The SECURE Act: A New Hope for Retirement Savings

What is underway as one of the most significant changes to retirement savings plans in years, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) was passed in May 2019 by the U.S. House of Representatives.  The Act is awaiting approval by the U.S. Senate later this month (August 2019). If passed, the SECURE Act will:

• Change the way company retirement plans are administered
• Offer more investment options
• Allow plan participants access to financial advisors
• Change the retirement plan’s distribution ages
• Mandate employee retirement plan participation is offered to both full-time and part-time employees.

If the SECURE Act is passed in the U.S. Senate and becomes law, it will be the greatest change to retirement savings plans since Congress allowed for automatic enrollment of employees and the addition of Target Date funds to retirement plans in 2006.

The SECURE Act aims to help Americans save more for retirement with advisory services and financial education now being included as part of all company retirement plans. Small businesses previously left out of offering retirement plans due to the high cost of plan administration, will now be grouped with other small businesses to allow for cost-sharing.

Most U.S. employer retirement plans administer by third-party providers, not the investment company or the financial advisor, and are a direct cost to the employer. Employer’s pay for each employee that participates in the plan, yearly upfront costs for having a retirement plan, and the employer contribution match.

What are the main features of the SECURE Act?

• Increasing the RMD (Required Minimum Distribution) age from age 70 ½ to age 72.
• Section 529 education savings account owners will be allowed to use retirement accounts to cover the costs of homeschooling, qualified student loan repayments of up to $10,000 (siblings included), private schools, and apprenticeships for the beneficiary of the account. The catch is a 529 plan must be in place for the retirement account to be used for education with no tax or early withdraw penalty.
• New 10-Year Rule to replace 5-Year Rule. Retirement accounts must distribute all benefits within ten years after a retirement plan participant dies or an IRA owner dies, except when the beneficiary is a spouse, disabled or chronically ill, a child who hasn’t reached the age of majority, or a beneficiary not more than ten years younger than the deceased owner. Currently, all benefits from an inherited retirement account or IRA must be depleted by the end of the fifth year of the owner’s death.
• Employees can make contributions after age 70 ½ to their retirement accounts; currently, workers over age 70 ½ are unable to contribute to their retirement savings accounts. The Act would help workers who plan to continue to work into their 70’s save additional money for retirement.
• 401(k) plans will offer annuities as an investment choice to help workers help guarantee a portion of their retirement savings from market risk. Annuities are backed by the claims-paying ability of the insurance company and are an insurance product.
• Parents would be allowed to withdraw $5000 penalty-free to pay for expenses related to the birth of a child or a new child through adoption.
• Permanent part-time workers (working 500 or more hours per year for at least three consecutive years) would be allowed to participate in their company’s retirement plan.

The goal of the SECURE Act is to help American’s save more for retirement, which is also my goal for my clients. If you have questions on retirement savings plans, other investments outside of your employer’s plan or education savings plans, feel free to reach out to our office to schedule a meeting anytime.

The Legitimate Value of Financial Advice

The financial advice industry has changed for advisors with a fiduciary financial planning emphasis in their practice.  These advisors have chosen process over product for the benefit of their clients. Additionally, new regulations, technology-enabled efficiencies, and fee compressions will continue to influence the advice industry and ultimately lead to higher client satisfaction and asset growth through relationship management.  No longer is relationship management considered merely customer service; it has evolved into a crucial element of each client’s experience.

Relationship management takes time but is enhanced when advisors implement the latest technology to help streamline the financial planning process and asset management aspects of their business.  Advisors that provide advice, transparency, and convenience along with ‘soft skills,’ such as developing deep relationships with their clients, differentiate themselves from their competitors- both human and Robo.

Although the client ultimately determines the value of the advice they receive, the advisor must decide what benefit comes from the cost of managing that relationship. Both sides of the advice relationship need to be assessed to determine the benefits to each party.

According to a research report by David M. Blanchett, Ph.D., CFP^® and head of retirement research at Morningstar Investment Management published in April 2019, advisors that provide relationship management and asset management as part of their practice produce better results for their client's portfolios than those advisors who leave the relationship management out. Those advisors that don't provide relationship management are considered 'transactional advisors,' only providing advice in hopes of producting a transaction and receiving payment. 

Relationship management is the ‘value-add’ of the advisor-client relationship, which, when providing behavioral coaching, can add basis points of value for the client.  Working with an advisor that understands your ‘pain points’ can help divert bad financial decisions when the stock market declines or talk you out of making bad investments. 

Relationship management technology will continue to enhance the advisor-client relationship by reducing time spent on administrative tasks and increasing time with clients. The use of technology translates to cost-savings to the client and advisors and helps increase the value of working with a financial advisor. The relationship building, processes, and planning for the benefit of the client is the legitimate value of financial advice which can’t easily be replaced by transactional investing.

Are You Losing Sleep Over Money?

Many Americans are losing sleep over money, according to a January 2019 survey by Bankrate. The media may report a ‘strong U.S. economy,’ but many people experience stress outside of what’s happening in the broader economy. The survey indicates that a large number of Americans live paycheck to paycheck and continue to struggle financially year after year. The top five money stresses keeping survey respondents awake:

• 32% reported stress paying everyday expenses
• 24% indicated stress about not having enough saved for retirement savings
• 22% were concerned about being able to pay for health insurance and healthcare.
• 18% stress about settling credit card debt and making mortgage or rent payments (18%).

So why are more people feeling financial stress despite the strong economy we’ve experienced since the recession? Usually, wages increase during an economic expansion, but the rising cost of living is eating up more of each paycheck, leaving little leftover for non-discretionary spending. Working Americans make only about 10% more than they did in 1973, when adjusted for inflation, according to a 2017 Brookings Institute Report. If we aren’t making more money, what can we do to sleep better at night?

• Create a Spending Budget- if it isn’t in the budget, don’t make a purchase. Part of the budget process should be assessing what you can eliminate. Maybe it’s a satellite TV package that’s bundled with home phone and internet.
• Automate retirement savings directly from your payroll deductions and automate savings contribution increases.
• Seek employment at companies that provide health insurance and also have an HSA (Health Savings Account) as part of their benefits package. An HSA is yours to keep and can be rolled into another HSA if you transfer jobs to help you pay for unexpected medical expenses. Another benefit of an HSA is it can be used for long-term care after you retire.
• Create a plan to pay off credit card debt and “cut the card,” or so to speak. Discontinue using credit for purchases and stop using ‘rewards’ to justify credit spending. If you use credit cards to pay for emergency spending, work to create an emergency fund for unplanned financial emergencies.
• If you have a significant mortgage or rent payment, consider moving to a more affordable residence or geographic area within your budget.  

Evaluating your spending and debt can reap greater rewards later, even on a stagnant wage if you don’t foresee making more money soon. Financial planning includes accessing your current situation and developing a plan so that you can save more and be financially secure.

Round Two of a Recession Amid Trade Wars?

As the economy shows signs of modest improvement, indications of downward shifting in U.S. production from the residual effects of the trade war are starting to surface, according to the May 2019  Federal Reserve’s Beige Book Report. The Beige Book Report compiles from information gathered by the twelve Federal Reserve Districts through direct interviews with businesses in differing business sectors. The report is published eight times per year.

The latest report indicates a slight improvement over the previous period, but with moderate gains in activity. While some sectors reported modest growth, others noted a slowdown due to tariffs on raw materials resulting in direct price increases to U.S. consumers. Many contributing businesses reported an uncertain outlook for future growth and production. Key report findings include:

• Residential construction and real estate show signs of growth, but both sectors show wide variation in sentiment across Districts.
• Consumer spending is positive, but weakening
• Tourism is stronger (seasonal), but vehicle sales are lower than in the last reporting period.
• Loan demand indicates growth, but positive reporting is mixed.
• Agricultural market conditions remain weak with a few Districts reporting slight improvement.

There are slight improvements in the U.S. economy, but the threat of a world-wide recession fueled by trade wars remains a concern among top financial analysts.

 If trade wars are temporary, similar to the risk of a trade war with Mexico in June 2019, the damage can easily be averted. However, as trade wars implode globally and are long-lasting escalations, the potential of far-reaching economic effects domestically and abroad is real.

The Fed’s semi-annual Monetary Report to Congress released last month in July 2019 reported: “Data for the second quarter suggest a moderation in GDP growth-despite a pickup in consumption-as the contributions from net exports and inventories reverse and the impetus from business investment wanes further.”

The U.S. economy is dependent on exports and balanced imports and ties to global issues, not just domestic issues. If you have concerns about your portfolio or the sector holdings within it, now may be a good time to review, rebalance, and plan for a possible secondary recession.