Twists and Churns: Annuities No Sure Path to Retirement Readiness

On every path to retirement security, there should be a blinking sign that reads: “Annuities This Way: Proceed at Your Own Risk.” Which is an entirely appropriate retirement planning thought.

What’s your appetite for investment risk? If you’re risk averse, it would appear that annuities are an iron-clad, guaranteed, safe investment option. They may be. They may also rope the plan participant into needlessly long investment commitments for which investors pay excessive fees. But not always.

That’s the problem with annuity contracts: too few investors know exactly what they’re buying. And that makes the annuities route to retirement a difficult one to navigate.

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Who will inherit your wealth? Your heirs or the IRS.

Consider these three facts:

  1. Americans held $7.9 Trillion in IRAs by the end of 2016. (2017 Investment Company Institute Fact Book)
  2. With more than 10,000 baby boomers retiring every day, we are on the cusp of an historic intergenerational wealth transfer that could total as much as $3.2 trillion. (RBC Wealth Management Survey.)
  3. As much as 30-80% of an estate could be made up of IRAs or other retirement plan assets according to most estimates.

And, let’s add a fourth fact that is worth considering: Only 3 in 10 of families have a wealth transfer strategy in place.

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How the Ivies Grow

Over the last five years, when the average college endowment fund earned an annualized 5.9%, a typical investor choosing a low-cost 60-40 index fund realized an average return of 8.2 %, a difference of 2.3%. So why weren’t more endowment funds passively managed? Why not park those billions in an index fund?

That’s a question raised (and criticism implied) of the Ivy Leagues’ largest endowments from their own graduates and investment gurus like Warren Buffet in his 2016 investor letter.

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There’s No Time like the Present, and other lessons on…

Defined Benefit Funding Levels, Contribution Relief, and Unintended Consequences

At the close of 2012, pension funding levels for a broad set of defined benefit plans sat in the high-seventies. Sponsors had weathered the massive equity losses of the 2008 global financial crisis (GFC), and subsequent plummeting interest rates, and they seemed poised to recoup their losses. The markets would be kind to investors over the next half-decade with the S&P 500 nearly doubling in price, generating a cumulative total return in excess of 100%, and outpacing long duration fixed income (a proxy for pension liabilities) substantially.

Figure 1

So how did sponsors fare? Not as well as one might expect, given the data above.

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The Latest ERISA Lawsuit Target: Hidden Fees

The central complaint of lawsuits filed against ERISA plan sponsors since 2006 has shifted with the financial markets like a seesaw.

When the markets were anemic and participants’ savings suffered, lawsuits alleging failures in diversification and offerings of poor-performing funds soared. When participant accounts began to benefit from bull-market returns, complaints shifted to allegations of excessive fees.

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Are your windows clean?

First law of window cleaning…the dirt is always on the other side.” Anonymous

With the arrival of spring, I find myself thinking of this quote. It’s too true for me. And in my profession, I regularly meet people who tell me they feel the same way about making financial decisions. Just when they decide to get into the market, it plummets. When they sit on the sidelines, the market roars back to life.

Many people feel they’re on the wrong side of the financial markets—the wrong side of the glass.

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Alarmed by the 401(k) Auto Enroll Headlines? Just Opt Out

Following the January 2018 meeting of the American Economic Association (AEA), the Wall Street Journal and other business publications ran these alarming headlines:

Major Problem Reported With 401(k) Auto Enrollment

Downside of Automatic 401(k) Savings: More Debt

401(k) Auto-enrollment Doesn’t Stop Workers from Taking on More Debt

And the sub-headings were nearly as alarming. Consider this one: “New research finds employees auto-enrolled in retirement plans borrow more than they otherwise would have, offsetting savings.” We’d like to propose another headline that our interpretation of the research would support: 401(k) Auto Enrollment Increases Net Worth.

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What Gives: The Impact of the 2018 Tax Cuts and Jobs Act on Charitable Giving

The Tax Cuts and Jobs Act signed into law in late December inspired a spate of commentary, particularly concerning the doubling of the standard deduction and the expected impact of that on nonprofits.

The new tax law doubles the standard deduction to $12,000 for individuals and to $24,000 for couples filing jointly, meaning millions of middle income taxpayers will find it easier and financially beneficial to take the standard deduction when filing their taxes rather than submitting itemized deductions. (Today, roughly 30 percent of taxpayers itemize deductions for things like mortgage interest, state and local taxes, medical expenses and charitable giving.)

For this group of people, the financial incentive inherent in itemized charitable contributions goes away. For higher income individuals (those with the ability to claim more than the standard deduction of $12,000 or $24,000) the value of itemizing deductions (including those for charitable contributions) remains.

The new law gave rise to some dire predictions for nonprofits at year-end.

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How Will Defined Benefit Plan Sponsors Deliver on Pension Promises?

Just a few months ago, UPS announced to 70,000 non-union workers that their pension benefits would be frozen. In order to manage a deficit in U.S. pension obligations of nearly $10 billion, affected workers will stop accruing pension benefits on January 1, 2023. On that date, the package carrier will instead begin contributing 5-8% of salaries into 401(k) savings accounts.

UPS is not alone in making difficult decisions that impact defined benefit (DB) plan funding, and in turn, corporate earnings, balance sheet stability, and the futures of thousands of long-serving employees. With collective unfunded pension obligations among S&P 1500 companies totaling $391 billion at the end of February 2017 (Mercer) and interest rates languishing at historic lows, a majority of employers are reckoning with the same dilemma.

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Family Wealth Management – Have You Tried it All and It’s Not Working?


Stressful business man looking at circular maze with nowhere to go.jpeg

Sir Winston Churchill once said…

“Americans can be absolutely relied on to do the right thing… after they have tried everything else.”

In our current political environment unprecedented in its volatility, what will we, as a country, try next?

On a personal level, we can also get buried in information and noise. Too often “the right thing” is buried in a deluge of information that overwhelms and paralyzes us.

We don’t know what to do, and we even lose hope that we can do much of anything to positively impact our future. We hear so many ideas pitched to influence and persuade us, but, ultimately, who cares for our interests? Who’s willing to pledge themselves to serving our best interests?

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