Financial Answers "IN SIMPLE LANGUAGE"

 

As a reader of In Simple Language you may have noticed that I often quote information from surveys on various financial topics.  A lot of these surveys are done by non profit think tanks and give a real life version of what is going on.  They actually interview real people in the real world.

 

The Survey

 

This particular survey was conducted in late March of 2009 and involved people who were employed or retired between the ages of 25 and 70.  This survey, once again, points out the disturbing fact of how most people are not knowledgeable when it comes to understanding investments.  The results were not shocking to me because I have been ranting and raving about the lack of financial education for many many years.  This is just more ammunition to prove how lacking our educational system is in providing basic financial education in our public schools.

 

This survey was conducted by Chicago based Envestnet Asset Management Inc. and Evansville, Illinois based Behavioral Research Associates LLC.  There were 251 respondents to the survey.  That is not a lot of people but based on the results it is still an accurate depiction of the lack of financial knowledge… at least as it relates to target date mutual funds.

 

What are Target Date Funds?

 

When target date funds were first made available to the public they may have been promoted as the end all be all for retirement plans.  As we have found out in the last twelve months that couldn’t be farther from the truth. 

 

Simply speaking, because that is what we try to do In Simple Language, a target date fund is a mutual fund composed of stocks, bonds, and cash that invests more and more conservatively as you reach a predetermined retirement date of your choose.  It is supposed to protect your investment by becoming more and more conservative as you approach that retirement date.

 

This is not what we have seen in the various target date funds that In Simple Language looked at.  Nor is this what was seen by the target date funds that congress looked at.  Congress is taking it a step further and is investigating several target date fund companies looking for answers on why they lost so much money for so many people.  And why these target date funds were aggressively invested in the year that they were supposed to be very conservatively invested.

 

Let’s Look at some of the Results of the Survey

 

Of the 251 respondents surveyed less than 6% (15) had even heard of target date funds and even those people didn’t describe them accurately.  Many thought that the purpose of the target date fund was to set the date of your retirement based on the date of the fund and they could be sure that that’s when they would be able to retire.  38% of the respondents thought that target date funds would produce a guaranteed rate of return.

 

Before I go any further let me make one thing perfectly clear.  Nothing, except death, is guaranteed in life.  There are no guarantees in investing.  Even the guarantees issued by the U.S. Government are only as good as the ability of the government to repay your money.  So if you don’t get anything else out of this post except this, remember “Nothing, nada, no investment is guaranteed”.

 

Okay back to the survey.  About one third of the respondents felt their money would grow faster in target date funds.  It doesn’t say why they felt that way.  It may have to do with the way the funds were marketed.  Who knows?  Almost another third of the respondents felt that target date funds were structured so that they could save less and still meet their retirement needs.

 

About one fifth of the respondents felt that they could not lose money in a target date fund.  What we have here is a huge lack of financial knowledge.  Yes, a target date fund is different than a regular mutual fund.  But it is still a mutual fund and until people learn and understand the basics of investments this situation is going to get worse not better.

 

If you are serious about taking care of your financial future or your loved ones then it is imperative on your part to educate yourself about financial matters.  This will not only help you make money in investments but also protect you from the likes of the Bernie Madoffs of the world.  And less face it.  There may be a Madoff lurking around every investment corner.

 

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Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media now at (502) 569-1714.

 

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Our defined contribution plans better known as 401k plans are once again in the financial limelight in Washington.  This time instead of the politicians calling for reforms we have some heavy hitters in the financial industry all abuzz about doing something to fix the current 401k program.

 

Who’s really Benefitting with this Plan?

 

If you have been following In Simple Language for the last couple of months I have spent much time and taken much effort to write several posts on defined contribution plans and what the politicians have been saying they want to do with 401k’s….which is get rid of them. 

 

I am not in favor of getting rid of the 401k program.  I am in favor of fixing it.  We now have some financial heavy hitters getting involved.  Robert Reynolds, president and chief executive officer of Boston-based Putnam Investments has jumped on the bandwagon to make some changes to the 401k program.

 

Mr.  Reynolds has outlined a 10 point plan-not that I could find-to fix the 401k system.  One thing he is urging is requiring employers to enroll all their workers in the plan.  And also increase employer contributions to plan participants over time on an ongoing basis.  Mr. Reynolds’ firm manages approximately $99 billion in 401k assets.

 

If I remember correctly, when we had the mutual fund scandal a while back Putnam investments was being accused of manipulating their funds in the company’s favor to the detriment of their customers.  I believe they were buying and pricing mutual funds “after” the market was closed.

 

Do we really need this type of company making suggestions on how we can make our retirement accounts better?  And here is more food for thought.  If companies are required to make employees automatically enroll in the 401k program and require automatic increases in their contributions the mutual fund companies, like Putnam, acquire more mutual fund assets and therefore make a lot more money when they charge their fees for managing that money.

 

Does this sound like a fair and unbiased way for the 401k system to be fixed?  It seems to me that the ones that will benefit most are the financial services companies again.  Yes, the financial services companies have made some good suggestions on improving the 401k program.  The guaranteed income option is one of them. 

 

However, I think we need more independent thought as to how all of this will work.  The mutual fund companies have everything to gain and not much, if anything, to lose.  It is almost the same ole same ole.  I don’t want that to happen.  The 401k program needs to be fixed right for the benefit of the participants first and foremost.  If that is not acceptable to the mutual fund companies then they can take their arrogance and go somewhere else.

 

Listen to this One

 

So let’s bring another expert in on the 401k fix.  Roger Ferguson, Jr., president and chief executive officer of the $276+ billion New York based TIAA-CREF and a past vice chairman of the Federal Reserve, is also in favor of the automatic enrollment feature.  He is also in favor of the annuity option, which would give the participant a guaranteed income.

 

Guess what TIAA-CREF does?  It handles 403b programs. This is the 401k counterpart for the non-profit market, where the vast majority of money invested with TIAA-CREF is in annuities.  Now I am not saying that there is anything wrong with this but I have to question the ulterior motive of these financial experts in the solutions that they are suggesting to congress.

 

My Solution

 

Just like every other company in corporate America, the top executives are removed from the real world by all the firewalls and gatekeepers they put up to protect themselves from the common folk.  That removes them from the real world and real world answers.

 

Have financial professionals out in the real world-practitioners who are dealing with the people face to face every day that are going to be directly affected by these ideas-sit on a committee to decide how the 401k program can and should be fixed.

 

There is a lot more expertise out in the trenches on 401k programs then there is in the boardrooms of corporate America and hallways of congress. Although they would disagree with that.  All we have to do is get past the egos and politics to get the 401k program fixed the right way this time.  Let’s all wish ourselves good luck.

 

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

 

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Thank you for taking the time to visit In Simple Language.  J 

  

Copyright © 2008-2009  “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media now at (502) 569-1714.

 

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Member One Southern Indiana Chamber of Commerce

 

 

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I really hate to be the purveyor of more bad news.  However this is something that you need to be aware of.  I have talked about the different types of pension plans in previous blog posts…the defined pension plan where your employer defines what you will get when you retire and the defined contribution plan where you define or tell your employer how much you want deducted from your paycheck, which is a 401k plan.

 

Let’s Talk About the Defined Benefit Plan

 

I suppose we all should have known that something like this was likely to happen considering all of the companies that have been going out of business.  Unfortunately congress has been aware of this problem for a long time and in my opinion hasn’t done squat about it.

 

The problem is called an unfunded or underfunded pension liability.  What this means is your company’s defined benefit pension plan-that you are relying on to live off of when you retire-is either being underfunded by your company because they don’t have all the money.  Or it is being unfunded by your company because they are not putting the money into your plan like the law says they have to.

 

What we are finding out today is that there are a lot of these companies doing this.  However, what you may not be aware of is these pension monies are protected by a governmental agency created in l974 under ERISA (Employee Retirement Income Security Act) which you may have previously heard of.

 

This governmental agency is called PBGC (Pension Benefit Guaranty Corporation) which insures “your” pension account.  If a company should go out of business, the PBGC steps in to take over the pension plan and make up for any deficit so you get your pension benefits or at least a good part of them.

 

Currently the PBGC guarantees your pension benefit up to a maximum amount of $54,000 a year for a retiree at age 65.   Now that is good news…the PBGC does not insure 401k plans.

 

PBGC in Trouble

 

As of September 30, 2008, the PBGC was running a shortfall of $11 billion.  A recent audit, as of March 30, 2009, shows that shortfall has increased to $33.5 billion, the largest shortfall in the agency’s history.

 

The PBGC is getting beaten up by companies that are going bankrupt with problem pension plans.  Nine of the ten largest pension plan terminations have occurred in the last eight years. Such companies as Bethlehem Steel, Kaiser Aluminum, and United Airlines have put a major drain on the agency’s insurance reserves.

 

Several days ago the PBGC announced that the Lenox Group Inc., with two pension plans covering approximately 4,300 workers and retirees, was being taken over.  Lenox is the long time maker of tableware, giftware, and various collectibles.

 

 

29,000 Employer Sponsored Benefit Pension Plans

 

With 29,000 employer sponsored pension plans to insure, the PBGC is being overwhelmed with these large bankrupt company pension plans.  It’s Acting Director Vince Snowbarger has stated that the PBGC has enough money to cover current pension retirees but that eventually the PBGC is going to need help. 

 

That help is going to have to be in the form of a government bailout.  The PBGC does not get any taxpayer money now.  It is funded by insurance premiums it charges corporate America and by the interest income it gets on its investments.  We already know what has happened to everyone’s investments.

 

The biggest issue PBGC faces right now is the auto industry.  It is estimated auto sector pensions are underfunded by approximately $77 billion dollars.  The PBGC would be responsible for guaranteeing $42 billion in the event that the auto sector pensions would have to be taken over.

 

These figures do not include other sectors across the country.  We are seeing the retail sector being clobbered.  We are seeing the financial sector being decimated.  And we are all aware of the problems in the health care sector.

 

If you want to learn more about what is going on with the PBGC I would suggest you go to their web site at www.pbgc.gov and read the various articles.  It is not a pretty picture but it is something you need to be aware of.  Knowledge is power only if you put it into action.

 

Protect yourself by being aware of what is happening in the economy by reading financial blogs, financial magazines, and financial newspapers.  Your financial future belongs to you so take charge of it.

 

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

 

·         Please ask your questions of In Simple Language and we will answer you as soon as possible in the comments section of the blog article you asked about.

 

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Thank you for taking the time to visit In Simple Language.  J 

  

Copyright © 2008-2009  “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media now at (502) 569-1714.

 

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Member One Southern Indiana Chamber of Commerce

 

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This time your tax money is being offered to six of the largest insurance companies in the United States.  How does that make you feel?

 

Who are They?

 

Uncle Sam has given preliminary approval to Allstate, Ameriprise, Hartford Financial, Lincoln National, Principal Financial, and Prudential for infusions of cash under the TARP (Troubled Asset Relief Program).

 

There were no details, as of this writing, as to who was getting how much.  Although Hartford Financial stated that they were expecting to receive about $3.4 billion.

 

The scary part of this cash infusion is these are some of the largest annuity providers in the United States.  And if you have an annuity which is paying you a monthly check that you need to live on then this may be a blessing in disguise for you.  The last thing you want right now is for your insurance company to default on its monthly income check that you depend on.

 

Also there are about 75 million families that hold policies with these and many other smaller life insurance companies that are also eligible for the TARP funds.  So I guess it is safe to say that the insurance companies, at least most of them, will survive this financial mess.

 

The bright spot in this insurance company bailout is MetLife. ..you know, Snoopy and the blimp we see at so many nationally televised sporting events.  MetLife says it does not need nor want any TARP funds.  Imagine that.  An insurance company turning down money.  What is this world coming to?

 

Accepting this TARP money, by the insurance companies, carries the same restrictions, including limiting executive pay that the banks have to abide by.  Does accepting TARP money then mean that those insurance companies are desperate?  Maybe?  Maybe not?  We’ll probably never know.

 

We Don’t Want Your Money

 

It now seems that several of the previously mentioned insurance companies, after having been approved, don’t want the TARP money.  Here we go again.  Insurance companies turning down billions of dollars.  Are they really secure or it is that they don’t want to play by the government’s rules?  You decide.

 

Ameriprise said that it was not going to accept any money.  Prudential is expected to turn down any TARP money also.  Allstate and the Principal Financial Group are probably going to turn down the TARP dollars.  That leaves us with Hartford Financial Services and Lincoln National.

 

As stated above Hartford Financial Services is expecting to receive $3.4 billion and is happy to have that money.  Lincoln National is said to be getting $2.5 billion.  Both of these insurance companies have seen the value of their stock plummet by 70% in the last 12 months.

 

This variety of responses from these six insurance companies, all large and well known, shows how things have changed since they first applied for the TARP funds back in November of 2008.  Yet, all of their stock is still selling at depressed prices.

 

Is it the PR?

 

After doing the research on this post, I am beginning to wonder if some of the insurance companies are afraid to take the money unless they absolutely have to.  The TARP money brings with it a certain stigma for anyone who accepts it…you wouldn’t be taking this money if you weren’t in serious financial trouble.  I think that many of the insurance companies don’t want to suffer the ill effects of bad public relations. 

 

They are having a hard enough time trying to stay afloat and sell their products without their financial situation being plastered all over the newspaper, television, Internet, and radio.

 

Also the restrictions-especially the limiting of executive compensation-just doesn’t sit well with the insurance bigwigs.  When I worked for insurance companies in the past the general attitude in the industry was that insurance companies have more money than God therefore no one was going to tell them what to do.  Remember the recent arrogance of AIG.

 

Think about this.  When anyone wanted to build or finance a major construction project they went to a bank for the loan.  The bank went to the insurance company to borrow the money to finance the loan.  Insurance companies always had all the money.

 

My how times have changed.  At least for now.  We will get out of this financial mess probably sooner than later.  And when we do will things go back to the way they were?  Or will we have so much government regulation that it will be impossible to get anything done in a timely fashion?  Only time will tell.

 

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

 

·         Please ask your questions of In Simple Language and we will answer you as soon as possible in the comments section of the blog article you asked about.

 

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Thank you for taking the time to visit In Simple Language.  J 

  

Copyright © 2008-2009  “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media now at (502) 569-1714.

 

Check out the “SERVICES” tab above the beginning of the post for all available services.

 

Member One Southern Indiana Chamber of Commerce

 

 

 

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Rather than rewrite this whole article, today is January 4, 2010, I will just state that BAB bonds are “Not Tax Free” as I have stated in this article.  I apologize for the confusion and I thank all of you who pointed this out to me.

 

Now somehow I missed this over the last several months.  It must have been all the hoopla over the inauguration and the stimulus package and AIG and ….well you get the idea.  I’m glad I found out about this because it sounds like a good thing.

 

So What Am I Talking About?

 

A lot of my friends and neighbors have been talking about all this money the government is spending on bailing out everybody while the infrastructure of the United States is falling apart.  Now I don’t remember hearing about this Bill S.238 but maybe I just missed it.

 

You would think that Congress would want to publicize this bill in lieu of all the bad publicity the government and Congress have been getting lately.  I guess they don’t know too much about marketing.

 

I’m talking about BAB…the government’s newest acronym for “Build America Bonds”.

 

First, let me define what a bond is In Simple Language.  A bond is a loan from you for a promise to pay you back all your money with interest at a set interest rate and over a specific period of time.  It is a loan from you to some entity like a corporation or local or federal government.

 

 It is an investment, by you or some mutual fund or pension plan, to some corporation or local or federal government. These bonds are sold to pension plans, individuals, and anyone else with the money to buy them-usually in increments of $1,000.  BAB Bonds are sold in increments of $5,000.  Unfortunately this $5,000 investment for each bond makes it tough for the average American to help invest in their country’s infrastructure.

 

 

So what are Build America Bonds?

 

Bill S.238 called “The Build America Bonds Act of 2009” would provide $50B ($50,000,000,000) in new infrastructure money so states and local governments could complete infrastructure projects including bridges, roads, rail and transit systems, ports, and inland waterways.

 

Now the beauty of these bonds is they pay tax free interest to you as the bond owner.  That’s tax free not tax deferred. Basically they are a new form of what’s called a tax free municipal bond.   Tax free municipal bonds have been around a long time and are used for building and fixing roads, bridges, sewers, and anything else that a governmental municipality might need.

 

The “Build America Bonds” are different.  They have something that no other municipal bond has.  This difference gives them an edge against “regular” municipal bonds.  That edge is the U.S. Government will give the issuing municipality a 35% rebate on the interest that the municipality pays to the bond holders.  This is a huge benefit for local governments.

 

An example of this is California.  California is in terrible financial shape.  Too much terminator maybe?  Anyway, California has issued $5 billion of these bonds paying an interest rate of 7% tax free.  That is an exceptional tax free interest rate today.  The beauty of this is because of the government’s 35% rebate California will only have to pay out 4.5% interest on these bonds.  This is saving California millions of dollars in interest payments.  This is a good thing for California and every other governmental entity selling these bonds.

 

We are Still Going to Have to Pay

 

Now I am in favor of this even though you and I are really the ones paying for the 35% interest rebate to all the state and local governments that are taking advantage of this bond.  This interest rebate money is coming out of or part of the $787 billion stimulus package passed this year.  It has to come from somewhere and that somewhere is usually us.

 

The bright side to all of this is now, hopefully, we will get our roads and bridges fixed and look like the great country that we really are.  Maybe this is not a perfect plan but at least it is a step in the right direction. President Obama and Congress have finally done something other than to bailout some financial dirtbag who should have probably been sent to Gitmo.

 

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

 

·         Please ask your questions of In Simple Language and we will answer you as soon as possible in the comments section of the blog article you asked about.

 

·         Please give In Simple Language your comments and suggestions about this post and/or future topics of interest to you.

 

·         Like what you read?  Send it to a friend.  Click on “share this post” right above leave a comment below.

 

·         Did you remember to bookmark this blog?

 

Thank you for taking the time to visit In Simple Language.  J 

  

Copyright © 2008-2009  “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media now at (502) 569-1714.

 

Check out the “SERVICES” tab above the beginning of the post for all available services.

 

Member One Southern Indiana Chamber of Commerce

 

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