It’s unsurprising that American workers love their retirement plans and don’t want them to change. The Investment Company Institute’s (ICI) recent research report, “American Views on Defined Contribution Plan Saving, 2020” confirms this fact in no uncertain terms. ICI has conducted this study for 13 years. Here are two key takeaways from the report.
First, American workers, who have a 401(k) plan or an IRA, like them and believe the accounts are instrumental in helping incentivize saving.
More than 90% of these workers agree that the plans simplified the saving process, helping them focus on the long term and
86% agreed that the tax treatment was a big reason they were saving. Almost all of these workers agreed that they should be able to choose and control their investments in the accounts. And
83% felt like retirement accounts could help them meet retirement goals.
Second, there’s a lot of talk in the political arena about altering retirement benefits to generate tax revenue, and workers are paying close attention to this. They strongly oppose changes to the tax advantages, contribution limits and removing control of investment decisions that come with 401(k) plans and IRAs:
87% of those saving via a 401(k) plan or IRA disagreed with the concept of the government taking away the tax advantage.
89% disagreed with the idea of reducing contribution limits. And
89% disagreed with the thought of giving away their ability to decide how to invest their money.
These results should clearly indicate to plan sponsors that they offer a benefit highly valued by their workers and that the workers gain financial security by receiving the benefit. The American retirement plan system is functioning well and workers do not want the benefit to change, especially when it is to their disadvantage. As my father used to say, “if it ain’t broke, don’t fix it.”
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Fritz Gomilahttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngFritz Gomila2021-04-01 15:59:222021-04-01 17:07:02Thin(k) About Your 401(k) Plan: What A Great Benefit!
Trailing returns can be a fickle beast. We are about to see dramatic examples of why rolling returns can often convey a deceiving message, especially when it involves an unprecedented time period like 2020. The intense market drop in March of last year began moving back upward just about the time the 1st Quarter ended. That means that this quarter, the published 1-year returns will begin at market lows.
If you had new cash, and invested during the crisis, then enjoy those 1-year numbers. They look pretty amazing, even for the hardest hit asset classes. If you were invested through the entire year of 2020, please take those numbers with a grain of salt.
In the chart above, I used a US real Estate ETF. This isn’t actively managed, and it’s designed to represent the general US Real Estate market. In early April, this ETF will publish something around a 50% increase for the 1-year trailing return. If you tick back the performance period to encompass the whole 2020 experience and the first three months of 2021, however, the 15-month return is really more in the 1% range.
If you were fully invested last year, one trick to use in assessing how distorted the trailing 1-year number is by looking for the calendar returns for the same investment. They usually are published on the same factsheets, and they can help you sort out the full story.
It’s no surprise that with the change of presidential administrations that we would see regulations changing. Late in the Trump Administration there were two regulations that particularly affected ESG (environmental, social and governance) investing. Many were concerned about these policy shifts, but as you’ll see, it appears that these rule changes have been put on hold at least temporarily if not permanently.
That was big news, and it didn’t stop there. Another policy was to limit ESG considerations in fiduciary proxy votes. Plan Sponsors serve as fiduciary to the plan and in the selection of investment options must, therefore, take into consideration how the funds they select vote proxies. 401k Specialist reported $7.9 trillion invested in all employer based defined contribution plans, of which $5.9 trillion were invested in 401k plans.* That is a lot of money under the watch of the DOL covered under ERISA Law.
The big news didn’t last long. On President Biden’s first day in office, he issued an executive order directing federal agencies to review existing regulations issued or adopted during the Trump administration “that are or may be inconsistent with, or present obstacles to, the policies” the new president set forth “to promote and protect public health and the environment.”+
Not long after the order, the DOL seemed to back away from its final rule from just a few months back. Here’s what it had to say about non-pecuniary factor consideration and proxy voting by fiduciaries: “Until the publication of further guidance, the department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules.”+
So much for final rules. The possibility of adding ESG investment options to ERISA governed retirement plans without potentially violating fiduciary responsibility is back on the table. Stay tuned.
*401k Specialist, 401k Assets Totaled $5.6 Trillion in First Quarter 2020, by John Sullivan, Editor-in-Chief, June 17, 2020.
+ ThinkAdvisor, DOL Won’t Enforce New Rules on ESG in Retirement Plans, by Bernice Napach, March 10, 2021.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Fritz Gomilahttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngFritz Gomila2021-03-22 09:45:272021-03-22 09:45:27Thin(k) About Your 401(k) Plan: ESG Investing in Your 401(k) Account
Are we in for a bumpy recovery ride? The above chart shows the average implied volatility on the left axis during the second year of a bull market, which is represented on the bottom axis.
March 23rd will mark the 1-year anniversary of the COVID-19 market low and the start of a new upward bull market environment. Year two of a bull market is about to begin. History suggests that volatility tends to really pick-up a couple months into the second year. If it holds true for this recovery, then May, June and July of this year could see above average volatility.
Our typical portfolio design factors in long-term volatility expectations, although short-term volatility can become a very big distraction. The drama of “the best day” and the “worst day” headlines can cause a significant amount of anxiety. But according to this chart, by the end of the second year, average historical volatility seems to taper down.
Every recovery has its own path, but it can be a relief to know that the bumps aren’t unexpected.
Weekly Market Recap, JP Morgan Asset Management. March 15, 2021. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/weekly-market-recap-us.pdf
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Sarah Bomhoff, CFA, CIPMhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSarah Bomhoff, CFA, CIPM2021-03-19 09:10:082021-03-19 09:10:08Thoughts in Charts: A Bumpy 2nd Year
One of the most common phrases in the COVID Crisis financial era seems to be “don’t fight the Fed”. While there is a lot of uncertainty in the economy, the influx in available money from the Federal Reserve and U.S. Treasury has been extensive. If we are going to trust this money as supporting our markets, it’s probably important that we understand the tools being used.
This week’s thoughts in charts illustrates the ways in which money has been flowing into the system, but also provides an opportunity to see the structure and the timing.
There are two types of programs:
Loan Facilities that lend directly
Purchase Facilities that buy debt from those that lent directly
The Loan Facilities are a bit easier to get your head around, partially because they are familiar from the 2008 crisis and because most of us are familiar with receiving a direct loan. The Paycheck Protection Program (PPP) was by far the largest of the direct lending activity with about $525 billion issued to small businesses.1 The chart illustrates that these Loan Facilities’ programs got off the ground quickly and pumped a substantial amount of money into the economy.
The Purchase Facilities are a little more interesting because they are a newer concept. The idea here is that the government will bear some of the risk born by lenders. As the crisis ramped up, it was clear that the risks of loaning money were higher. To try to incentivize banks and other institutions to keep loaning money, the government agreed to purchase a substantial portion of the loans. The lenders were no longer responsible for taking the full brunt if the loan could not be repaid; therefore, they remained incentivized to loan.
Because the Purchase Facilities concept was newer it took more time to get off the ground. While the Loan Facilities were in full swing or winding down by June of 2020, the Purchase Facilities were just ramping up.
One of the quickest Purchase Facilities programs to get off the ground was the corporate bond support. If you owned corporate bond mutual funds in 2020, you may have noticed that your results were higher than we usually expect. In part, you can thank the Purchase Facilities for gain, as their promise to buy corporate debt restored a crashing bond market.
On the slower side of the Purchase Facilities was the Main Street Lending Program, which didn’t really ramp up until the end of the year. It targeted loans to mid-sized companies that had too many employees for PPP but were too small for some of support going to giant corporations. As of December 31, 2020, the program issued about $17 billion in loans.1 This program was tiny when compared to PPP, but this is still new money that has really just started circulating in the U.S. Economy.
With all of these facility programs targeting specific spaces in the market, it’s no wonder the market isn’t fighting back. The 2008 Financial crisis really solidified the Loan Facilities as a tool, and now the COVID crisis has likely done this with the Purchase Facilities.
1Donald P. Morgan and Steph Clampitt, “Up on Main Street,” Federal Reserve Bank of New York Liberty Street Economics, February 5, 2021, https://libertystreeteconomics.newyorkfed.org/2021/02/up-on-main-street.html.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Sarah Bomhoff, CFA, CIPMhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSarah Bomhoff, CFA, CIPM2021-03-10 08:59:042021-03-10 08:59:04Thoughts in Charts: No Fighting It
It’s the annual proxy season, and many eyes are on investor votes concerning a variety of corporate matters including the election of board members.
Suzanne Mestayer
In a world increasingly focused on diversity, equity and inclusion, we may wonder to what extent these concepts are embraced within the corporate boardroom. What is the composition of most boards? Are we still seeing members who represent a “first” in a category?
This topic is centered on the G (governance) of ESG investing. Our firm has researched, monitored, and presented the topic of board composition to groups for the past six years, with specific focus on gender. However, we recognize that gender alone does not fully represent diversity. It includes minority and ethnic representation, as well as diversification of skills, age, and functional experiences. The belief, is that these differences provide for better decision making, mitigation of risk, and improved performance.
Looking for data that accurately presents the “state of the boardroom” on gender and minority diversification, we can begin with statistics from the S&P 500 companies. For the past 35 years, Spencer Stuart has published a Board Index that comprehensively reports trends and statistics on the topic of board governance within the S&P 500. The 2020 report was recently released, and it reveals the following about diversity:
Every S&P 500 company had at least one woman on its board, with 39% of boards having three women and 20% of boards having four women. On average, three board seats were occupied by women.
In 2020, women held 28% of board seats, while they held 16% in 2010, a 75% increase.
Of the top 200 (as measured by revenue) of the S&P 500 companies, 97% had at least one minority director in 2020, an increase from 89% in 2010.
Of the same top 200 companies, all minorities together held 20% of board seats.
Of new independent board members appointed during 2020, 59% were women and/or minorities. 22% were minorities (12% men and 10% women) and 47% were women.
The data is encouraging, yet it shows more progress for women in the past 10 years than minorities. In addition, the commentary in the report notes that the low turnover of existing board members opens few opportunities for new board members each year. Some companies have increased the size of their board in order to reach their desired diversity levels.
What is not considered above, however, are statistics relating to public companies that are smaller than the S&P 500. If we broaden the database to the 3,000 largest public companies, we find less progress with both gender and minority board representation. The larger companies are clearly setting the pace.
The investing public is holding companies accountable for all aspects of ESG, particularly through the stewardship of institutional managers ( e.g. Blackrock, Vanguard, State Street, etc.). Board diversity is an important part of the Governance evaluation. With the increasing responsibilities of board members for oversight of corporate activities, the diversity of the board will likely remain a best practice well into the future.
Suzanne T. Mestayer is managing principal of ThirtyNorth Investments, LLC.
All investment strategies have the potential for profit or loss.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
Thin(k) About Your 401(k) Plan: What A Great Benefit!
It’s unsurprising that American workers love their retirement plans and don’t want them to change. The Investment Company Institute’s (ICI) recent research report, “American Views on Defined Contribution Plan Saving, 2020” confirms this fact in no uncertain terms. ICI has conducted this study for 13 years. Here are two key takeaways from the report.
First, American workers, who have a 401(k) plan or an IRA, like them and believe the accounts are instrumental in helping incentivize saving.
Second, there’s a lot of talk in the political arena about altering retirement benefits to generate tax revenue, and workers are paying close attention to this. They strongly oppose changes to the tax advantages, contribution limits and removing control of investment decisions that come with 401(k) plans and IRAs:
These results should clearly indicate to plan sponsors that they offer a benefit highly valued by their workers and that the workers gain financial security by receiving the benefit. The American retirement plan system is functioning well and workers do not want the benefit to change, especially when it is to their disadvantage. As my father used to say, “if it ain’t broke, don’t fix it.”
For disclosures, please click here.
Thoughts in Charts: Beware of the 1-Year Returns
Trailing returns can be a fickle beast. We are about to see dramatic examples of why rolling returns can often convey a deceiving message, especially when it involves an unprecedented time period like 2020. The intense market drop in March of last year began moving back upward just about the time the 1st Quarter ended. That means that this quarter, the published 1-year returns will begin at market lows.
If you had new cash, and invested during the crisis, then enjoy those 1-year numbers. They look pretty amazing, even for the hardest hit asset classes. If you were invested through the entire year of 2020, please take those numbers with a grain of salt.
In the chart above, I used a US real Estate ETF. This isn’t actively managed, and it’s designed to represent the general US Real Estate market. In early April, this ETF will publish something around a 50% increase for the 1-year trailing return. If you tick back the performance period to encompass the whole 2020 experience and the first three months of 2021, however, the 15-month return is really more in the 1% range.
If you were fully invested last year, one trick to use in assessing how distorted the trailing 1-year number is by looking for the calendar returns for the same investment. They usually are published on the same factsheets, and they can help you sort out the full story.
For disclosures, please click here.
Thin(k) About Your 401(k) Plan: ESG Investing in Your 401(k) Account
It’s no surprise that with the change of presidential administrations that we would see regulations changing. Late in the Trump Administration there were two regulations that particularly affected ESG (environmental, social and governance) investing. Many were concerned about these policy shifts, but as you’ll see, it appears that these rule changes have been put on hold at least temporarily if not permanently.
In October of last year, the Department of Labor (DOL) issued a final rule for private-sector retirement plans regarding non-pecuniary factors like ESG ,which limited these factors, stating that, “retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.”
That was big news, and it didn’t stop there. Another policy was to limit ESG considerations in fiduciary proxy votes. Plan Sponsors serve as fiduciary to the plan and in the selection of investment options must, therefore, take into consideration how the funds they select vote proxies. 401k Specialist reported $7.9 trillion invested in all employer based defined contribution plans, of which $5.9 trillion were invested in 401k plans.* That is a lot of money under the watch of the DOL covered under ERISA Law.
The big news didn’t last long. On President Biden’s first day in office, he issued an executive order directing federal agencies to review existing regulations issued or adopted during the Trump administration “that are or may be inconsistent with, or present obstacles to, the policies” the new president set forth “to promote and protect public health and the environment.”+
Not long after the order, the DOL seemed to back away from its final rule from just a few months back. Here’s what it had to say about non-pecuniary factor consideration and proxy voting by fiduciaries: “Until the publication of further guidance, the department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules.”+
So much for final rules. The possibility of adding ESG investment options to ERISA governed retirement plans without potentially violating fiduciary responsibility is back on the table. Stay tuned.
*401k Specialist, 401k Assets Totaled $5.6 Trillion in First Quarter 2020, by John Sullivan, Editor-in-Chief, June 17, 2020.
+ ThinkAdvisor, DOL Won’t Enforce New Rules on ESG in Retirement Plans, by Bernice Napach, March 10, 2021.
For disclosures, please click here.
Thoughts in Charts: A Bumpy 2nd Year
Are we in for a bumpy recovery ride? The above chart shows the average implied volatility on the left axis during the second year of a bull market, which is represented on the bottom axis.
March 23rd will mark the 1-year anniversary of the COVID-19 market low and the start of a new upward bull market environment. Year two of a bull market is about to begin. History suggests that volatility tends to really pick-up a couple months into the second year. If it holds true for this recovery, then May, June and July of this year could see above average volatility.
Our typical portfolio design factors in long-term volatility expectations, although short-term volatility can become a very big distraction. The drama of “the best day” and the “worst day” headlines can cause a significant amount of anxiety. But according to this chart, by the end of the second year, average historical volatility seems to taper down.
Every recovery has its own path, but it can be a relief to know that the bumps aren’t unexpected.
Weekly Market Recap, JP Morgan Asset Management. March 15, 2021. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/weekly-market-recap-us.pdf
For disclosures, please click here.
Thoughts in Charts: No Fighting It
This week’s thoughts in charts illustrates the ways in which money has been flowing into the system, but also provides an opportunity to see the structure and the timing.
There are two types of programs:
The Loan Facilities are a bit easier to get your head around, partially because they are familiar from the 2008 crisis and because most of us are familiar with receiving a direct loan. The Paycheck Protection Program (PPP) was by far the largest of the direct lending activity with about $525 billion issued to small businesses.1 The chart illustrates that these Loan Facilities’ programs got off the ground quickly and pumped a substantial amount of money into the economy.
The Purchase Facilities are a little more interesting because they are a newer concept. The idea here is that the government will bear some of the risk born by lenders. As the crisis ramped up, it was clear that the risks of loaning money were higher. To try to incentivize banks and other institutions to keep loaning money, the government agreed to purchase a substantial portion of the loans. The lenders were no longer responsible for taking the full brunt if the loan could not be repaid; therefore, they remained incentivized to loan.
Because the Purchase Facilities concept was newer it took more time to get off the ground. While the Loan Facilities were in full swing or winding down by June of 2020, the Purchase Facilities were just ramping up.
One of the quickest Purchase Facilities programs to get off the ground was the corporate bond support. If you owned corporate bond mutual funds in 2020, you may have noticed that your results were higher than we usually expect. In part, you can thank the Purchase Facilities for gain, as their promise to buy corporate debt restored a crashing bond market.
On the slower side of the Purchase Facilities was the Main Street Lending Program, which didn’t really ramp up until the end of the year. It targeted loans to mid-sized companies that had too many employees for PPP but were too small for some of support going to giant corporations. As of December 31, 2020, the program issued about $17 billion in loans.1 This program was tiny when compared to PPP, but this is still new money that has really just started circulating in the U.S. Economy.
With all of these facility programs targeting specific spaces in the market, it’s no wonder the market isn’t fighting back. The 2008 Financial crisis really solidified the Loan Facilities as a tool, and now the COVID crisis has likely done this with the Purchase Facilities.
1Donald P. Morgan and Steph Clampitt, “Up on Main Street,” Federal Reserve Bank of New York Liberty Street Economics, February 5, 2021, https://libertystreeteconomics.newyorkfed.org/2021/02/up-on-main-street.html.
For disclosures, please click here.
ESG investing: Spotlight on board composition
It’s the annual proxy season, and many eyes are on investor votes concerning a variety of corporate matters including the election of board members.
Suzanne Mestayer
In a world increasingly focused on diversity, equity and inclusion, we may wonder to what extent these concepts are embraced within the corporate boardroom. What is the composition of most boards? Are we still seeing members who represent a “first” in a category?
This topic is centered on the G (governance) of ESG investing. Our firm has researched, monitored, and presented the topic of board composition to groups for the past six years, with specific focus on gender. However, we recognize that gender alone does not fully represent diversity. It includes minority and ethnic representation, as well as diversification of skills, age, and functional experiences. The belief, is that these differences provide for better decision making, mitigation of risk, and improved performance.
Looking for data that accurately presents the “state of the boardroom” on gender and minority diversification, we can begin with statistics from the S&P 500 companies. For the past 35 years, Spencer Stuart has published a Board Index that comprehensively reports trends and statistics on the topic of board governance within the S&P 500. The 2020 report was recently released, and it reveals the following about diversity:
The data is encouraging, yet it shows more progress for women in the past 10 years than minorities. In addition, the commentary in the report notes that the low turnover of existing board members opens few opportunities for new board members each year. Some companies have increased the size of their board in order to reach their desired diversity levels.
What is not considered above, however, are statistics relating to public companies that are smaller than the S&P 500. If we broaden the database to the 3,000 largest public companies, we find less progress with both gender and minority board representation. The larger companies are clearly setting the pace.
The investing public is holding companies accountable for all aspects of ESG, particularly through the stewardship of institutional managers ( e.g. Blackrock, Vanguard, State Street, etc.). Board diversity is an important part of the Governance evaluation. With the increasing responsibilities of board members for oversight of corporate activities, the diversity of the board will likely remain a best practice well into the future.
Suzanne T. Mestayer is managing principal of ThirtyNorth Investments, LLC.
All investment strategies have the potential for profit or loss.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
For disclosures, please click here.