Category Archives: Uncategorized

When luxury pricing goes awry

Gucci America, Inc. has typically been known as a luxury brand that charges a significant premium for their goods.  Unfortunately some employees feel like that has also been the approach taken by their retirement plan vendor Transamerica.

Gucci Retirement Plan Sued for Charging Excessive Fees

We commonly see small plan sponsors complacent regarding their retirement plan approach because they view themselves as being too small to face a lawsuit.  2017 saw a number of small plans start to face suits (some egregious, some with merit in our humble opinion) and a proactive approach by plan committees is the best defense.

A 1000 points here, a 1000 points there

When looking at what captures eyeballs, it frequently is extreme events that we don’t see everyday.  With the recent market volatility, everyone is captivated (and horrified) by 1000 point swings in the Dow Jones Industrial Average.

While those numbers certainly seem large, it is mainly because the stock market has expanded quite a bit.  A 1000 point swing when the market was at 10,000 would be a 10% loss.  When the market was at 26,000, it was less than half of that.

What we also point out to retirement investors is the Dow is a fairly narrow measure of stocks.  When we look at how someone is invested in a globally diversified portfolio, they hold thousands of stocks from many different countries.  Not just 30 from the US.  If they are closer to retirement, they also in all likelihood don’t have 100% of their portfolio in stocks (or hopefully don’t).  Sticking to the basic fundamentals of consistently investing during both market expansions & contractions as well as rebalancing on an ongoing basis are the simplest ways to stomach the eyeball test.

Is this time different?

When stocks start to move up and down quickly, everybody starts to ask the same question:  Is this time different?

The simple answer is, of course it is different!  Every market environment has different aspects that make it unique.  Currently the country is at full employment, with low interest rates relative to historical standard, in a booming stock market that has high valuations relative to historical PE ratios, that just passed a tax cut during a growth cycle and just passed a budget that increases government spending without revenue to offset those expenditures.  In that terrible run on sentence there is a combination of factors that make this time unique.

What isn’t unique for retirement investors is their long term horizon.  Someone in their 40’s has 20+ years of saving left and probably 40 to 50 years left in their life.  They have to maximize their savings rate to fund what will probably be a unique retirement.  They likely don’t have a pension and have to rely solely on their own retirement savings to fund an expanded life expectancy from prior generations.

Will the market be higher in one year?  We have no idea.  Will it be higher in 10, 20 or 30 years?  I sure hope so and using history as a guide, it typically has been.

Market volatility in perspective

It’s happening again.  Investors are picking up the phone and calling in as they are worried about volatility.  Now keep in mind, they haven’t been concerned about volatility since around 2010.  The main reason is that volatility has primarily been to the upside.  That is also fairly uncommon when looking at average intra-year declines.

From 1979 to now, the average intra-year decline has been about 14%.  About half of the years experienced declines of 10% and around a third of those years had declines of at least 15%.  Despite these intra-year declines, 33 out of 39 of these years was positive.  Going back to the basics of “why” we invest is important at times like these.  Remember why you invested “hopefully” in a globally diversified portfolio of stocks, bonds & cash.  Also remember why you take risk in the first place and how that will help you achieve your long term goals.

Why proprietary target date funds matter in a conversion

When benchmarking a retirement plan, the biggest driver of costs tend to be the asset based fees charged by the investment managers.  As advisor’s have driven these costs down over the last five years utilizing institutional funds and collective investment trusts, recordkeepers are all trying to figure out how to make money in this low margin business.

One heavily used approach is to offer discounted or free pricing for recordkeeping if the plan sponsor agrees to convert their plan and do a target date conversion to a proprietary fund offering.  The recordkeeper knows that 80%+ of the assets will stay in these funds.  The asset management side of their business also has a much higher margin than the recordkeeping side.  Win/win right?

The answer is complex.  It could be a win/win if the advisor has benchmarked the target date funds and it was determined those were the ideal fit for the plan sponsor and their employees.  If this is the case and it is clearly documented in advance, then yes, it is probably a win/win.  BUT…what if the recordkeeper was selected first and no real review occurred of the target date funds?  This could be a problem.  You don’t have to look far for lawsuits against these asset managers when managing their own plans.  Not only that, many of these cases have been successful in getting significant settlements for their clients.  Working with an experienced consultant who knows the inner-workings of the marketplace will be the first step in solidifying and documenting that target date fund review process.

Key components of tax bill part 3

One of the main things that has changed is whether or not it will continue to make sense for you to itemize your tax deductions or not.  While the final bill didn’t really deliver on the ability to file your taxes on a post-card, it does minimize the effort for those who no longer itemize.  The general thinking is that pool of tax payers will expand since the standard deduction has increased.

Standard Deductions increasing nearly 90%. For married couples filing jointly, the standard deduction rises to $24,000 from $12,700; for single filers, it moves to $12,000 from $6,350.

Personal exemption ending, but child tax credit increasing. The bill ends the personal exemption of $4,050 for you, your spouse, and your dependents; it doubles the child tax credit to $2,000 per dependent child under age 17.

Limits to state and local taxes (“SALT”). Under the bill, you may only deduct up to $10,000 in state and local taxes, including sales, income, and property taxes. This deduction was not previously subject to limitation.

Caps on mortgage interest. The bill allows mortgage interest deductions for current homeowners, but caps the interest deduction at $750,000 in mortgage debt for homes bought in 2018 and beyond, down from the $1 million limit in place now. It eliminates deductions for interest on home-equity loans, as well as deductions for moving expenses and employer-provided expense reimbursements (except for members of the military).

Expands medical deductions. Current law allows for deduction of medical expenses over 10% of adjusted gross income (AGI). The bill lowers the threshold to 7.5%.

Changes to investment advice fee itemized deduction. Investors will no longer be able to take an itemized deduction for investment advice expenses. The effective tax rates on investment returns will be higher. For example, if a client realizes a 6% return on an investment and pays a 1% management fee, the client would earn a net 5% but still pay tax on the full 6% gain. This will result in higher taxes for clients and will effectively make independent advice more costly.

Charitable deduction decisions may change. Although the current tax deductions stay in place, the doubling of the standard deduction to $24,000 essentially raises the threshold on deductibility. Taxpayers will have to itemize donations to get the benefit.

Key components of tax bill continued…

So now that we know what the rates are, what else might you want to know that’s in the bill?  For starters, IRA savers will want to be aware of a key change to recharacterizations.  Under current law, if you convert a traditional Individual Retirement Account (IRA) to a Roth IRA, you can later choose to do a recharacterization back to a traditional IRA. The bill takes away the recharacterization provision that allows taxpayers to unwind a conversion.

So if you are deciding whether to do a recharacterization, make sure you have crossed your T’s and dotted your I’s, there is no going back anymore.

Key components of Tax Bill

So what is in the tax bill and does any of it effect retirement plans?  The short answer is that retirement plans were not directly effected by the tax bill.  That being said, there are a few items which indirectly touch on retirement and whether and to what amount you should participate.  We will cover this over our next few posts but let’s start with the basics, what are the new marginal tax rates:

Current Marginal Tax Rate Proposed Marginal Tax Rate Income Level (Single Filers) Income Level (Couples Filing Jointly)
10% 10% $0 — $9,525 $0 — $19,050
15% 12% $9,525 — $38,700 $19,050 — $77,400
25% 22% $38,700 — $82,500 $77,400 — $165,000
28% 24% $82,500 — $157,500 $165,000 — $315,000
33% 32% $157,500 — $200,000 $315,000 — $400,000
35% 35% $200,000 — $500,000 $400,000 — $600,000
39.60% 37% $500,000 and up $600,000 and up

These amounts will be relevant when you decide whether to participate in your plan and also if your plan offers a Roth provision, whether to utilize it or the traditional pre-tax deferral.