Financial Answers "IN SIMPLE LANGUAGE"

It had to happen sooner or later with all the publicity about 401(k) plans. The supposed excessive fees that are being charged to 401(k) participants are in the news again.  But don’t worry.  Congress is on the case and is still working to get laws and regulations passed to protect you.  Now doesn’t that make you feel a lot better?  Sure!

 

Lookout for lawsuits

 

So it did finally happen.  A smaller 401(k) plan-a group of less than 30 employees in the State of Kansas- has filed a lawsuit because of what the 401(k) participants are referring to as excessive and secretive fees.  The employees are not only going after the custodian who safeguards their deposits but also the recordkeeping company.  In addition, and this is a real surprise, the participants are also going after the investment advisor to their 401(k) plan.

 

Although filing a law suit against 401(k) plan custodians and record keepers is not something new, this particular case is because of its small size.  This Kansas 401(k) plan case has around $2 million and less than 30 participants which is small by 401(k) standards.  Small plans like these don’t have deep pockets and usually don’t go after the plan administrators, record keepers or their financial advisor.

 

Case in point is that the dozens of 401(k) cases that are currently pending are going after the 401(k) administrators of very large companies such as Deere & Co. and Wal-Mart Stores Inc.  This Kansas 401(k) case is somewhat of a precedent setting case because of its small size.

 

Many of the larger 401(k) cases will be going to court this year (2009).  Hopefully these cases will help congress and the courts figure out what needs to be fixed in this “fees” problem that has developed over the years.  There really are two problems to be addressed by the courts and congress.  The first is the proper disclosure of these 401(k) fees and secondly the supposed excessive amount of these fees.  In Simple Language will be keeping an eye on this topic and will keep you informed as to what is happening.

 

Financial advisors at risk?

 

Because this Kansas case has included the individual financial advisor in its suit many financial advisors will be watching this case to see how this all plays out.

 

What I am seeing and hearing is that more and more financial advisors are looking more closely at the 401(k) plans and the companies that are providing them to insure that their individual clients are getting their monies worth.  This is another area where your trusted financial advisor earns their worth.

 

What is also happening is that smaller plans are asking their financial advisors to look at the fees that are being charged in the 401(k) plans that they offer to make sure that the fees are in line with the service that is being provided. 

 

Small plan sponsors are concerned that they could become the target of more of these smaller lawsuits and they don’t have the deep pockets like the plan custodians such as a Charles Schwab, Fidelity Investments, or Vanguard, to name a few.

 

Like everything else in the financial services world today, everything is being examined under a microscope and maybe it should.  Time will tell if congress is serious about fixing this “fees” problem in your 401(k) and 403b defined contribution programs.  Let’s all hope so.

 

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, LLC now at (502) 569-1714.

 

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Although it has been around for awhile, not many financial advisors and very few consumers are familiar with a product referred to as asset-based LTC insurance.

What is asset-based LTC insurance?

 

Almost everyone is familiar with life insurance and how it works to protect your family in case of your death.  You know that if you were to die than your beneficiary(s) would receive an amount of money called the face value of the life insurance contract.  That could be $5,000 or $5,000,000 or whatever amount you and your advisor determined was needed. This insurance money would take the place of your former earning power-your paycheck- to help your beneficiary(s) maintain their current life style.

 

You have probably also heard about and even had an insurance agent or your financial advisor talk to you about “Long Term Care Insurance” and how it protects you from being financially wiped out if you should have a long term illness. Long term care insurance would protect you in case of such a long term illness at home or in a nursing home or assisted living facility.

 

But not many of you have heard of this combination insurance policy called asset-based LTC insurance which is a combination of life insurance with a rider-an attached option-of long term care insurance.  It seems that recently there has been a lot of interest by consumers in this combination insurance policy.

 

This interest seems to have been heightened by consumers looking for ways to take care of several issues at the same time keeping it all together.  That could be a good thing and a bad thing.  The good part is you have one insurance policy and one premium payment with the same company which makes it easier to maintain.  And you are filling two needs with one action.  You have life insurance and long term care insurance all wrapped up together.  So if you live or die you are protecting your family in one fell swoop.

 

What’s not so good?

 

Just like every other investment or insurance product there is a dark side.  The combination of life insurance and long term care insurance can be confusing to you if you are not familiar with insurance products.  The insurance terms can be confusing enough to most people but when you put two different types of insurances together it could become totally confusing.

 

Also the cost of the combination policy seems to be a little more expensive than the individual policies might be.  You need to ask your agent/advisor about this and shop and compare.

 

Another issue with this combination is the underwriting qualifications…do you qualify for life insurance and do you qualify for long term care insurance?  When you buy life insurance the life insurance company wants you to live a long life so they have use of your premiums for a long time.  The insurance company has certain qualifications you have to meet.  Whereas, with long term care insurance the life insurance company would not want you to live long. Being disabled, physically and/or mentally means they have to continue to pay you or a nursing home or assisted living facility for as long as you are eligible to receive benefits. This could be for life and that would be very expensive for the insurance company.  If you qualify for one and not the other then you would probably not be able to buy an asset-based LTC policy.

 

And then there is the question of what is covered in an asset-based LTC policy?  They are not all the same.  One combination policy might allow you to have home care coverage and another may not or severely limit what is paid.  You need to talk with your insurance agent/financial advisor and understand what you are covered for. 

 

This is a very complex topic.  I want you to take away at least one thing from this article and that is to feel comfortable with any insurance or financial product that you are considering buying.  If you can sleep at night with what you have purchased then that is all you can do.  Do your homework before you buy.  Work with a trusted insurance professional/financial advisor and you will probably be alright.

 

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, LLC 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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Before I get started on my post I want to let all my faithful readers know that In Simple Language will be taking a break the week of July 20, 2009 and will again start posting the week of July 27, 2009.

 

I think that most of us are familiar with how most of the banks have been changing the rules on our credit card accounts whether we like it or not.  Well guess what?  It now appears that the insurance companies are doing the same thing…at least when it comes to variable annuities.

 

What is a Variable Annuity?

 

If you remember from previous posts a variable annuity is a life insurance contract with an insurance company in which you can put your money into either a saving account-like feature or chose to put your money into a sub account…which is what a mutual fund is called in a variable annuity.

 

Now I feel that a variable annuity or an annuity in general may have a place in an individual’s investment plan. However you need to understand and be aware of what you are getting.  It seems that certain insurance companies are doing things to their variable annuities which may not be to your benefit. 

 

First, many insurance companies are raising the fees that they charge their customers to have a variable annuity.  Make sure you get clear answers on fees and charges on any variable annuity you are considering purchasing or that you currently own.

 

Second, many of the insurance companies are reducing the benefits and guarantees they have been offering under the riders or add on features that are offered by most insurance companies.  Again ask about these “riders” and ask until you understand and feel comfortable about what they mean and the benefit they provide you.  If you don’t understand or feel comfortable with what you are hearing then you probably shouldn’t do it.

 

Third, many insurance companies are eliminating guaranteed living benefits that they have offered previously.  Make sure the person proposing the variable annuity explains each part in clear understandable language so you feel totally comfortable on what anything means.  Guaranteed living benefits could mean a host of different options for you.  Whether it might mean protection of your principle or protection of your income options, it will depend on the way it is written in the contract.  Do some homework on your own to understand what guaranteed living benefits are and how they can work for you.

 

I apologize for giving you homework but this blog post isn’t long enough to do justice to such a complex topic as guaranteed living benefits.  If you want to wait a year or so to learn more intricate details on annuities, I will go into much more detail in one of my future financial books on annuities which you can purchase and then become an annuity expert.  Right!

 

Just be careful and be aware

 

Like every other financial product out there, do your best to learn as much as you can about the product or investment before you sink your hard earned money into it.  If you have been reading this blog for the last 16 months-and I know you have- then you know that I am all about financial education.  Learn what you can when you can.  You worked awfully hard to earn your money.  Now you have to work equally as hard to keep it.

 

Thanks for reading In Simple Language and we will see you in about a week or so.

 

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, LLC 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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In Simple Language has talked about Target Date Funds in previous posts and it looks like the government regulators have them in their sites once again.

 

What’s a Target Date Fund?

 

A very popular mutual fund called a “target date” mutual fund is used in many retirement accounts and 401(k) plans.  This type of mutual fund is set up so that it invests aggressively when the participant, you, is younger and gets progressively more conservative as you get older.  You choose a target date fund based on the date that you think you will retire. 

 

Someone in their early thirties looking at their choices in their 401(k) may not even consider looking at a target date fund.  Someone in their late forties or early fifties, who is beginning to think about retirement in ten, fifteen or twenty years, needs to start planning for retirement.  This is where the target date fund comes into play.

 

Someone who is fifty years old may say that they want to retire in fifteen years at age 65.  In that case they would look at a target date fund that had a maturity date of fifteen years from today.  That target date fund with the maturity target date of fifteen years from today would be structured to be somewhat aggressive in its investments today and get less and less aggressive in its investments as it approached that fifteen year maturity date.

 

Target date funds have become popular because you can have all or a good portion of your retirement assets being automatically adjusted in a target date fund. As you get closer and closer to retirement your investments in the target date fund become more conservative. This is supposed to provide a minimal amount of worry so you don’t feel that you are too aggressively invested and have taken on too much risk as you get older and approach retirement.

 

So what’s the Problem?

 

Unfortunately target date funds have not lived up to what they are supposed to do…go from aggressive to conservative as you approach retirement.  If we look at what has happened to target date funds and how they were affected by our latest financial crisis you can understand why the government regulators are looking at them with a jaundiced eye.

 

2010 target date funds last year varied in returns from -3.6% to -41%. Yes, those are losing returns. These returns have raised a lot of regulatory eyebrows.  How can target date funds that are “maturing” in 2010 for their participants have a difference of -37.4% (-3.6% – -41%) in their returns when they are supposed to be virtual mirrors of each other?  What this tells you is that the target date funds that lost 41% of their value were not investing in conservative investments like they are supposed to when they are approaching their target maturity date.

 

This is nuts.  How are you, as the investor, supposed to feel about a mutual fund that promotes itself as providing an effective way to protect your investment-getting more conservative as you approach retirement-and then doesn’t do what it said it was going to do?  How does that make you feel?  It is your money after all.

 

2010 target date funds should have been at their most conservative point yet some of these target date funds lost close to half their value.  That is not supposed to happen yet it did.  If you are an investor and you buy an investment that is supposed to be conservative because you need to protect your principal more than you need to make a higher risky return than that is what you should be getting. 

 

That is not what has happened.  This needs to be fixed now so it can never happen again.  If you are sixty or sixty five or older you don’t have the luxury of time to make up for huge losses.  That is what the “theory” and “structure” of target date funds was supposed to prevent. 

 

Since some people-portfolio managers and mutual fund companies-didn’t follow what target date funds are structured to do you will probably have to have government intervention with these target date mutual funds.  Just what you need more government intervention.

 

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, LLC 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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My last blog post this past Tuesday was about the fifth pending bill in congress requiring full disclosure of fees by all providers involved in 401(k) plans.

 

Who’s disclosing what?

 

I’m going to repeat myself again. I want you to understand that I am totally in favor of 401(k) plans for employees.  They are still the best form of retirement vehicle for the employee.  However, as I said in my previous post, this fee disclosure problem has to be fixed and it looks like it is finally being addressed by congress.

 

For the sake of clarity let me explain what I am talking about and what congress seems to be talking about when they say they want to have all fees disclosed.

 

When your employer sets up a 401(k) program with a plan administrator, the plan administrator has costs that have to be paid.  That’s just the cost of doing business. You don’t just walk in one day and say let’s set up a 401(k) plan and the next day it happens.  Oh if only it were that easy.  But it’s not.  So you need a plan administrator working with your employer to get the 401(k) plan started.

 

Remember the term 401(k) refers to the section of the Internal Revenue code that allows employers to have this defined contribution plan.  If the government and its agencies are involved, especially with the federal tax code, you can guarantee it will be confusing, complex, and difficult to understand and costly to set up and administer.

 

Your employer is the one who will be paying the plan administrator for setting up and maintaining the plan so the fee disclosures that congress have been talking about are directed more at the investments inside the 401(k) plan.

 

So what are you paying for?

 

All these pending bills in congress, five as of this writing, are not really concerned with what your employer is paying to plan administrators.  What congress is in a huff about is that the investments-usually mutual funds that make up the working investment part of the 401(k)-have not been clearly disclosing what it costs you to invest part or all of your money in a particular mutual fund within your 401(k) plan.  Try reading a mutual fund prospectus and tell me how much in fees-a specific dollar amount-you are paying to the mutual fund company for the privilege of investing in that particular mutual fund?

 

This investment choice fee disclosure is where the real problem lies.  In all my years in the financial services business, no one has ever been able to tell me how much that mutual fund that I was investing in cost me in “real dollar terms”.   All I ever heard was look in the mutual fund prospectus and it gives you ranges and percentages of the costs.  What nonsense.

 

Would you buy a car and have the bank tell you that your costs will be somewhere between 2% or 3%…and not tell or show you what the actual figures were?  How could you claim the mortgage interest deduction on your home if the bank didn’t give you a form at the end of the year disclosing the total amount of interest you paid on your loan which you need for your federal income tax return?  Yet that is what is happening with your 401(k) investments.  You have no real clue as to what the investments are actually costing you.  This is what congress wants to change and I say about time.

 

What else is happening?

 

The other shoe that is dropping on the 401(k) market is the area of investment advice.  This is probably another blog post but I want to touch on it here.  Let me ask you this.  Can you get unbiased investment advice from a financial advisor who is handling the investment choices inside your 401(k) investments if that same financial advisor is compensated by those investment choices?

 

If the financial advisor sells you mutual fund A in your 401(k) plan they may get paid x dollars.  If the financial advisor sells you mutual fund B they may get paid y dollars.  One fee or commission may be more or less than another.  What do you think would happen?  Let’s get some feedback from our readers.  Tell us what you think.

 

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, LLC 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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