it’s impossible to say. The SEC and New York Attorney General’s office have sent warning letters to hundreds of funds saying they may be a target, but until formal charges are filed — let alone proven to be true — you have no way of knowing whether your fund will be dragged into the mess. The risk now is that, if you shift money to a new fund, that fund could end up in the headlines tomorrow.

The SEC says it believes about 1 in every 4 funds may be involved in one of the abusive trading schemes that are the focus of the broad investigation. But since federal regulators were so far behind the curve, Washington has a lot of catching up to do. It may be awhile before it can sift through all the evidence to determine which funds are guilty and which ones aren’t.

If you’re invested in one of the funds that has already admitted they let professional traders profit at the expense of small, long-term investors, you may want to sell your shares just to be rid of the bums. If you’re considering moving your money, but still believe mutual funds are the way to go, the safest thing is to stick to basics. Look for mutual funds with the lowest fees and consistent management (recent changes are a red flag). And avoid funds that have a high “turnover” rate — they drive up fees by moving in and out of stocks.

What is the risk of holding on? If other shareholders bail out of your tarnished fund in large numbers, the fund manager may have to sell stocks faster than they’d like. That means you may get hit with a bigger capital gain that you wanted or expected. And tarnished funds that lose assets quickly will have to spread costs over fewer shareholders, so the your fees may go up. Funds with a bad name will also probably have trouble getting — and keeping — their top performers.

But keep in mind that you’re much less likely to lose a bundle holding a fund that’s the target of the current investigation than you would have lost by holding, say, Enron or Lucent stock. That’s because, for most of these funds, there’s still nothing wrong with the stocks they hold. Even if the fund has to liquidate, it should still be able to raise plenty of cash to pay shareholders.

Finding fund fees

Why, whenever I have a transaction for either a mutual fund or stock, do I buy it for the high price of the day and sell it for the low price of the day. Is the SEC monitoring these specifics or is this something that the government should also look at? Is this another can of worms for the worms?
          Duane R — Chicago

The difference in the two prices you’re referring to is the “spread,” and it represents the commission that is paid to the broker who executes your trade. In theory, buyers and sellers could be matched electronically. But as long as the trades are handled by human beings, they have to get paid somehow.

While fees are regulated, they vary a great deal, and high fees can quickly sap your fund of any investment gains. The NASD limits sales loads to 8.5 percent, for example, which is more than many funds are making these days.

The “spread” is one of the most visible fees: You just compare the “bid” (the price you’ll pay to buy a share) and the “ask” (the price the seller gets) and the difference represents a commission you pay. You may pay a “sales load” — the broker’s commission — on the front-end (when you buy) or back-end (when you sell) or both.

But the “spread” is only one of the costs you’ll encounter when you invest in mutual funds. The problem many individual investors have is figuring out just how much they’re paying — and where all these fees are going. That’s one of the ways that New York Attorney General Eliot Spitzer wants the industry to clean up its act — by making it much easier to figure out what you’re paying.

Until that happens, you’ll just have to dig further to find the other fees and expenses buried in the fund’s prospectus — that mind-numbing document written by lawyers that fund companies know you’re just going to throw away.

Each time the fund manager buys or sells a stock in your fund, for example, there’s a commission paid to whoever executed that trade. Funds with high “turnover” — heavy trading of its portfolio — will pay more in commissions that more stable funds. You may also be charged so-called 12b-1 fees for expenses like advertising and marketing — for all that useless junk mail your fund sends you every month trying to get you to buy other funds from the same company.

The list goes on; for details on other fund fees you may be paying, check out the Securities & Exchange Commission’s explanation.

One of the easiest ways to compare funds is to look at the so-called “expense ratio.” Though not all fees are covered, this is supposed to tell you what percentage of the funds assets are being used to pay fees and commissions to the fund manager and the various traders and brokers who get their cut. The higher the expense ratio, the more likely your fund is to lag other funds in its category, because there’s no connection between the level of fees you pay and the funds performance. In this case, you don’t necessarily “get what you pay for.”

Am I trapped?

What do you think of letting victims of the current mutual fund scandal pull their money out (even if it’s an IRA) with no penalties? Otherwise, they are somewhat trapped in a no-win situation.
          Donna — San Antonio, Tex.

You can move money from one mutual fund to another without penalty as long as you keep the money within an IRA. Some brokerage IRA accounts let you to buy and sell from a variety of fund families within that account. If your IRA account is “captive” to a single fund family, you can “roll over” the money into a new fund IRA within 60 days and not owe any taxes or penalties.

For more on how to roll over your money to a new fund, check out IRS Publication 590.

Forced 'vacation'

My company is forcing its employees to take 6 days vacation in order to affect the bottom line. Many employees must take the time without pay because they do not have enough vacation hours accrued. Did the company break its contract with the salaried employees and revert them to hourly ones? If so, are the employees entitled to be compensation for overtime since their date of hire?
          Tres H. — Columbus, Ohio

When looking for answers to legal questions, we usually turn to the lawyers. Unfortunately, that means the answer isn’t simple, but this one may help you to get paid after all.

First off, is the “contract” you refer to a personal services contract? A collective bargaining agreement? If so, you need to check and see if the issue of involuntary, unpaid “vacation” is covered under those agreements.

If not, the question of whether you’re an hourly or salaried worker really doesn’t apply, according James Katz, a Philadelphia labor lawyer. And neither you nor your employer are free to designate you arbitrarily as an hourly worker, and thus eligible for overtime. That status, says Katz, is determined by the Fair Labor Standards Act and depends on a host of job characteristics, including how much you make, your level of skill or education and how closely you are supervised by a manager.

There may also be state laws that apply to the issue of involuntarily, unpaid “vacation.” (We made several calls to the Ohio Dept. of Labor but were unable to get an answer.)

But if you want to get paid for your “vacation,” Katz suggests you try filing for unemployment insurance.

“You can call it what you want,” he said, “but it’s really a layoff.”

You may be ineligible for payment if the waiting period is longer than a week. But it’s worth a try: If your claim is accepted, your employer will have to kick in to cover part of the cost of your claim.

And if you’re successful, it might discourage the company from pulling this stunt again, said Katz.

“If an employer decides to shut down a plant to save money, they may think twice about it if it’s going to increase their unemployment insurance costs,” he said.

Old $20 bills

I heard that the old $20’s would be unusable. Is this true? Are the old $20 bills still going to be in circulation, or will we have to change any old bills for new ones? If so, do we have a time limit?
          Dawn S. —- Denver

Not true. The old $20s are good forever. Over time, the Treasury will pull the old ones out of circulation, but you don’t neet to trade them before any set deadline. The average “lifespan” of a $20 bill is about two years, but you’ll no doubt still see them in circulation for years.


Ever wonder what a P/E ratio is and why it's so important? Are you confused about the official definition of a recession? And just what the heck is a derivative? We're here to give you the answers.'s weekly feature "The Answer Desk" helps you make sense of business, the economy and investing. So send along your questions to and we'll try to get you the answer. (Please include your home town with your question; we'll only include your first name if we use your question.)

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