08 Feb 2017
“’I think the genie is out of the bottle,’ Ms. Borzi [Phyllis Borzi, former Labor Department assistant secretary] said in an interview. ‘The market has already spoken. The best interest is what they are asking for and what consumers are now beginning to expect…’” The Wall Street Journal, February 6, 2017
Last Friday, President Trump issued a Presidential Memorandum delaying the implementation of the Department of Labor’s fiduciary rule, and an Executive Action calling for a review of the Dodd-Frank legislation signed in reaction to the financial crisis. This allows his administration to further review the DOL fiduciary rule put in place under the Obama administration and set to take effect in April. This should come as no surprise as President Trump has telegraphed this action for quite some time. Whether or not you agree with the rule, its purpose was to require that financial advice given to investors with 401(k) accounts or IRAs be in their best interest. This rule has been debated far and wide since it was announced, but I don’t believe it is the rule that matters most.
As an investor, regardless of the rule, you should make sure that you understand the basis of the business relationship you have with the person providing you investment advice. Are they required to place your best interest first, or are they selling you a product as a broker or agent?
When is the last time you reviewed your 401(k) or retirement account? I’m not talking about opening your statement and taking a cursory glance at the balance. The beginning of the calendar year is a good time to do an annual review. Too many times, investors set the deferral rate and investments in their retirement accounts and forget about it. You should annually review your portfolio to make sure that you are (1) saving as much as you can, (2) your risk level remains appropriate and (3) that you have selected the right investments. Reviewing your account annually will help you better understand your financial path to retirement and allow you to correct mistakes that could otherwise linger for years.
Increase your Savings Rate
Research suggests that the single most important factor in achieving retirement readiness is how much you save. The concept of retirement readiness can be boiled down into one simple concept. Will you be happy in retirement without worrying too much about money? We measure retirement readiness as the ability to use your investments to generate income that will replace your salary when you retire. Rather than think about how much money is in your account, make sure you are aware of how much monthly income you can expect that money to provide. Most of the major 401(k) plan providers offer tools that help project how much monthly income you can expect given current savings rate. The example below shows various sources of income, current estimated monthly income goal and your shortfall if applicable. Additionally, the Plan’s investment advisor can often help with retirement planning questions.
Source: Voya Financial
For 401(k) plan accounts, this time of year is a good time to assess whether or not you are saving as much as possible. If you have received a raise, or your financial circumstances have changed, consider increasing your savings rate. As a rule of thumb, the 401(k) industry recommends saving 10% to 15% of your salary. The earlier you start the better off you will be because you will have longer to enjoy the benefits of expected compounded growth. The more money in your account at retirement the more income it will be capable of generating. Remember, generating income in retirement is one, if not the number one purpose of the 401(k) retirement plan account.
As I am sure you have heard by now, Bob Dylan was recently awarded the 2016 Nobel Prize in Literature and that the award has stirred much debate. In fact, to add to the controversy, the Swedish Academy that awards the prize, after many failed attempts, gave up trying to reach Dylan to notify him of the prestigious honor. No doubt, Dylan’s lyrics, which were poetic and never shied away from controversy, will long be remembered for the impact they had on our world. Perhaps, at least for me, his most meaningful verse was in the song, “The Times They Are A-Changin’.” “If your time to you / Is worth savin’ / Then you better start swimmin’ / Or you’ll sink like a stone / For the times they are a-changin’.”
This lyric stands out to me because of the simple fact that we do live in an ever-changing world. Our ability to adapt to change is the key to not sinking like a stone. As an investment advisor assisting retirement plan sponsors and participants, I look for ways to help clients deal with the imminent changes on the horizon. Currently, the retirement plan industry faces significant change driven by the Department of Labor (DOL). In April of 2017, the DOL will begin to phase in new rules requiring investment advice to be held to a best-interests standard. I will write more on this in blogs to come. Today, I want to stress that while the times will continue to change, those changes often impact how we do things. But changes do not necessarily impact what we are attempting to do and why we are doing them.
The purpose of a retirement plan is simply to help participants save for retirement. There are many reasons for the complex rules that govern the administration of a plan, but when you boil it all down, the end goal is to help participants build wealth that can be used in retirement. With that goal in mind, my logical next question, as an advisor, is how can I help clients best reach that goal? What can be done to help drive the best possible outcome for plan participants? Two things immediately jump to mind.
12 Sep 2016
These days, we can hardly pick up a newspaper and not find an article about retirement. Of course, the endless articles addressing the current election often camouflage these articles. Elections, especially Presidential elections, always make for meaty reporting, but I don’t have to tell you that this one seems to be over the top. However, hidden amongst the election news are important articles about how to prepare for retirement. I’d like to add a piece to that stack.
Retirement seems daunting to many because of the multitude of worries regarding money, healthcare and simply what will you do in retirement. There are too many unknowns; market returns, interest rates, future taxes, and inflation are all uncertain. All of these worries can cloud the fairly simple concept of how to save for retirement. At the risk of sounding like a cliché, I recommend that clients apply the KISS approach – Keep it Simple Stupid. You can achieve success in retirement savings by focusing on three basic factors.
1. Save as much as possible (and a little more). The amount to save will depend upon your retirement goals, but an easy back of the envelope approach is to save 12-15% of salary over a career. The single most important factor in saving for retirement is how much you save. Take full advantage of the company match (if offered) to help you reach that 12-15% goal. Compounding returns also help, which means that the earlier you start to save for retirement, the better.
2. Diversify your investments and take an appropriate amount of risk. Younger savers can afford to take higher risk in their portfolios because they have more time to weather market downturns. Riskier portfolios achieve higher expected returns over time. Investors should reduce risk as they move closer to retirement. Regardless of risk level, prudent investors should broadly diversify their portfolios globally and across asset classes.
3. Seek advice from a professional when making decisions about how much to save and how to invest your money. Retirement is the largest investment most people will make. These are extremely important decisions that have the potential to significantly impact your life. Getting them right could make the difference when it comes time to retire.
So, going back to the KISS concept, saving for retirement can be simplified into three key principles. Save as much as possible, invest smartly by taking the appropriate amount of risk and diversifying broadly and seek advice when you need it. It does not have to be more complicated unless you want it to be.
03 Aug 2016
Have you ever bought a can of beans at the grocery store? It is pretty easy to do, right? You might be looking for baked beans or red beans, but all you have to do is look for the type you want, check the price and grab the can off the shelf. Wouldn’t it be nice if all purchases were that simple? Sorry, that just isn’t the case. Whether you are buying a car or opening a checking account, transactions these days can be complicated. Pricing schemes and paperwork are only a couple of the difficulties one might face.
Pricing a 401(k) retirement plan can be downright daunting, especially if you don’t do so on a regular basis, which very few people do. As an advisor to 401(k) plan sponsors, I use excel spreadsheets to analyze pricing structures in order to develop apples to apples comparisons for clients. I can tell you flat out that it is nothing like buying a can of beans at the grocery. However, if you make the effort, you can get an accurate comparison and potentially reduce the fees of your plan, which effectively means more money in participants and sponsors pockets. We do this for our clients at ThirtyNorth Investments.
Many plan sponsors attempt to analyze plan fees, get about half way into it and throw up their hands in frustration. Then they return to the many other pressing matters of their organizations. At ThirtyNorth Investments, we help our clients determine exactly what and to whom they are paying fees for their plans. We do this regularly, so we know where to look.
When we begin to decide about our can of beans, we look at the three main components of plan fees:
1. Administrative costs – You might prefer Trappey’s or Bush’s Beans. These costs are akin to the brand of the plan and include plan record keeping, administrative (including filing of Form 5500), accounting, legal and trustee functions. Often a Record Keeper handles this entire area and charges your plan on a percentage of assets or flat fee basis. We strongly believe plan sponsors should pay a reasonable flat fee or a low asset based fee for these services. The amount of dollars in an account should not change the required administrative work.