Why Investors Should Own International Stocks

Why Investors Should Own International Stocks

 

LUTZ BUSINESS INSIGHTS

 

WHY INVESTORS SHOULD OWN INTERNATIONAL STOCKS

JOSH JENKINS, CFA, SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

 

There is a tendency for investors to focus their attention and investment dollars on assets located within the United States. This tendency is well documented and is referred to as Home Country Bias. People are generally more comfortable with the familiar and there is a certain sense of safety that comes with investing in what you recognize. The fact that the U.S. market has performed much better than its international counterpart in recent years further reinforces investor preference for domestic assets. Is this lack of international exposure wise? Or are these investors missing out on a significant opportunity by not allocating (more) internationally?

A strong argument can be made for maintaining a sizable allocation to international stocks. The benefit can generally be boiled down to a reduction in portfolio risk, while maintaining or even improving the expected return.

The reduction in portfolio risk is primarily a function of diversification. The behavior of the various stock markets across the globe will differ based on their own set of circumstances, each with unique growth prospects, fiscal and monetary policies, regulatory framework, and tax structures.  Globalization has increased the tendency for different markets to behave in similar fashion, but they remain far from perfectly correlated. In normal market conditions certain countries will often zig, while others zag.

The chart below demonstrates the impact on portfolio risk of adding international exposure to an all U.S. stock allocation. The X axis represents the portion of the portfolio allocated internationally, and the Y axis reflects the degree of risk reduction(1). As you can see, even a small allocation to non-U.S. stocks has historically reduced portfolio risk. This benefit increases as the allocation expands, with the maximum benefit generally achieved by allocating 25-40% of the stock exposure to non-U.S. companies. Beyond this level the benefit begins to erode as the portfolio becomes overly concentrated in non-U.S. stocks, which are more volatile on a standalone basis.

 

Risk Reduction From Adding International Stocks to a U.S. Stock Portfolio

Source: Morningstar Direct and DFA. U.S. stocks represented by the Russell 3000 TR index. International stocks represented by the MSCI EAFE NR Index from 1/1979 through 12/1998, and the MSCI ACWI ex US from 1/ 1999 through 1/ 2019. Returns based on monthly data, and the blended portfolios were rebalanced monthly. Risk was represented by standard deviation (annualized).

U.S. stocks have outperformed international stocks for much of the period following the 2008 financial crisis. The scale of the recent outperformance in terms of time and degree can easily lead investors to believe that this is the norm, but is this belief justified? To answer this question, we looked at the relative performance between U.S. and international stocks on a rolling five-year basis going back as far as we have data. The chart below reflects the results of this analysis, and clearly illustrates the relative performance between the two are cyclical. There have been several extended periods over the last 40 years where international stocks handily outperformed the U.S. market.

 

Cyclicality of U.S. vs. International Stock Returns

Source: Morningstar Direct and DFA. U.S. stocks represented by the Russell 3000 TR index. International stocks represented by the MSCI EAFE NR Index from 1/1979 through 12/1998, and the MSCI ACWI ex US from 1/ 1999 through 1/ 2019. Returns based on monthly data.

If we know international markets have outperformed in the past, do we have reason to believe they could again outperform in the future? The key to this question could lie in the relative valuation between the two.

Valuation is a measure of how cheap or expensive a stock (or entire market) is and is one of the best predictors of return over the long run. It is generally quoted in terms of the price paid for a unit of some fundamental figure, such as earnings. In simple terms: the lower the price you pay for an asset, the better the chance it is going to deliver an attractive return. Finally, relative valuation simply compares how cheap or expensive one investment is relative to another.

The chart below applies the relative valuation technique to the comparison of U.S. vs. international stocks(2). The middle grey bar indicates the level where the two alternatives are equally valued. When the green line is above the top grey line, international stocks are considered expensive. They are considered cheap when the green line is below the bottom grey line. As you can see, international stocks are currently near the cheapest levels relative to U.S. stocks in 18 years (as far back as we have data). This provides a sound basis to expect higher returns from international stocks over U.S. stocks moving forward.

 

Relative Valuation: U.S. vs. International Stocks

Source: Morningstar Direct. Valuations are based on an equally weighted composite of price/book value, price/earnings, price/sales, and price/cash flow. The chart illustrates the ratio of the international composite over the domestic composite. U.S. stocks were represented by the Russell 3000 index, international stocks were represented by the MSCI EAFE index. Data from 1/2001 to 12/2018. Gaps in the green relative valuation line are due to missing/inconsistent data.

While valuation is arguably the best predictor of long-term returns, it unfortunately does not tell us much about what is going to happen in the coming days, months, or even years. Markets can and will stay out of balance for extended periods of time. A second look at the cyclicality of returns chart, and you can see the outperformance of one market vs. the other is highly variable in terms of both duration and intensity. Like gravity, valuation should ultimately pull the market back toward balance, even if it takes a long time to do so.

Though many U.S. based investors exhibit Home Country Bias, there are compelling reasons to consider and/or maintain a meaningful allocation to international stocks. Through the benefit of diversification, adding international stocks can reduce fluctuations in portfolio value. While investors exhibiting Home Country Bias have been rewarded with strong performance in the U.S. recently, this relative performance has historically been cyclical. The attractive relative value provides us with a reason to expect international stocks to outperform in the future.

 

  • Risk in this instance is defined as the standard deviation of returns. The reduction in risk is measured by the spread between the standard deviation of the various blended portfolios and the Russell 3000.
  • The Y axis of the relative valuation chart can be interpreted as the discount on buying international stocks vs U.S. stocks. Over the measurement period the price paid for international stocks has average 74% of the price paid for U.S. stocks (based on the equally weighted composites of the four price multiples: P/E, P/B, P/S, P/CF). As of year-end 2018 the price paid for international was 65% of the U.S. price, meaning you can buy international stocks much more cheaply then you have been able to historically.

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over eight years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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February Retirement Plan Newsletter

February Retirement Plan Newsletter

 

LUTZ BUSINESS INSIGHTS

 

FEBRUARY RETIREMENT PLAN NEWSLETTER

REPAY STUDENT LOANS OR SAVE IN A RETIREMENT PLAN? WHY NOT BOTH?

Repay Student Loans or Save in a Retirement Plan? Why Not Both?

Many employees feel squeezed to both pay off their debt and save for their future. A recent Private Letter Ruling (PLR) opens the door for employers to help them.

The average student graduating in 2016 has $37,172 in student loan debt.¹ According to the New York Federal Reserve, more than two million student loan borrowers have student loan debt greater than $100,000, with approximately 415,000 of them carrying student loan debt in excess of $200,000.

What do these numbers mean for you? They mean that debt repayment is typically an employee’s foremost priority. It’s not just the newly minted graduates, either – typically, student loan repayment is stretched over 10 years with close to an 11 percent default rate.

In this climate, don’t be surprised when a desired prospective or current employee inquires how you can help them with their priority – debt reduction. Nor should you be surprised when you find that your debt-burdened employees are not using the savings opportunity of their retirement plan. Many employees feel too squeezed to both pay off their debt and save for their future. Those employees are frustrated not only by their lack of opportunity to save early, as is prudent, but also because they frequently miss out on employer matching contributions in their retirement plans.

Some employers are attempting to solve these issues. On Aug. 17, 2018, the IRS issued PLR 201833012. The PLR addressed an individual plan sponsor’s desire to amend its retirement plan to include a program for employees making student loan repayments. The form of this benefit would be an employer non-elective contribution (a student loan repayment contribution, or “SLR contribution”).

The design of the plan in the PLR would provide matching contributions made available to participants equal to 5 percent of compensation for 2 percent of compensation deferred, it includes a true-up. Alternatively, employees could receive up to 5 percent of compensation in an SLR contribution in the retirement plan for every 2 percent of student loan repayments they made during the year. The SLR contribution would be calculated at year-end. The PLR states that the program would allow a participant to both defer into the retirement plan and make a student loan repayment at the same time, but they would only receive either the match or the SLR contribution and not both for the same pay period. Employees who enroll in the student loan repayment program and later opt out without hitting the 2 percent threshold necessary for an SLR contribution would be eligible for matching contributions for the period in which they opted out and made deferrals into the plan.

The PLR asked the IRS to rule that such design would not violate the “contingent benefit” prohibition under the Tax Code. The Code and regulations essentially state that a cash or deferred arrangement does not violate the contingent benefit prohibition if no other benefit is conditioned upon the employee’s election to make elective contributions under the arrangement. The IRS ruled that the proposed design does not violate the contingent benefit prohibition.

All that said, it is important to note that a PLR is directed to a specific taxpayer requesting the ruling, and is applicable only to the specific taxpayer requesting the ruling, and only to the specific set of facts and circumstances included in the request. That means others cannot rely on the PLR as precedent. It is neither a regulation nor even formal guidance. However, it does provide insight into how the IRS views certain arrangements. Thus, other plan sponsors that wish to replicate the design of the facts and circumstances contained in the PLR can do so with some confidence that they will not run afoul of the contingent benefit prohibition.

Companies are increasingly aware of the heavy student debt carried by their employees, and are exploring a myriad of programs they can offer to alleviate this burden. This particular design is meant to allow employees who cannot afford to both repay their student loans and defer into the retirement plan at the same time the ability to avoid missing out on the “free money” being offered by their employer in the retirement plan (by essentially replacing the match they miss by not deferring with the SLR contribution they receive for participating in the student loan repayment program). This design is not meant to help employees accelerate their debt payoff. If that’s your goal, you would have to do so directly into the student loan repayment program – there is no conduit to do so through the retirement plan.

While the IRS ruled in regard to the contingent benefit prohibition, the PLR states definitively that all other qualification rules (testing, coverage, etc.) would remain operative. Thus, if you wish to pursue adding such provisions to your retirement plan, you must take care as you undertake the design.

The facts provided in the PLR were very basic, and the plan design is very basic in that it requires deferral/student loan repayment equal to 2 percent for a 5 percent employer contribution (either match or SLR contribution) with no gradations. This is important because gradations could create separate testing populations for each increment of the SLR contribution plan, since it is a non-elective contribution, not a matching contribution. This could become a nightmare scenario for non-discrimination testing and administration.

Alternatively, to avoid the potential nondiscrimination testing issues, the benefit could be designed to exclude highly compensated employees. However, that still doesn’t alleviate the potential administrative burden placed on your payroll and human resources teams. Most of the debt repayment programs are not yet integrated with retirement plan recordkeepers. That means that administering some of the interrelated elements of the two plans would have to be undertaken in-house.

There are more than a few consequential elements that you should be wary of while exploring opportunities to assist your employees and employment targets. In all cases it is recommended that you involve your retirement plan’s recordkeeper, advisor and even – in some sophisticated design scenarios – outside counsel to make certain they: (1) don’t inadvertently create qualification issues, (2) understand the potential for additional testing and perhaps additional financial considerations of the design; and (3) are prepared for any additional administration the program may require.

This month’s employee memo gives ideas for eliminating student loan debt. Even if you are not yet offering this benefit, the memo offers other practical ideas to assist your employee population with student loan debt.

 

About the Author, Joel Shaprio, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

EFFECTIVE EMPLOYEE EDUCATION

Fiduciary duty requires you to provide your employees and participants with educational opportunities so they can make informed investment decisions.  It’s not always easy to know what your participants need, want or will take advantage of.  Using a simple framework for your educational program may increase the effectiveness of your program.

 

  1. Provide a consistent, ongoing program using a variety of communication mediums. This can include group meetings, podcasts, online tools, one-on-one meetings or other mediums attractive to your participants. 
  2. Vary the content of your program to provide broad education. Content should include plan basics, such as Basic Investing/Getting Started, but may also include topics related to a participant’s entire financial picture – e.g., Saving for College, Estimating Retirement Income Sources and Needs, Health Care Options – and other topics of consideration to a retiree’s financial well-being.  
  3. Offer online and professional advice tools to help retirees determine how much they need to save and how they will invest their contributions.
  4. Fully disclose to participants, in easily understandable terms, information about the fees associated with their different investment options.
  5. Offer participants opportunities to discuss their risk tolerance level, and help them understand how much risk they are willing to take when investing for their retirement.
  6. Consider allowing employees to take advantage of educational opportunities and/or one-on-one meetings during working hours. This helps send a message to employees that their employer values this important benefit and is interested in helping employees prepare for their future.
  7. Survey employees to determine if they find the educational program valuable, are taking advantage of it, what would make it more attractive and other feedback they may have to help continuously improve the program.

 

Every plan and its participant base is different, and there is no one right structure for an educational program. By starting with the above and being willing to modify your program’s offerings according to participant feedback, your educational program will get stronger, you will meet this responsibility and you may even see employee engagement increase!

 

HEY JOEL!

Welcome to Hey Joel! This forum answers plan sponsor questions from all over the country by our in-house former practicing ERISA attorney.

Hey Joel,

What are the risks for late 5500 filings? – Tardy in Tallahassee

 

Dear Tardy,

The main risk is the daily penalties that accrue from the IRS and DOL for each day the filing is not submitted past the deadline. There is a process you can go through that reduces the amount of daily penalties, but there is a filing charge associated with this process as well.

The DOL has a good Q&A document about the program for correcting a late filing: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/dfvcp.pdf. Some of the penalty dollar amounts may have changed since this was published as they are adjusted on occasion.

 

Punctual and proud,

Joel Shapiro

 

About Joel Shapiro, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

PARTICIPANT CORNER: DON'T LET STUDENT LOAN DEBT GET IN YOUR WAY OF FINANCIAL SUCCESS

This month’s employee flyer gives participants ideas to assist in eliminating student loan debt. Download the flyer from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt on the next page.

If you find yourself in a position of not being able to pay off your student loan debt and save for your future, you’re not alone. According to the New York Federal Reserve, more than two million student loan borrowers have student loan debt greater than $100,000, with approximately 415,000 of them carrying student loan debt in excess of $200,000. Here are some steps you can take to help eliminate your student loan debt:

 

  1. Make a Budget

Do you have a budget that you’re following each month? If not, create one today! With a monthly budget you can track where you are spending your money and where you can cut back. Then take your savings and put it towards your student loans!

 

  1. Pay More Than the Minimum 

It’s no secret that paying the minimum each month will not

get you far. By paying more than the minimum you can attack the principal at a quicker rate. Then your loans will be paid off faster.

 

  1. Apply Raises and Tax Refunds to Your Student Loans

When you get some extra dough from a raise or tax refund it may be tempting to run out and spend it. Wouldn’t it be so much more beneficial to put any extra money you receive towards your debt? Doing this will get you to your goal of being debt-free much quicker.

 

  1. Find Out if Your Employer Offers a Student Loan Repayment Program

Last year the IRS issued a Private Letter Ruling stating that companies offering a retirement plan can amend their plan to include a program for employees making student loan repayments. Under this program, employers make retirement plan contributions into the accounts of employees who are making student loan repayments.

 

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

Why Investors Should Own International Stocks

There is a tendency for investors to focus their attention and investment dollars on assets located within the United States. This tendency is well documented and is referred to as Home Country Bias. People are generally more…

read more

Lutz Financial adds Austin Wells

Lutz, a Nebraska-based business solutions firm, welcomes Austin Wells to the Omaha office. Austin joins Lutz’s financial division as a Retirement Plan Consultant and Investment Advisor, and brings over four years of experience…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz Financial adds Austin Wells

Lutz Financial adds Austin Wells

 

LUTZ BUSINESS INSIGHTS

 

Lutz Financial adds Austin Wells

Lutz, a Nebraska-based business solutions firm, welcomes Austin Wells to the Omaha office.

Austin joins Lutz’s financial division as a Retirement Plan Consultant and Investment Advisor, and brings over four years of experience in the financial industry. He is responsible for providing comprehensive financial planning and investment advisory management services to clients with a focus on retirement plan consulting. Wells received his Bachelor’s degree in business administration from the University of Nebraska at Omaha.

RECENT POSTS

Why Investors Should Own International Stocks

There is a tendency for investors to focus their attention and investment dollars on assets located within the United States. This tendency is well documented and is referred to as Home Country Bias. People are generally more…

read more

2019 Manufacturing Outlook Survey Results

This year’s survey report contains the expectations and opinions of more than 350 manufacturing executives who produce a wide variety of products including industrial/machining, transportation/automotive…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Will I Outlive My Assets?

Will I Outlive My Assets?

 

LUTZ BUSINESS INSIGHTS

 

Will I Outlive My Assets?

JOE HEFFLINGER, DIRECTOR & INVESTMENT ADVISER

 

Running out of money is often cited as the biggest fear of retirees. Most investment and financial advice has traditionally been focused on the accumulation phase (growing assets before retirement). But, with the elimination of traditional pension plans and increased life expectancies, retirees are now finding that the distribution phase (spending down assets in retirement) is far more complex and requires a skill-set that they may not possess. This blog will provide a couple brief pointers on how to review your financial situation and investment allocation so that you don’t spend your retirement worrying about outliving your assets.

 

How much can I spend each year in retirement?

The best way to answer this is to perform a comprehensive retirement cash flow analysis. By modeling out detailed projections, you can analyze how your income and expenses will affect your retirement nest egg over time. This will include a review of your balance sheet, sources of annual income, tax features and how much you plan on spending each year. It is important to work with an experienced advisor who uses a high-quality planning software that can model out different scenarios so that you can see how modifying various assumptions can impact your financial picture.

Keep the following points in mind to ensure an accurate review of your financial situation:

  • Understand the timing and length of your retirement (estimate of retirement date and how long you will live) – longevity is one of the biggest stresses on retirement funds
  • Prepare an estimated budget of your annual expenses (don’t just wing this, if this is way off it can materially impact the analysis)
  • Quantify your sources of income (Social Security, rental income, farm income, pension, part-time employment, required minimum distribution (RMD) income, etc.)
  • Get a good estimate of what your healthcare and potential long-term care expenses will be[i]
  • Have a conservative assumption for taxes and inflation
  • Set a realistic growth rate for your investments based on your overall asset allocation (more on this to come below)

The cash flow analysis will help you find out if a level of annual spend is sustainable based on your balance sheet and the underlying assumptions (the key is to be realistic but conservative). It’s important to update this analysis periodically as you progress through retirement to account for any changes in your situation and to confirm your plan remains on track.

 

How do I determine my investment allocation in retirement?

As mentioned above, it’s important to use a reasonable investment growth rate when modeling out your retirement cash flow. What’s “reasonable” depends in part on what your investment allocation will be in retirement (i.e., your ratio of stocks vs. bonds/cash). But, how do you go about determining what that allocation should be? While there are lots of personal factors to consider and several different methodologies to use to answer that question, the approach we like to use is what I will call the “3 bucket model.” 

 

Three Bucket Allocation Model

In the bucket approach, you start out by estimating what your annual retirement “shortfall” will be (meaning by how much do your annual retirement expenses exceed your annual retirement net income). You then try to fill Bucket 1 with one year of this shortfall in a money market account. Next, you try to fill Bucket 2 with 7-10 years (or more) of this shortfall amount in a diversified fixed income (bond) portfolio. Lastly, fill Bucket 3 with the remainder of the portfolio in a diversified stock/bond mix. How aggressively Bucket 3 is allocated depends on how large the overall portfolio is and what the primary goal of the investor is (i.e., either protecting the corpus to provide a bigger spending cushion for the investor or growing the pot in an attempt to leave a larger amount for heirs or charity).

What this 3 bucket approach accomplishes is theoretically not having any funds you plan on needing in the next 7-10 years in the stock market. It also helps to avoid having to sell stocks at an inopportune time. If the stock market pulls back (as it inevitably will at various points during your retirement), you can pull any funds needed for living expenses from Bucket 1 or Bucket 2 and allow your stocks in Bucket 3 time to recover. 

If you are in retirement and can’t fill a 7-10 year bucket with conservative bonds, you may either need to be more aggressive with your investments then is ideal or you may need to reduce your annual spend. An illustrative example of this 3 bucket approach is set forth below.

 

Allocation Buckets

 

As you approach and enter retirement, managing your finances becomes much more complex. Determining how much you can safely spend each year and how to allocate your investments are just a couple of the many critical financial decisions you will face in retirement. Make sure you work with your financial advisor to put together a plan that meets your needs. If you don’t feel that your current advisor is providing adequate guidance in these areas, find one that will. Feel free to contact us for more information on this topic or to schedule a meeting to discuss your situation further.

 

 

[1] See https://www.lutz.us/planning-health-care-costs-retirement/ and https://pressroom.vanguard.com/nonindexed/Research-Planning-for-healthcare-costs-in-retirement_061918.pdf for more information on how to estimate healthcare and long-term care costs in retirement.

 

Important Disclosure Information
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jhefflinger@lutzfinancial.com

LINKEDIN

JOE HEFFLINGER, JD, CFP® + DIRECTOR & INVESTMENT ADVISER

Joe Hefflinger is a Director & Investment Adviser at Lutz Financial with over 14 years of relevant experience. He specializes in providing both financial planning and investment advisory services.

AREAS OF FOCUS
  • Financial Planning
  • Investment Advisory Services
  • Business Owners
  • Retirees
  • Corporate Executives & Professionals
AFFILIATIONS AND CREDENTIALS
  • Financial Planning Association, Member
  • Society of Financial Service Professionals, Member
  • Nebraska State Bar Association, Member
  • Omaha Bar Association, Member
  • Omaha Estate Planning Council, Member
  • Certified Financial Planner™
EDUCATIONAL BACKGROUND
  • JD, Creighton University School of Law, Omaha, NE
  • BS in Economics, Santa Clara University, Santa Clara, CA
COMMUNITY SERVICE
  • Partnership 4 Kids - Service League, Past Board Member
  • Omaha Venture Group, Member
  • Christ the King Sports Club, Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

January Retirement Plan Newsletter

January Retirement Plan Newsletter

 

LUTZ BUSINESS INSIGHTS

 

JANUARY RETIREMENT PLAN NEWSLETTER

SIX EASY STEPS TO KEEP YOUR PLAN ASSETS SAFE

Six Easy Steps to Keep Your Plan Assets Safe

Cyber fraud is a growing concern globally. Individuals are typically very careful to keep their bank account and email authentication information safe, but they aren’t always smart with the rest of their personal information.

Participants need to be vigilant with their retirement savings accounts as well. In the past year we’ve seen a slew of cases of attempted fraud – some successful – against retirement savings plan participants across a multitude of recordkeepers.

The good news is that virtually all recordkeepers view security as a prominent priority and diligently update their technology. However, their security can only go so far if the participant isn’t being equally vigilant. Educate your plan participants on the following tips to ensure the security of their retirement savings accounts.

 

  1. Use all available levels of authentication. If your plan’s recordkeeper comes out with a new type of authentication, your participants should implement it immediately.
  2. If participants frequent a website or have an account with a company whose website and information has been compromised, they should change all their passwords for all online accounts.
  3. Remind participants to use strong passwords. Utilize letters, capitalization, numbers and symbols. Don’t use recognizable words. Don’t use the same password for multiple purposes. Have the password be at least 14 characters in length. Consider changing passwords frequently. Using a password manager can make this task less unwieldly.
  4. Don’t send authentication information to any third parties, and remind participants to limit authentication access to use on sites which are navigated to independently – not through a link or other prompt.
  5. Check your participants’ accounts frequently and address any irregularities, and remind participants to keep an eye out, too.
  6. Ask participants to immediately contact you if they receive any “updates” that look suspicious so you can notify your recordkeeper.

 

Keep your participants in the know. We recommend sending them the participant memo that is included with this newsletter on the importance of remaining vigilant when it comes to cybersecurity – it’s one of the most important investments your participants can make.

For more information on keeping your plan assets safe from cyberattack, please contact your plan advisor.

 

About the Author, Joel Shapiro

Joel ShapiroAs a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

RECORDS AND THEIR EXPIRATION DATES

“What records should I keep? How long should I keep them? How should I organize my files?”

Advisors have been asked these questions time and time again by plan sponsors looking for a general guideline for record expiration dates.

Record retention doesn’t need to be a mystery, and the filing system doesn’t need to become a tomb. For audits, remember the following requirements.

 

chart 1

 

As for organizing your fiduciary file, we suggest a format that includes the following sections:

chart 2

 

If a participant or DOL agent requested plan information, could you find it quickly? The key is twofold: keep the things you need and store them so you can find them easily.  Of course, these are only general guidelines. For questions about your specific case, contact your plan advisor to discuss best practices for keeping records.

 

About the Author, Joel Shapiro

Joel ShapiroAs a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

HEY JOEL!

Welcome to Hey Joel! This forum answers plan sponsor questions from all over the country by our in-house former practicing ERISA attorney.

Hey Joel,

Will hardship suspensions go away in January 2019? If someone takes a hardship today, do we stop the suspension on Jan. 1 2019? – Anxious in Alabama

 

Dear Anxious,

First, understand that we are all still awaiting further guidance from the IRS/Treasury on the new hardship safe harbor rules. The suspensions don’t so much as “go away” as much as the necessity to suspend deferrals potentially becomes optional. That said, if a plan wants to keep the suspension, I believe they may do so.
The only question would be whether or not the safe harbor remains intact for the plan sponsor. As originally stated, we are still waiting on additional guidance from the IRS/Treasury on whether or not all the new rules would be required, or are just optional, for the safe harbor protection.

 

Also Anxious,

Joel Shapiro

 

About Joel Shapiro, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

PARTICIPANT CORNER: KEEP YOUR PLAN ASSETS SAFE

This month’s employee memo reminds participants to remain vigilant when it comes to the cybersecurity of their retirement plans. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt below.

You work hard for your money. You wisely choose to defer a portion of your salary for your interests in your retirement years. The plan is designed to help you grow your savings to an appropriate amount of money to support you once you reach your retirement years.

But as you are aware, the plan is only as effective as you make it. If you defer too little or make unwise investment decisions there is a chance that you will not reach your goals. Similarly, if you drain your plan balance over the years, you understand you will find a shortfall in retirement. What many participants do not think about is being responsible for the security of their savings as well.

Cyber fraud has been a growing concern globally for years. Individuals are typically very careful to keep their security measures (passwords, authentication codes, etc.) private with regards to their banking and electronic mail accounts. However, in the past few years, there have been breaches of major companies containing personal information of individuals. And unfortunately, much of the personal information has become accessible by bad actors on the dark web.

Participants need to be vigilant with their retirement savings accounts as well. In the past 12 months, there have been a slew of cases of attempted fraud, some successful, enacted on retirement savings plan participants. And these attempts have occurred across a multitude of recordkeepers. The good news is that virtually all recordkeepers have security as a prominent priority and spend. They are constantly updating their security technology and protocols. But their security can only go so far if the participant is not being equally vigilant.

 

The following are a few prudent tips for participants in ensuring the security of their retirement savings accounts:

  • Use multiple levels of security and authentication – if your plan’s recordkeeper comes out with a new level/type of authentication, engage it immediately.
  • If you frequent a website or have an account with a company, whose website and information has been compromised, change all your passwords. For example, Yahoo recently had a large breach – a breach containing passwords – if you ever had a Yahoo account you should change your password.
  • Make sure your password is strong – utilize letters, capitalization, numbers, and symbols. Don’t use recognizable words. Don’t use the same password for multiple purposes. Have the password be at least 14 characters in length. Consider changing your password on a frequent basis.
  • Never send your authentication to anyone requesting it. It should be limited to use on sites on which you navigated to independently of any outside request.
  • Check your account on a semi-regular basis for any irregularities.
  • Immediately contact your plan administrator and/or the recordkeeper if you receive any update that sparks your concern – do not wait, the money could leave the U.S. quickly.

 

As your employer, we are always looking out for your wellbeing. We trust that the plan is in good hands with our recordkeeper. We have reviewed their cyber security protocols and technology. But we felt a need to provide a gentle reminder that your involvement is crucial in maintaining the security of your account too.

We want your savings experience to be as simple and easy as possible. We want you to someday enjoy your retirement years.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

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Lutz, a Nebraska-based business solutions firm, welcomes Pam Mathison to the Financial division in the Omaha office.

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Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850