Oh Bill Losey, Why are you Scaring People?

written by Jouran Crosby

I am a avid viewer and reader of many financial websites especially CNBC, but today I am quite disappointed that CNBC did not fact check before they let Mr. Bill Losey post inaccurate information about employer sponsored plans. Let me precede this blog by saying, I do not personally know Mr. Losey nor am I going to say that he is not qualified to provide the information that he provides. According to his bio, he appears to have had distinguished 20 year career in financial services, and this could be just a brain fart. Unfortunately, it will be a brain fart that will be exposed to millions of individuals whom are already scared because their retirement assets are being wiped out.

Here is the article that resulted in this blog (http://www.cnbc.com/id/28862360):

Ask The Experts: What If My Money Manager Defaults?

Here is the reader's question:

My problem is that i have a 401(k) through my employer and it is well funded now that I have been working for 30 years. However, I am seeing now on the news this week that the money managing company that my employer uses to manage the 401(k) is having serious financial difficulties. I am now worried that my 30 years of savings could go up in smoke if the money manager defaults. Can you recommend any steps that I should take to protect my money? I have considered crazy things like rolling over the 401(k) into my IRA, which is via a different money manager. Your help is appreciated. -Leonard, NJ

Here is Mr. Bill Losey's Response:

I'd start by confirming that your 401(k) account is segregated from the companies assets and is not subject to the claims of any creditors. Next, I'd make sure that your firm is a member of the Securities Investor Protection Corporation (SIPC). Accounts protected by SIPC shield accounts of each customer when a firm is closed due to bankruptcy or other financial difficulties. SIPC protects brokerage accounts of each customer up to $500,000 in securities. Lastly, I'd check with your HR department to see if your 401(k) plan allows for an in-service withdrawal transfer. Some companies, not all, will allow active employees and participants to roll some or all of their 401(k) plan money to a rollover IRA with another custodian. This could provide the peace of mind you're looking for.

Rebuttal 1:

Mr. Bill Losey's comment - I'd start by confirming that your 401(k) account is segregated from the companies assets and is not subject to the claims of any creditors.

My statement: Mr. Losey the first item in the response is a irrelevant statement. Any licensed professional in this business should know that co-mingling of assets is illegal and this information should not have been disseminated to the general population that is already fearful.

Per the ERISA Act of 1974 - "...ERISA requires that promised pension benefits be adequately funded and that pension monies be kept separate from an employer’s business assets and held in trust or invested in an insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company’s creditors." It continues by stating "...plan fiduciaries must comply with the ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan’s trust or insurance contract. "

The same would apply in the event the trustee/employer sponsored plan's record keeper (401K/Pension Manager) were to go out of business; if they did the assets would be transferred to a new plan manager and creditors of that fund would not be able to stake a claim to these assets.

Mr. Losey please update your information accordingly.

(Reference: Department of Labor, Your Employer's Bankruptcy - How Will It Affect Your Employee Benefits?, http://www.dol.gov/ebsa/newsroom/fsbankruptcy.html)

Rebuttal 2:

Mr. Bill Losey's comment - Next, I'd make sure that your firm is a member of the Securities Investor Protection Corporation (SIPC). Accounts protected by SIPC shield accounts of each customer when a firm is closed due to bankruptcy or other financial difficulties. SIPC protects brokerage accounts of each customer up to $500,000 in securities

My Comments - Mr. Losey the SIPC comment was not explained fully. According to SIPC's website (http://www.sipc.org/), "...When does SIPC gets involved? When a brokerage firm fails owing
customers cash and securities that are missing from customer accounts..." It continues by stating "...Customers of a failed brokerage firm get back all securities (such as stocks and bonds) that already are registered in their name or are in the process of being registered."

The above information again only applies to brokerage accounts, however for 401K plans or most employer sponsored plans they are not covered by SIPC or PBGC (Pension Benefit Guaranty Corporation (PBGC), a Federal Government corporation that insures pension funds). Assets in plans such as these are held in trusts or insurance contracts (as mentioned above) so in the event of a bankruptcy of the firm or record keeper, the plan assets would be transferred to a new trust or the plan would be terminated thus allowing the participant to roll or cash the funds out of their plan.

Again these assets are not co-mingled with the record keeper or employer's assets, thus SIPC would not apply in this case as a result of a Employer's or Record Keeper (401K Plan Manager) bankruptcy.

Agreement 1:

Mr. Bill Losey's comment: Lastly, I'd check with your HR department to see if your 401(k) plan allows for an in-service withdrawal transfer. Some companies, not all, will allow active employees and participants to roll some or all of their 401(k) plan money to a rollover IRA with another custodian. This could provide the peace of mind you're looking for

My comment: I agree if an individual would like to have more control over their assets they are saving for retirement and they have reached a point where they qualify for an in-service withdrawal, they can execute a rollover of all eligible plan assets. Very few plans offer a means to access funds prior to reaching the age of 59.5 (retirement age set by the IRS) or leaving employment. This information can be obtained from contacting one's HR department or contacting the customer service line/Retirement Specialists at the company that is holding the records for the plan.

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Again I do not want to challenge Mr. Bill Losey's expertise or knowledge, however, the information provided about this gentleman's 401K was grossly inaccurate. I hope this clarifies this question for everyone.

Financial Management For Tough Times: Understanding Your Car Payment Part 2 - Paying off your Auto Loan Early

Written by Jouran Crosby

If you are aiming to pay the loan off faster, Let's use the same example as before which assumed our loan was $25,000.  The easiest way to figure this out is just take what you intend to pay and subtract the monthly interest due; this will let you know how much will go to the principal.

For Example:

You want to pay an extra $100 a month, and since we are using the $531.18 from the first example, you are going to pay$631.18 for the first payment. Subtract $631.18 (car payment) from $208.33 (monthly interest due) resulting in $422.85 would go to the princpal of the loan. 

Step 1:

$531.18 (monthly car payment due) + $100.00 (extra money added to the car payment) = $631.18 (total car payment that you will pay for that month)

Step 2: 

$631.18 (total car payment that you will pay for that month) - $208.33 (monthly interest due) = $422.85 (portion of your car not going to reduce the car loan)

For this example we determined that this was the first car note we were going to pay on our loan. So to calculate how much would be left on the loan to calculate the next month's interest follow Step 3 below:

Step 3:

$25,000 (outstanding loan balance due for month 1) - $422.85 (portion of your car not going to reduce the car loan)= $24,577.15 (outstanding loan balance for month 2)

It again does not matter if this is a new loan you just got or a loan that you are already paying. Just follow the displayed steps on this and the first part and you will be able to pay your car loan off sooner than you expect. 

Next Post - Understanding your 401K

Financial Management For Tough Times: Understanding Your Car Payment

written by Jouran Crosby

Today we are going to discuss how car payments work.  Have you ever looked at your auto loan balance and wonder why the principal does not seem to drop at a fast rate even though you are paying more than the required payment? Ever wonder how much interest is being paid on a monthly basis and how that interest is calculated? Wonder how you can actually pay it off faster than expected or at least make a dent into the principal of the loan? Well if you have asked these questions, hopefully this series of blog will provide you with some insight that can help you and your loved ones. 

Everyone knows that every loan from a commerical lender has some sort of interest rate attached. This is how the bank makes money on the money they lend to individuals. Some may pay a lower or higher interest rate due to your credit rating, down payment, or terms of the loan, etc. Regardless of what that interest rate, here is the formula that one can use to pay down this debt faster. 

Let's use this example:

Say after everything is said and done the amount of the loan to be financed is $25,000 and you are paying 10% interest on the loanfinanced over 5 years (60 months). Using these terms your monthly payment would be $531.18. Now I am sure most people do not want to pay that note for five years, so the first thing we need to calculate is how much interest the loan is incurring on a monthly basis. 

To calculate that do the following:

Step 1: 

- Take the annual interest rate, which in this case, is 10% and divide that by the number of months in a year which is 12 (months) and that would equal .008333 or .8333% interest a month.

.1(annual interest rate converted to a decimal)/12 (number of months in the year) = .008333 (monthly interest rate converted to a decimal) or .8333% (monthly interest as a percent)

Step 2: 

Next take  the monthly interest and multiply it by the principal due for that month; so for this example let's say this is your first car payment that is due. That means that the full $25,000 is owed and is eligible to earn interest. For the first month you are responsible for $208.33 in interest. 

$25,000 (outstanding loan balance due for current month)*.008333 (monthly interest rate converted to a decimal) = $208.33 (total monthly interest due rounded to the nearest cent)

Now to figure how that affects your car not follow step 3:

Step 3:

Take the monthly car payment of $531.18 and subtract that from the total montly interest due which is $208.33. 

$531.18 (monthly car payment) - $208.33 (total monthly interest due)= $322.86 (the amount of the car note that will be applied to lower the auto loan due)

What this means is that when you make your first car payment this month $322.86 will go to the principal and $208.33 will go towards interest. 

Step 4:

Once you make this payment, under this scenario, month two the interest will be calculated on an outstanding loan balance of$24,677.14. 

$25,000 (outstanding loan balance due for current month) - $322.86 (the amount of the car note that will be applied to lower the auto loan due)= $24,677.14 (outstanding loan balance for the month)

Step 5:

Now to determine how much interest is due next month take the outstanding loan for the next month in this case it is $24,677.14 and repeat steps 2 - 4 here. That means $205.56 in interest would be due for the next month.

$24,677.14 (outstanding loan balance for the month) * .008333 (monthly interest rate converted to a decimal) = $205.56 (total monthly interest due for next month)

That ends today's lesson and now you should be able to determine how much of your car payment actual goes to interest and how much will go to pay down the auto loan. Now in our example we used a scenario as if no payments had been made, however, it does not matter how much is left on the loan or how many payments you have made already. Just plug in your information and now you can see what the bank sees each time you make a auto loan payment. 

Next lesson will answer that question how to pay off my auto loan faster.  

Feel free to post your questions below if you have any and I will be more than happy to respond to them... Good Day, Good Luck, and Good Saving....