Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
The pendulum of life is always swinging. With respect to employees and employers the pendulum swang in the direction of paternalism in the middle 20th Century. Employees and their employers had informal contracts that implied that if employees worked there long enough, their employers would take care of them. That pendulum swung in the other direction for a good part of the last 50 years with employees assuming more and more responsibility for their own wellbeing and employers taking a more hands off approach. Is the pendulum swinging back again?
Some new research from PIMCO, a large asset management firm on the west coast, is suggesting that the pendulum is indeed swinging back at least a little bit. In the last couple of years, more and more research has come out that employees trust their employers more than they used to. They are looking to their employers for help and guidance in a number of areas from better health and wellbeing advice to retirement and financial planning tools. This new research from PIMCO is now showing a further iteration in employees and employers working together.
It has long been known that most employees when they retire have almost no idea how to arrange their assets in such a way as to provide a lifetime of income. And why should they? After all, they have been spending a lifetime accumulating assets and saving, not figuring out how to make their assets last the rest of their lives. It appears that employers are starting to take notice and help out. The PIMCO Study shows that in the Small Plan Market (<$50mm in plan assets), the top client priorities in 2020 are Improving Participant Retirement Education, Evaluating Retirement Income for Participants, and Minimizing Fiduciary Liability, in that order.
So what does this mean, or could this mean, to you as a Plan Sponsor? The first question to ask, of course, is do you have any interest in helping your employees prepare for retirement beyond just helping them save through the retirement or 401k plan? If yes, then it is probably a good idea to begin exploring what this assistance would look like. It should begin with education and helping employees understand how to use their assets in retirement. It could then move to helping employees work with an advisor to put together a plan for transitioning into retirement and living the life they want and can afford.
But where does it truly begin? It begins with working with an advisor with experience in helping pre-retirees plan for retirement. Experience helping employees understand their asset mix and the tax implications of using those assets. Experience with Social Security and estate planning.
If you are concerned with your current advisor’s level of experience, please give me a call. I would love to work with you and your employees as they prepare for a retirement they have earned.
Pete Welsh a/k/a 401kGuy
PWC is one of the largest accounting firms in the country working with some of the largest corporations in the US and even around the world. Given their size and scope, they do a lot of research, and one annual report they have been publishing for several years is around Employee Financial Wellness. They have been producing this report for 8 years.
The report is interesting because it asks employees a number of questions regarding their overall financial wellness and preparedness. How confident are employees regarding their financial decisions? What kind of decisions are employees making? What do employees think about their future? And the ones I find most interesting are those around what their employers can do to help them with their overall financial wellness.
Financial Wellness and programs around them in the workplace have been very popular for a number of years now. It’s very seldom I come across a 401k prospect that doesn’t have some type of “program” in place to address financial wellness for their employees. So you would think that after several years of workplace initiatives employees would be feeling better about their finances, right? Less stressed than ever. Ya, well, it doesn’t seem to be working out that way.
In 2017, the PWC survey indicated that 46% of employees said that financial or money matter challenges were their #1 stressor. After years of trying to help employees, the most recent PWC survey indicates that 59% of them now consider financial or money matter challenges their #1 stressor. Almost 30% more employees are stressed about financial matters now than they were just 3 years ago! At this rate, we should have everyone completely freaked out about financial matters by 2025!
So what the heck is going on here? During this time frame, the economy was strong, inflation was virtually non-existent, and unemployment was at historic lows. We can’t blame any of those factors. What I think is going on is an over reliance on technology as the solution to this issue. I see it all the time as companies roll out new programs to help employees. They are well intentioned, and often well-constructed, but they lack much human involvement.
In my practice, when I am able to meet with employees face-to-face to review their situations and make plans, they are not more stressed after our visit(s) but less stressed. Sure we use technology as an enabler, but the real work happens face to face.
If you are an employer who has implemented a Financial Wellness program but are questioning its effectiveness, I would love to sit down and discuss how we can change that result and begin getting your employees less stressed!
Please give me a call.
Pete Welsh a/k/a 401kGuy
I do a lot of 1-on-1 meetings with employees of my corporate clients. The meetings tend to be clumped after employee education sessions as part of the 401k or 403b plan. I always make sure that any employee who wants to have a private conversation with me about their situation has my contact information and we can schedule either a phone or in person consultation.
Yesterday I had a meeting with a young lady (24 years old is young to me) who works for one of my retirement plan clients. She asked to meet to get an opinion that was not a friend’s or family member’s on whether or not what she was doing was the right thing. She was a very impressive woman, in her first job out of college, and had done her homework on the retirement plan, investments, and savings options outside the plan.
As we were getting into her situation, it occurred to me that many individuals would benefit from the work she has done. First, she noted that many of the free planning tools on the web are too simplistic to account for life as we live it. How perceptive! Even at 24 years old she realized that while some of these tools can provide some direction, they are not a map. On-line tools are generally just calculators and none of us are math problems to be solved.
Secondly, she realized the value of saving both before and after tax. She had calculated what she needed to save in the corporate plan to maximize the company match, and then all additional dollars she is putting into a Roth IRA. She has an auto-sweep on her checking account to automatically take $500 per month out of her checking and put into her Roth IRA. What genius! We discussed how having both before tax and after-tax buckets of money in her retirement years will be extremely beneficial. She noted that many of her peers don’t even know that they can contribute to both a company retirement plan and a Roth IRA. It’s true that there are income thresholds that phase out the ability to do this, but for 2020 that threshold is not met until her income hits $124,000, and she is well below that.
After we got a clear picture of her retirement savings strategy, we discussed the need for an emergency fund and only then did we discuss the merits of whether or not she should try to pay down her mortgage.
Suffice to say that she is a remarkable young lady who will clearly be in a great position once she reaches retirement age…in 41 years! But what struck me most about her was how poised, confident, and in control she was after our meeting. I couldn’t help but think what an asset she must be to her employer/my client.
As a financial advisor, some days are better than others, but yesterday was pretty good, and inspired me to continue helping other employees of my clients to get the financial confidence she has. I would love to speak with you about how we might work on this together.
Please give me a call!
Pete Welsh a/k/a 401kGuy
I started working with a new client last week. The initial conversations were around their desire to establish a retirement plan for their small but growing company. The company was started in 2014 by the 2 founders and is in construction. They have now matured to the point where expanding their benefits offering makes sense and they want to reward the employees who were with them in the beginning and attract new talent. All of this is pretty straight forward, and we will be starting up a new plan for them in the next few weeks.
The interesting part of the conversation occurred after we discussed the establishment of the retirement plan. I asked the two owners about the company and what planning they had done. In particular, I asked about their growth plans, as well as their exit plans, including if one should die unexpectedly. They did not have good answers, but their answers were not that unusual for successful entrepreneurs. They have been working hard at growing the business, making sure that it’s moving forward, but not stepping back to consider longer term opportunities and risks.
One item on which we spent considerable time involved what would happen to the business if one of them were to die unexpectedly? They did admit that they had brought this up to one another in the past, but never moved forward to take action or to visit with anyone about it. When I asked them to “give me a rough number” on what they thought the business was worth today, they both said “$1million” at the same time. This means that if one of the partners were to die that the other would need $500,000 to buy out that interest. That’s $500,000 in cash, today. How much more might be needed in 3, 5, or 10 more years? And neither has the $500,000 needed now.
Additionally, we talked about how the founders have been reinvesting most of their earnings into the business to help it grow. This is great in many respects, but by doing so they have not been doing any planning for themselves. The business is everything, but we all know it might not always be. So the conversation quickly moved to how we can begin to de-risk their personal situations by initiating some financial planning for themselves.
In total, it was a good conversation with numerous next steps. They were concerned where to begin on a couple of action items and I told them that I could work directly with their CPA and Attorney to get the ball moving on the buy/sell agreement. I’m putting together some quotes for consideration and gave them a list of items I need to begin working on their personal situations. By breaking everything down into steps and charting a path forward, both partners felt empowered about taking control.
In many respects, that is how I see my job – empowering you as the business owner to take the steps you know need to be done but are unsure where to start. Give me a call at your convenience and we can begin taking those next steps together.
Pete Welsh a/k/a 401kGuy
Now few people are against making more money, so I am not going to suggest that making more is a bad thing. At almost any wage level, people generally lift their gaze to the next level up and begin to think what life would be like if only they were there. Fortunately, many people do move up the salary scale over the course of their careers and often hit peak earning years in their 50s.
However, one common misconception about earning more money is that money alone will result in less stress and financial worry. Some new research out from the Salary Finance suggests that this is just not the case. Salary Finance interviewed over 10,000 employees recently on a variety of Financial Fitness measures. The report is voluminous, and it isn’t possible to cover all the topics mentioned, but the idea that earning more relieves stress is so ingrained in our DNA, that I thought I would use some of the research here to debunk it.
We should start by saying that there is a level of earning below which extreme stress is omnipresent. If a person is earning below subsistence level, stress will be experienced. So let’s for argument sake not consider that low of a level of income. For Salary Finance, they interviewed people at all levels and found that 58% of individuals earning between $25-40k have financial worries. That probably doesn’t surprise any of us.
What was interesting is that 40% of the people earning between $160-200k also have financial worries. Wouldn’t you think the percentage should be much less for this higher income earning group? I bet if you asked someone making $30k if they would have financial stress if they were making $180k, for example, they would say Heck No! But yet, the stress is present to a surprising extent.
So if money alone does not reduce financial stress and worry, what does? It appears that the number one difference is that people with less stress are Planners, using the language of Salary Finance. What is a Planner? Well, it’s someone who lives within their means, has emergency savings on hand, and focuses on long-term financial goals. In short…a Planner!
If you are an employer who would like to help your employees move from Coping to Planning, and thereby maybe not think that you paying them more alone is going to solve their problems, give me a call. I would love to have a discussion about how we can improve the financial lives of your employees.
Pete Welsh a/k/a 401kGuy
I saw some recent research from ValuePenguin that suggested 63% of Americans do not understand how a 401k plan works. This is as recent as May of 2019. Does this surprise you?
Last week I did a number of enrollment meetings for a client of mine. They are a Charter School here in Indianapolis and recently hired about 50 new teachers for the upcoming school year. They are technically a public school which allows them to sponsor a 403(b) plan. I started each meeting by asking for a show of hands of how many in the room understood what a 403(b) plan is. What do you think was the percentage of hands that went up? If only 37% of Americans understand a 401k plan, I can assure you that even less understand a 403(b) plan. In fact, most people in the room were surprised to learn that both types of plans get their name from the corresponding section of the Internal Revenue Code.
For my part, I do not find it surprising that the majority of employees do not fully understand how a corporate retirement plan works. After all, why should they? It’s not their job to understand how these work, it’s mine. And it’s my job to help them understand how to fully take advantage of these plans. A key challenge to doing this is a practical one – time. Most enrollment meetings are designed by the employer to last 20-30 minutes. It is enough time to cover the basics, but do you think that everyone walks out of the room with a full understanding?
What’s the best outcome that can come from an in-person enrollment meeting? For my part, the goal is not to provide a complete understanding of everything about the plan. My goal is to get the employees to take at least one step forward on their investing journey. Especially with younger folks, I encourage a modest percent of their income – 2 or 3 pennies on the dollar in the retirement plan. Once they get started, they can always increase. Certainly deferring to the match is optimal, but many employees starting out struggle with deferring 6% or so of pay. 2% or 3% is at least a start.
So after the meeting, what are the next steps? I encourage employees to contact me directly, and many do. I always find it interesting to visit with employees regarding their own situations. Exploring their own challenges allows for another learning opportunity to explain how the plan works and why they need to take advantage of it.
If you want an adviser for your employees that understands the financial future of your employees requires a long term journey and not just a 20-30 minute drive-by, give me a call!
Pete Welsh a/k/a 401kGuy
I was recently reading an article from the Pension Research Council of the Wharton School of Business and came across this little nugget from Olivia Mitchell from the School, “the baby who will live to be 200 has already been born.” Does anyone think this is a good thing?
Regardless of whether or not Ms. Mitchell is correct, the key point she is making is that people are living longer than they once did. On the whole, this is probably a good thing, right? However, it also raises some obvious issues. The first one, and one that has been noted many times in the financial press, is how are individuals going to plan for what could be a prolonged period of retirement? 100 years ago, retirement was a relatively short period of time. If Ms. Mitchell is correct, retirement in the future could last 100 years?!
The truth is probably somewhere in between, of course, but what will be the consequence for those who have not saved enough for a prolonged retirement, whether that be 20, 30, or even 40 years? Many people say they want to continue or will continue to work into the years that would otherwise be defined as their “golden years.” This is great, if they are able and allowed to do so. Let’s explore that last point
According to a study by ProPublica and the Urban Institute, between 1992 and 2016, 56% of older workers reported either being laid off or pushed out of a job at least once in their older years. Once reemployed, only 1 in 10 reported earning at or above the rate they were making. Rehiring older workers has always been a challenge, and remains so today, even though there are more and more older workers desiring to work!
What’s it going to take for employers to get more comfortable hiring older workers? Obviously there will be a large pool of such older workers available who need and want to work in the future. If we continue to harbor a bias against older workers, how are these individuals going to support themselves in their older age? This situation is going to get uncomfortable for all parties in the not too distant future
We can’t change society in a blog post, but we can at least take accountability for ourselves. If the thought of a prolonged retirement has you concerned and working into retirement is not your first option for several reasons, it is probably time to put together a plan. After all, no one wants to be 150 and standing in line for a job
Give me a call.
Pete Welsh a/k/a 401kGuy
I have long given up believing that investors are “rational” as I was taught in college. As a Finance major, I learned that investors are rational and make decisions in their own best interest. People don’t voluntarily make decisions that do not favor them, I was told, but rather “optimize” their decisions to benefit themselves. HA!
Some new research from Bankrate.com would leave some college professors scratching their heads. The survey asked 1,000 individuals about their investing preferences for 2019 for money that they would be investing for more than 10 years. Obvious categories were Stocks, Cash, Real Estate, Gold, etc. (Real Estate was #1 for 2019, by the way). What was really interesting, however, was a question about how falling interest rates would affect their investing decisions. Now for a “Rational Investor” falling interest rates should have a profound effect on where they put their money for 10 years or longer, just as rising interest rates should affect such a decision. Entire financial empires wobble on whether the Federal Reserve Board will raise or lower interest rates by even tiny percentages, for example. Certainly, a rational investor would factor declining interest rates into their investment decisions for the long term, right?
Nope. Not going to happen. According to BankRate.com’s research, the survey respondents would make almost no changes to their investments in a declining interest rate environment. It appears that people pick a preferred investment and then decide to stay with it regardless of what is happening around it that would impact their long-term returns. In fact, only 33% of the respondents said that if interest rates were declining would they put more money into the stock market. 67% of the respondents are “not rational.” Surprise!
So, what can we make of this information? If people should be making changes to their long-term investments as a result of macro changes in the economy, and the vast majority won’t, we obviously can’t rely on people making their own decisions in their best interest. Rather, the obvious takeaway for me is that investors need to have some distance from their investments and the decisions on those investments. What does this distance look like? To me, it looks like a competent investment advisor. Someone skilled in taking the emotions out of the decisions and applying financial analysis to the situation. It looks like someone who will act in your best interest. I guess, it looks sort of like me. Give me a call so we can discuss your situation.
Apparently, we do. At least you should talk about your parent's retirement with them, according to some new research from TIAA. The research just released last month indicates that 53% of Gen Xers and 66% of Baby Boomers are concerned about their parents’ financial security in retirement. The reason why this is a concern is because we get STRESSED OUT about our parents financial situations as they age. I suppose we didn’t actually need any survey to tell us this.
However, the more worried we get, the more it takes a toll on our own health and financial preparedness. The research seems to suggest a trickle down effect showing the more we are concerned about our parents, the more likely we are to lack confidence in our own retirement prospects. And I wouldn’t be surprised if this lack of confidence that we develop flows down to the next generation.
Is there any hope to break out of this cycle? The good news is yes, and it’s not that complicated, but it’s not that easy either. Evidently, we need to talk about our parents retirement WITH THEM. Having a discussion, and the sooner the better, allows both the parents and the children to understand the realities of retirement better. Discussing begets understanding, which begets planning, which, when done well, can alleviate our concerns. It’s not always a full proof strategy, but it is better than doing nothing and presuming the worse.
Now I said those discussions while simple on paper might be difficult in reality. How might such a conversation begin? I would recommend engaging with a good financial planner to who can assist leading a multi-generational discussion at a neutral location. These types of conversations are never easy, but better to have them with a financial professional than over Thanksgiving Dinner. Those never work out well.
Apparently, Required Minimum Distributions (“RMDs”) are a lot harder than you would think. A new survey from TD Ameritrade finds that only 38% of Americans actually know that RMDs are required from tax advantaged qualified retirement accounts, e.g. IRAs, 401ks. And if we are to believe that the Baby Boomers are retiring at the rate of 10,000/day, it’s safe to say that this could become an issue in the not too distant future.
Not taking RMDs is a problem because the penalty for missing one is 50% of the amount that should have been with withdrawn, in addition to the income tax due! If that seems like a pretty steep penalty, that’s because it is! The good news is that these accounts are generally at financial institutions that are aware of the need to make the RMDs and notify the individual of the amount that needs to be withdrawn. Nevertheless, this doesn’t necessarily always mean things go well
For example, do you know when you MUST begin your first RMD? The first one is due by April 1st of the year FOLLOWING the year in which you turn 70 1/2. That’s all well and good, and many people (or at least some people) actually know this. A problem can surface, however, if you wait until April 1st because delaying doesn’t mean you don’t need to take another distribution by December 31st of that same year. Consequently, you could get two distributions in one year which could do some things to your tax bill that you would rather not happen.
Another common challenge folks face is when they have multiple tax advantaged accounts – IRAs, old 401k balances, etc. Any idea how to calculate what is required there? The math isn’t necessarily that hard, but the actual distributions can be tricky. For instance, if you have multiple IRAs, you can take the total required distribution from 1 IRA or mix it up. No problem as long as the total for the IRAs is distributed. Does it work the same for 401ks? Nope, it does not. Each 401k account stands on its own. How about 403b balances left with old employers. Seems like they should be treated like 401ks, right? Wrong. Now we are back to the IRA method. Don’t worry, if you get it wrong the penalty is only 50%!
There is some legislation that will be changing the RMD rules again if it gets passed this year, which seems like a real possibility. Will the new rules make things less complicated? Maybe…maybe not. You should probably talk to a professional about this. You should probably talk to me.
Give me a call and let’s have conversation.
Pete Welsh aka 401kGuy