May Retirement Plan Newsletter 2022

May Retirement Plan Newsletter 2022

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: MAY 16, 2022

MAY RETIREMENT PLAN NEWSLETTER

WHY RETIREMENT PLAN SPONSORS SHOULD CARE ABOUT EMPLOYEE STUDENT LOAN DEBT

According to the College Board, the cost of a four-year education increased more than 200% (after inflation) from 1988 to 2018. This has placed a tremendous burden on graduates, with national student loan debt now topping a staggering $1.6 trillion. Surprisingly, while grads ages 25 to 34 are most likely to carry educational loans, the greatest amount of debt is owed by 35- to 49-year-olds, making this a problem not limited to those just entering the workforce.  

Whether it’s through providing holistic financial wellness programming that addresses this issue or offering a more formal, structured student debt repayment benefit, there are compelling reasons plan sponsors should care about the negative effects of student loan debt on their employees and consider taking action.    

 

Impacts on Employees 

High loan balances can delay the achievement of important financial milestones such as home ownership (23%), emergency savings (34%), and retirement savings (29%), according to a 2019 Bankrate survey. And these delays can have serious downstream effects on other areas of financial wellness. When it comes to planning for retirement, student loan payments can keep employees on the sidelines — missing out on valuable early years of compounding returns.   

Student loans are also a significant contributor to worker stress, which can lead to mental and physical health issues as well as absenteeism. According to Kiplinger’s 2020 Retirement Survey Sponsored by Personal Capital, respondents ages 40 to 74 reported a number of negative health effects due to financial stress, including increased anxiety (35.9%), sleep loss (27.4%), weight gain or loss (21.6%), depressive thoughts (20.1%) and chronic illness (5.5%).  

 

Mutual Benefits 

Providing assistance with student loan debt can help address many such issues. But the benefits aren’t limited to employees — they can also extend to the organizations that employ them. Offering a student loan repayment benefit may help afford employers an opportunity to stand out, attract top talent and boost their bottom line. 

Set yourself apart. As this is a relatively uncommon benefit, student loan assistance can help employers differentiate themselves in a tough labor market. And it could particularly assist companies struggling to hire in sectors harder hit during the pandemic such as health care, leisure, hospitality and travel. 

Increase productivity. It’s hard to stay engaged and focused on the job when you’re having a tough time managing student debt. So, organizations that can help their employees successfully navigate this stressful situation may enjoy improved worker productivity and overall job satisfaction — and the myriad benefits that come with them.   

Protect your bottom line. Excessive student loan obligations can siphon off would-be retirement plan contributions and hinder employees’ retirement readiness. And that could lead to delayed retirement, which can increase health care costs for sponsors and result in higher turnover due to “promotion blockage.” 

Attract the right candidates. Student loan repayment benefits offer a potentially outsized advantage for specific subsets of employers. For example, those with workforces with a large percentage of recent grads, older millennials, Gen Xers and employees with post-secondary education (e.g., tech, financial services companies) may want to prioritize offering a student loan benefit.  

 

Why Act Now? 

While the legislative fate of SECURE 2.0 and RISE could broaden the range of options for sponsors, employers should consider focusing on this issue in the near term, nonetheless. Student loans are about to become a bigger problem for employees as the moratorium on student debt repayment is set to expire on August 31, 2022. 

 

Sources:

https://www.bankrate.com/pdfs/pr/20190227-student-loan-survey.pdf

https://www.nerdwallet.com/article/loans/student-loans/student-loan-debt#:~:text=U.S.%20student%20loan%20debt%20totals,as%20of%20March%2031%2C%202021.&text=Who%20has%20student%20loan%20debt%3F  

https://www.kiplinger.com/web_docs/kiplinger/Kiplinger_Personal%20Capital%20National%20Poll%20Results_12-23-20.pdf  

https://www.aarp.org/work/job-search/info-2020/job-losses-during-covid.html  

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/workers-not-retiring.aspx

EARLY WITHDRAWALS CAN LEAD TO TARDY RETIREMENTS AND PROBLEMS FOR EVERYONE: HOW TO HELP

Albert Einstein may not be remembered as a finance expert, but he seems to have had a bead on the power of smart investing. When asked what mankind’s greatest invention was, he’s reputed to have answered “compound interest,” describing it as the “eighth wonder of the world.” Compounding may indeed be one of the most potent forces in the universe, but there’s one noteworthy caveat — to leverage its awesome power, investors need to stay in the game. 

According to a recent Bankrate survey, many are failing to do just that — more than half of those polled reported they took an early withdrawal from their retirement account. Gen Zers were the most likely to tap into their 401(k), with 40% saying they did so during March 2020 or after; another 18% took a withdrawal pre-pandemic. Baby Boomers were the least likely to touch their accounts during COVID-19, with just 6% indicating they did so during or after March 2020. 

When account holders keep money on the sidelines by taking early withdrawals, retirement goals can become elusive — or even impossible to achieve. So how do you convince participants to hold their ground? A strategy that employs a holistic financial wellness offering, optimized messaging and facilitated rollovers can go a long way toward preventing premature cash-outs. 

 

Offer Comprehensive Support 

In a study conducted by Kiplinger, nearly one-third of respondents ages 40 to 74 said they took money from their retirement accounts in 2020 due to the CARES Act; another 27% took loans. The withdrawn funds were used mostly for living expenses (63%), but other reasons included covering medical expenses, home repairs and auto costs; paying college tuition; and helping family members. 

Regardless of the need or circumstances, participants should be educated about the consequences associated with early retirement plan withdrawals and develop strategies to avoid them. To that end, a holistic financial wellness offering should include broad-based education around debt and credit management, emergency funds, budgeting and goal setting. Prudent planning can help employees reduce the need to tap into their nest egg and help keep them on the path toward retirement readiness. 

 

Tailor Participant Messaging 

Communications in a multigenerational workplace can be more effective when delivered in formats targeted to each age cohort. For example, messaging aimed at Gen Zers could be provided through channels they’re more likely to engage with — like videos and social media. For Gen X and millennials, email communications and online resources, respectively, may be more effective, while Baby Boomers may prefer written or face-to-face communications. 

 

Reduce Fund Transfer Friction 

Set up your plan to accept roll-in contributions and do what you can to facilitate them. The easier sponsors make it for employees to transfer funds, the more likely they’ll participate consistently over time. Discourage plan leakage by engaging a service provider to offer guidance, education and support to both newly hired and terminated employees. 

 

Better for Everyone 

Helping employees stay on target with their retirement goals by minimizing early withdrawals is a win not only for employees, but for sponsors and the organization as a whole. Because happier, healthier, more productive and more financially secure employees boost everyone’s bottom line in the end. 

 

Sources

https://www.planadviser.com/prevent-retirement-plan-leakage/  

https://www.bankrate.com/retirement/retirement-savings-survey-november-2021/  

https://www.cnbc.com/2021/11/22/half-of-americans-with-retirement-accounts-have-taken-early-withdrawals.html  

https://www.kiplinger.com/web_docs/kiplinger/Kiplinger_Personal%20Capital%20National%20Poll%20Results_12-23-20.pdf

 

FEE LITIGATION WITH AN ODD "TWIST"

A recent class action lawsuit highlights an often neglected but important item of fiduciary concern.  

The plaintiffs in this case have asserted claims for breach of the fiduciary duties of prudence and failure to monitor fiduciaries. Nothing new so far, but in addition to naming the typical plan fiduciaries as defendants, the lawsuit also targets members of the board of directors, as well as other officers of the firm who serve on the retirement plan’s fiduciary investment committee. 

The complaint indicates that the “Taylor Corporation, … is the Plan sponsor, the Plan Administrator (as defined in Section 3(16) of ERISA), and a named fiduciary,” (highlights added). 

You may be wondering why the board of directors is implicated in this litigation.  The reason is that the Taylor Company’s plan document indicates that “the company” is the named fiduciary for the plan. The “named fiduciary” identifies the plan’s primary fiduciary (the main decisionmaker for the company).   

In a corporation with a board of directors, where “the company” is identified as the named fiduciary the board is considered to be the main decision-maker on behalf of the company and thus, as a result, the primary fiduciary of the plan per ERISA. Other co-fiduciaries may also be liable for any fiduciary breaches they may be involved with. This is a concept often misunderstood by many plan fiduciaries and members of board of directors. 

Fortunately, there is a simple way to offset this liability, if done prior to a fiduciary breach taking place. The solution is to have the board delegate fiduciary responsibilities to individuals or a committee, as permitted by their plan document. The board should formally delegate responsibilities pursuant to formal board action (may be reflected in board meeting minutes or board resolutions) and adopt a committee charter which identifies the company’s intended named fiduciary(ies). Others can be delegated for specific fiduciary responsibilities as co-fiduciaries who should sign on acknowledging their roles and responsibilities. This simple action essentially helps to insulate the board of directors from liability for day-to-day actions taken by delegates that the board may often not even possess knowledge of. That said, the board still remains the named fiduciary under the plan document, so they have a fiduciary responsibility to monitor their delegates.  That can be accomplished as simply as reviewing meeting minutes taken by the delegates during the course of the plan year.  As long as no action taken by the delegates seems unusual or not in the best interests of participants the board should be relatively insulated from potential liability.

Contact your financial professional for a sample board resolution, Committee Charter, committee acknowledgements, and committee resignation/removal templates. These documents are easily customizable and ready for implementation upon board resolution. It is considered best practices for all plans to utilize these documents as they explicitly identify individuals/entities that are intended to be fiduciaries for the plan’s administrative, operational, and investment responsibilities.  

The class action complaint can be found at: 

https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2022/02/18145712/FrittonvTaylorCorpComplaint.pdf  

PARTICIPANT CORNER: MILLENNIALS - THE TIME TO START SAVING IS NOW!

Typically, younger people don’t make retirement savings a priority. Living expenses, student debt, rent or house payments, and other day-to-day expenses mean that retirement savings take a back seat. In fact, research from National Institute on Retirement Security says that 66 percent of millennials haven’t saved any money for retirement, and 66 percent haven’t started saving.1 That attitude, however, will make it much more difficult to have a secure retirement later, according to seasoned retirement plan advisors.

The main thing that millennials are sacrificing by not saving now is time. Time allows funds to grow through compounding, and that can turn relatively modest savings into much larger nest eggs. For example, saving $50 each month in a retirement account earning 6.5 percent annually and compounded monthly would generate retirement savings of $226,781 over 50 years. A millennial who starts saving the same amount 30 years later, allowing it to only compound for 20 years, would have only $24,525 at the end of the 20 years.2

And $50 each month isn’t a huge amount, even for a cash-strapped millennial. Some other retirement savings tips include:

  • Take full advantage of employer-sponsored retirement plans, like 401(k) or 403(b) plans. Funds contributed to these tax-advantaged programs grow free of taxes, which means more money stays in the account to generate interest.
  • Contribute at least as much as your employer is willing to match. If your employer matches 3 percent of your salary, you should start by contributing that much.
    • Otherwise, you’re “leaving money on the table.” Your employer match instantly increases your contribution, and your money grows faster.
  • Don’t worry about not being an investment expert. Many retirement plans now offer target-date funds (TDFs). Also known as lifecycle or age-based funds. TDFs automatically adjust your investment assets as you age, so you don’t need to balance your funds yourself.

One common objection millennials have about contributing to an employer-based retirement fund is that they may not stay with that employer. Actually, very few people stay with a single employer for their entire careers, and retirement plan funds can be rolled over into a new employer’s plan or rolled over into an IRA if you leave your job.

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.

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Investor Sentiment Hits Extreme Low + Financial Market Update + 5.10.22

Investor Sentiment Hits Extreme Low + Financial Market Update + 5.10.22

FINANCIAL MARKET UPDATE 5.10.2022

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

INVESTOR SENTIMENT HITS EXTREME LOW

The selloff in the stock market has continued into this week with the S&P 500 falling -16.8% from the January highs as of Monday’s close. The technology-heavy Nasdaq Composite Index has been even more volatile and is down -25.5% over the same period. In light of these painful drawdowns across the stock market, it’s no surprise that investor sentiment is negative. According to a widely followed measure, the pessimistic sentiment has reached extreme levels.

Every Thursday, the American Association of Individual Investors (AAII) publishes a popular sentiment survey. The publication shows how individual investors feel about the short-term prospects of the stock market. While not always meaningful, when the gauge hits an extreme, it’s often an accurate indicator of where things are headed.

The survey began in the late 1980s and is often used by professional investors trying to take the temperature of the market. It asks a simple question: “I feel that the direction of the stock market over the next six months will be…?”

  1. Up (Bullish)
  2. No Change (Neutral)
  3. Down (Bearish)

One common way to analyze and interpret this data is to calculate the spread between the percentage of respondents that are bullish versus those that are bearish. A positive number would generally suggest that investors are optimistic about the future for stock prices, while a negative figure would be indicative of pessimism. The chart below illustrates this sentiment indicator over the last roughly ten years. The middle blue line, which represents the average sentiment level (7.1%), was calculated using data back to the survey’s inception in 1988.

Source: American Association of Individual Investors. Data from 12/31/1987 – 5/4/2022.

This data is very noisy and can ocellate widely from week to week. As a result, the usefulness of the survey results is often low. It becomes relevant, however, when it reaches an extreme level, which we highlight on the chart with the top and bottom blue lines.

The table below summarizes how the market has performed in the three months before and after each survey since its inception. There are two important takeaways:

  1. Investor sentiment typically reflects what has just happened. High pessimism typically followed periods where the market had negative performance, while high optimism followed periods where the market had above-average performance.
  2. When sentiment hits an extreme level, the market tends to reverse. Excessive pessimism has often been followed by above-average returns, while excessive optimism is typically followed by below-average returns.

The results from a recent survey revealed that 16% of investors were bullish, while 59% were bearish (-43% spread). Not only did that survey suggest sentiment had reached extremely pessimistic levels, it was the lowest reading over the last ten years. It is amazing to think that sentiment was higher during the depths of the Covid selloff in early 2020. In fact, you would have to go all the way back to early March of 2009, just days before the stock market bottomed from the Financial Crisis, to find a more pessimistic sentiment reading. As it turns out, that would have been a phenomenal day to invest.

Unfortunately, no indicator can inform investors precisely when a steep selloff is going to end. Assets have declined substantially to reflect a world with higher inflation, tighter monetary policy and increased geopolitical uncertainty. It’s possible the repricing is near the final stage, but investors should brace for the possibility we have further to go. On the bright side, historical evidence demonstrates that when investor sentiment reaches an extreme, the market tends to reverse course.

Fear is clearly the dominant emotion among investors today. When I consider how I should feel about where we stand, I’m reminded of the famous quote from Warren Buffett:

“We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.”  

WEEK IN REVIEW

  • According to FactSet, 87% of S&P 500 companies have reported earnings for the 1st quarter. Year-over-year earnings growth for companies that have already reported, blended with the estimates for those yet to report, has been 9.1%. Initial earnings estimates for the quarter was forecast to be 4.6%,
  • Last week the Bureau of Labor Statistics (BLS) published the payrolls report. The data showed the economy added a robust 428k jobs during April. The unemployment rate remained at 3.6%, while the labor force participation rate declined to 62.2%.
  • The latest Consumer Price Index (CPI) data will be published on Wednesday and will headline the economic data releases for the week. According to MarketWatch, headline CPI is expected to decline to 8.1% year-over-year from 8.6% last month. Some of that decline relates more to the high reading of the comparison period 12 months ago. The month-over-month change in inflation is actually expected to accelerate from 0.3% to 0.4%.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Inflation Outlook for Consumers Falls From Record High, Fed Survey Shows (CNBC)
  • Payroll Growth Accelerated By 428,000 in April, More Than Expected as Jobs Picture Stays Strong (CNBC)
  • How the Inflation Rate is Measured: 477 Government Workers at Grocery Stores (WSJ)

Investing

Other

  • If You’re Paying for College, Watch This Week’s Treasury Auction (WSJ)
  • The Coup in the Kremlin (Foreign Affairs)
  • The NCAA Approval of NIL Guidelines Signals a Crackdown on Boosters Could be Coming (Sports Illustrated)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

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Investor Sentiment Hits Extreme Low + Financial Market Update + 5.10.22

Should Investors Be Concerned About Recent Volatility? + Financial Market Update + 5.3.22

FINANCIAL MARKET UPDATE 5.3.2022

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

SHOULD INVESTORS BE CONCERNED ABOUT RECENT VOLATILITY?

The stock market has been experiencing some heightened volatility recently. The S&P 500, which represents domestic large-cap stocks, is down over 13% from the highs in early January. Understandably, this has many investors on edge. With this in mind, we thought it would be beneficial to put the recent volatility in perspective.

There are a variety of reasons that may explain the market weakness. A few of the leading candidates include:

  • Elevated stock valuations
  • Tightening monetary policy
  • High inflation
  • Supply chain disruption
  • The Covid Outbreak in China
  • The war in Ukrain

Each of these risks has likely made an impact on stock prices, though it is impossible to attribute any one factor to specific market gyrations. While the current environment seems unique, most of the above items have occurred at some point(s) in the past. An investor could produce a similar-sized list of risks at virtually any point in history. The major difference is that when market sentiment is optimistic, investors generally just ignore the looming risks. When sentiment sours, market participants begin to fixate on the potential downside.

Volatility is a common feature of the market. It is impossible to predict in advance when it will arise, but it is generally a safe bet to assume that it will from time to time. This is demonstrated in the table below, which highlights the frequency of varying degrees of market declines over the last 75+ years. As you can see, a 5-10% dip has historically occurred more than once a year on average. A decline of 10-20% has occurred every two to three years on average. A 20-40% decline has historically occurred every eight to nine years, while the largest declines have occurred every twenty-five years.

Source: CNBC / Guggenheim

Although declines in the market are clearly a common occurrence, many investors feel compelled to try and avoid them. The desire to do this is rational, but successful market timing is extremely challenging, and failed attempts can come at a high cost. The chart below demonstrates this. It illustrates the growth of $1,000 invested in the S&P 500 from 1990 through 2019.

Source: Dimensional Fund Advisors. In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. One-Month US T-Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct.

 

The total return during the period was 9.96% per year, as shown by the column furthest to the left. Earning that return over the 30-year period would have grown the starting value of $1,000 to $17,273. Had an investor missed out on the single best day, their return for the entire period would have declined to 9.56% per year, and their ending value would have only been $15,480. If five of the best days were missed, the annualized return would have been 8.47%, and the ending value would have declined to $11,459. To say that another way, by missing the five best days over a 30-year period, an investor would have cut the appreciation of their wealth by a third! You can see that the negative impact on an investor’s outcome continues to get dramatically worse as the number of good market days missed increases.

Investors attempting to time the market risk the fate demonstrated above in a variety of ways:

  • The anticipated decline in the market may never materialize
  • The anticipated decline occurs, but only after an extended period of further gains
  • The decline has fully occurred by the time the investor exits (the investor sells at the bottom)
  • The investor successfully gets out ahead of the decline but remains out during the subsequent rally

As the bullets above demonstrate, to successfully time the market, an investor must be correct twice. They must forecast the right time to get out, as well as the right time to get back in. Investors tend to fixate on the first decision with little thought given to the latter. Unfortunately, there is no reliable signal to notify investors when it is time to get back into the market. Consider all of the gains forgone by an investor that did not get reinvested after selling during the technology bubble, financial crisis, or pandemic sell-off.

Staying invested can be uncomfortable when stock prices are falling. At the end of the day, volatility is a normal and healthy feature of the market. It keeps a lid on excessive speculation, which can lead to crashes. It also resets valuations lower and positions the market to continue appreciating in a sustainable manner. Investors that can stick to their plan have historically been rewarded for doing so.

WEEK IN REVIEW

  • The Federal Reserve’s meeting on monetary policy will conclude tomorrow and will be followed by a press conference with Chair Jerome Powell. The market is pricing in a 0.50% hike with near certainty. If they follow through with this expectation, it would be the largest rate hike in decades. Although this hike is already priced in, Powell has the potential to move markets if he provides more clarity on how high the Fed thinks rates are going. The Fed is also expected to announce plans on how to wind down its bond portfolio.
  • As of Friday, 55% of companies in the S&P 500 have reported earnings for the 1st quarter. Earnings growth was initially expected to be +4.7%, but companies have been outperforming in aggregate. Earnings growth for companies that have reported, blended with the estimates for companies that have yet to report, is 7.1%. Interestingly, if you stripped out the weak Amazon report, the blended growth rate would be 10.1%.
  • Data published last week showed a decline in GDP of 1.4% (annualized). While the headline may stoke fears that we are already entering a recession, the details of the report were not as bad. The decline was primarily caused by a huge surge in imports and reduced government spending. Consumer spending (+2.7%) and business investment (+9.2%) were both positive during the quarter, and suggest the potential for a rebound in the second quarter.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Fed Prepares Double-Barreled Tightening With Bond Runoff (WSJ)
  • U.S. GDP Fell at a 1.4% Pace to Start The Year as Pandemic Recovery Takes Hit (CNBC)
  • The Fed’s Favorite Inflation Gauge Rose 5.2% in March as Worker Pay Fell Further Behind (CNBC)

Investing

Other

  • Big Money Donors Have Stepped Out of the Shadows to Create ‘Chaotic’ NIL Market (SI)
  • Everything’s a WeWork Now (Wired)
  • Dogs’ Personalities Aren’t Determined by Their Breed (Scientific American)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

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4.20.2022 | Benefits of Moving Your 401(k) to a Pooled Employer Plan | Recording

4.20.2022 | Benefits of Moving Your 401(k) to a Pooled Employer Plan | Recording

 

LUTZ BUSINESS INSIGHTS

 

AM I READY TO SELL MY BUSINESS?

Benefits of moving your 401(k) to a pooled employer plan

4.20.22 | Recording

Is your business looking to reduce its time-consuming administrative duties, fiduciary liability and expenses related to its employee retirement plan? A Pooled Employer Plan (PEP) offers the flexibility to implement plan features that fit your organization while limiting your risk and cost associated with an individual custom plan. In this webinar, Chris Wagner of Lutz Financial and Mike Lyons and David Lipscomb of Newport help companies understand the benefits of moving to a pooled employer plan.

Key Takeaways:

  • Overview of a PEP
  • Benefits of a PEP
  • Is a PEP Right for You?

Seminar Level: GENERAL EMPLOYEE BENEFIT PLAN KNOWLEDGE AND UP

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Investor Sentiment Hits Extreme Low + Financial Market Update + 5.10.22

What a Yield Curve Inversion Means for Investors + Financial Market Update + 4.12.22

FINANCIAL MARKET UPDATE 4.12.2022

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

WHAT A YIELD CURVE INVERSION MEANS FOR INVESTORS

As the 2nd quarter began, an unusual and potentially ominous warning signal began to flash. While it garnered meaningful media attention at the time, the signal quickly shut back off. I am referring to, of course, the inversion of the yield curve. If you are unfamiliar with or want to understand it better, here is a quick summary of what it is and what it could potentially mean for investors.

What is the Yield Curve?

As you can see in the chart below, the yield curve is a simple graphical representation of bond yields across various maturities. You may also hear the yield curve referred to as the “term structure of interest rates.” When discussed in the financial media, the yield curve almost always corresponds to US Treasury bonds.

Source: Treasury.gov

Under normal market conditions, the yield curve is upward sloping. Bonds with a longer term to maturity generally carry more interest rate, inflation, and default risk. As a result, prospective buyers require a higher rate of return on these bonds to compensate for that increased risk. The green line on the above chart, which demonstrates the shape of the curve last year, provides a good illustration of a normal yield curve. As you can see, yields gradually increased as you pushed further out on the curve.

What Is a Yield Curve Inversion?

A yield curve inversion describes a scenario where longer-term rates are lower than shorter-term rates. The blue line in the above chart represents the yield curve as of yesterday’s market close. The curve remains inverted in a few areas. For example, the 7-Year yield (2.84%) is higher than the 10-Year yield (2.79%), while the 20-Year yield (3.02%) is higher than the 30-Year yield (2.84%). Investors don’t pay much attention to these spreads, however. There are two measures that generate the majority of headlines; these include the 3-Month versus 10-Year and the 2-Year versus 10-Year curves. It was the latter that briefly inverted earlier this month.

The 3-Month Treasury yield generally tracks the benchmark federal funds rate closely. While the Federal Reserve has foreshadowed a relatively fast pace of interest rate increases over the next year, it’s only actually done a single 0.25% hike thus far. Conversely, the 2-Year yield largely reflects where investors think short-term rates are heading and has already priced in a substantial amount of hiking activity. As a result, there is a large spread between the 3-month and 2-year yields. You may hear the financial media describe the front end of the curve as “steep.”  Conversely, there is not much spread between 2-Year yields all the way out to 30-year yields. That section of the curve would generally be described as “flat.”

Implications of an Inverted Yield Curve

Investors pay close attention to the yield curve because it has historically been one of the most accurate early warning signals for a looming recession. As the chart below shows, the spread between the two and 10-Year Treasury yield went negative (inverted) ahead of each of the last six recessions. The track record would be even stronger if data on the 2-Year yield went further. There were two additional recessions in the early 1970s that were preceded by inversions of the 3-Month vs. 10-Year curve, which has a longer history.

Source: Fred Database. Data from 6/30/1976 to 4/1/2022.

With inflation accelerating at the most rapid pace in decades, the Federal Reserve has shifted towards tightening monetary policy. While the Fed can exert considerable force on short-term rates through its management of the benchmark fed funds rate, longer-term rates generally fluctuate based on expectations for economic growth. One explanation for the recent curve flattening (and brief inversion) is that investors are concerned the Fed’s policy tightening will tip the economy into a recession.

Despite its strong track record as an early warning signal, not everyone is convinced the yield curve has any special explanatory power. For starters, the six to eight recessions discussed here hardly constitute a sufficient sample size to draw meaningful statistical conclusions. Additionally, there has historically been substantial variation between an inversion and the onset of a subsequent recession. In the case of the Financial Crisis (2008), the recession came almost a full two years after the initial inversion. There has also been a rather dramatic range of equity market performances following an inversion. As a result, the efficacy of the yield curve as a timing mechanism has historically been quite poor.

Finally, the Federal Reserve is acutely aware that its policy tightening risks pushing the economy into a recession. Ideally, they would be able to thread the needle and pump the breaks on the economy just enough to stabilize prices but avoid causing a recession. This is commonly described as “engineering a soft landing.” An example of this balancing act came in 2019 when the Federal Reserve reversed course and began cutting rates in response to market signals of a coming economic slowdown. It’s possible they would have been successful if not for the pandemic that followed a few months later. Ultimately, it’s unclear if the brief inversion means we are heading towards a recession, and it provides even less information as to when it would arrive. The tremendous strength in the labor market, however, suggests that the economy should retain some momentum in the near-term.

WEEK IN REVIEW

  • Data published by the Bureau of Labor Statistics (BLS) showed inflation continues to accelerate at the fastest pace in decades. The Consumer Price Index (CPI) increased 8.5% YoY, which was slightly faster than economists’ expectations, according to MarketWatch. Core CPI, which excludes the volatile food and energy components, increased 6.5% YoY. Shelter, which comprises about 1/3 of the Core CPI measure, was a large contributor on a month-over-month basis and is expected to continue to power core inflation higher.
  • Earnings season is quickly approaching. How companies have performed thus far as inflation has accelerated and the forward guidance provided will likely set the tone for how the market performs in the coming months.
  • Important economic data to be published later this week includes retail sales, jobless claims and consumer sentiment on Thursday. On Friday, we will get an update on industrial production and capacity utilization.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Earnings Season Poses Next Trail For Volatile Stock Market (WSJ)
  • Consumer Prices Rose 8.5% in March, Slightly Hotter Than Expected and the Highest Since 1981 (CNBC)
  • Where Inflation Rose, Cooled the Most in March (WSJ)

Investing

Other

  • 60 Minutes Interview with Ukrainian President Volodymyr Zelenskyy (60 Minutes)
  • What Cities Lose When They Lose Pro Sports (The Ringer)
  • Weddings are Booming Again, and the Industry is Struggling to Keep Up (Washington Post)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

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FORM CRS RELATIONSHIP SUMMARY

May Retirement Plan Newsletter 2022

April Retirement Plan Newsletter 2022

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: APRIL 12, 2022

APRIL RETIREMENT PLAN NEWSLETTER

THE RISK OF 401(K) LAWSUITS: IF IT CAN HAPPEN TO THEM...

When a giant organization with extensive resources gets sued for alleged ERISA compliance failures — especially if the organization’s own service offerings include reviewing for such violations — that could very well be the canary in the coalmine for all other, lesser endowed firms. And that’s perhaps the key takeaway for plan sponsors in light of a complaint filed late last year against KPMG for an alleged fiduciary breach.

The lawsuit, filed by former KPMG 401(k) plan participants, names the firm’s fiduciaries — including its Board of Directors and Pension Strategy and Investment Committee — as defendants. Noting established requirements, it points to the high level of diligence and care imposed by ERISA on fiduciaries and their responsibility to establish a prudent process for choosing service providers and investment options. It also cites their responsibility for ensuring these selections are appropriate on an ongoing basis. “Prudent and impartial plan sponsors thus should be monitoring both the performance and cost of the investments selected for their retirement plans,” the complaint states, “as well as investigating alternatives in the marketplace to ensure that well-performing, low-cost investment options are being made available to plan participants.”

The plaintiffs allege that KPMG, by failing to reduce its plan’s expenses or appropriately scrutinizing investment options, failed to meet the required standard of care. The complaint states the plan’s considerable assets under management should have given it substantial bargaining power to negotiate more competitive service rates. The plaintiffs allege excessive recordkeeping and administration fees, accusing KPMG of wasting plan and participants’ assets due to unnecessary costs. The suit alleges that the firm failed to conduct RFPs “at reasonable intervals … to determine whether the plan could obtain better record-keeping and administrative fee pricing from other service providers.”.

The complaint alleges that KPMG’s plan costs were more than twice that of its peers and that certain funds were maintained despite other available investment options that had lower costs and a history of better performance. Plaintiff’s counsel adds, “[d]efendants’ mismanagement of the Plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence and loyalty, in violation of 29 U.S.C. § 1104. Their actions were contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”

In arguing that plan costs were excessive, the complaint also states that the record-keeping market is highly competitive and that numerous vendors are “equally capable of providing high-level service.” The plaintiffs are seeking class-action status.

It is important to be aware that the number of ERISA lawsuits are growing.  Litigation is expensive, even if fiduciaries have a spotless record of taking care of their ERISA responsibilities.  It behooves the prudent fiduciary to explore every avenue to protect themselves whilst acting in the best interests of their participants.

 

Please note, this article is based solely on the plaintiff’s counsel filed complaint which is purposefully crafted towards an intended end.  It does not include independently investigated facts, the defendants’ perspective on the allegations, or any opinion of the author.  It is always important to hear both sides of any argument and view the evidence before taking away any substantive opinion of the facts in issue.

 

Sources:

https://s32566.pcdn.co/wp-content/uploads/2021/10/401k-lawsuit-roundup-102921.pdf

https://www.plansponsor.com/familiar-erisa-complaint-filed-kpmg/

https://www.pionline.com/defined-contribution/kpmg-fiduciaries-face-erisa-lawsuit-former-401k-participants

FINANCIAL HYPOCHONDRIA: WHEN INVESTMENT VIGILANCE BECOMES A PROBLEM

Plan sponsors invest much time and effort in improving employee financial literacy. They offer educational content, provide opportunities for group and individual consultation, and encourage participants to approach retirement planning proactively by staying on top of their investments. But what happens when workers go overboard with well-intended advice?

Today, stock market data is available 24/7 with just a few clicks on links. And this development, in many ways, has been a double-edged sword. While it has made investing a lot more accessible for many, it’s become all too easy to fall into a pattern of checking portfolio performance daily — or even multiple times a day — especially after doom scrolling clickbait financial headlines during periods of heightened market volatility.

And this isn’t helpful.

According to Frank Murtha, Ph.D., cofounder of MarketPsych, such behavior can create a myopic focus that may blur an investor’s long-term perspective. It could also lead to a state of heightened anxiety and the kind of cognitive errors that may result in faulty short-term financial decision making. When a health coach is working with a client, they motivate healthy behaviors, but not in the extreme. For example, the coach might recommend working out a several times a week, though not several times each day. Similarly, participants should be encouraged to have a healthy amount of investment awareness, while avoiding extreme hypervigilance.

On the other hand, prescriptively dictating how frequently participants should check their 401(k) or 403(b) or governmental plan balances without addressing their underlying fears is shortsighted. It’s also unlikely to be effective, as such financial fears rarely stem from a mere lack of information. When an investor acknowledges and comes to terms with their uncomfortable emotions, they’re often better positioned to find healthier coping mechanisms for the uncertainty and risks that inherently come with investing.

At that point, things like providing a broader historical context for stock market performance and explaining how asset allocation and dollar cost averaging can mitigate risk become much more helpful. And it goes without saying that so long as investment strategy does not match up with investor risk tolerance, such work can remain a stubbornly uphill climb. But once participants accept that a certain amount of risk and uncertainty is necessary to reach financial goals, it becomes much easier to put a plan in place to better manage financial stress — whether that includes meditation, taking a walk or turning to a trusted friend or advisor.

In the end, it’s important to remember that investing decisions are ultimately emotional ones — centered on hopes and dreams for the future. And any financial discussion that fails to take that fundamental truth into account risks missing the forest for the trees.

 

Source: https://www.apa.org/news/podcasts/speaking-of-psychology/stock-market-anxiety

IRS/DOL AUDITS ARE INCREASING DRAMATICALLY ARE YOU READY?

Facts you should know

If your plan has not been recently audited, it is likely only a matter of time before the Internal Revenue Service (IRS) or the Department of Labor (DOL) comes knocking. If/when you are notified of an audit, early preparation can help streamline the process, keep the investigation narrow, as well as potentially avoid financial costs of potential penalties and interest.

DOL and IRS audits focus on different issues guided by their specific jurisdictions.

The DOL is responsible for the enforcement of labor laws set forth in the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry in order to provide protection for individuals covered by these plans. The DOL can enforce penalties for breaches of ERISA fiduciary conduct and can even sue fiduciaries for these breaches on behalf of a plan and its participants. In cases of the most egregious misconduct, the DOL can initiate criminal proceedings that may result in jail time for plan fiduciaries based on investigations dealing with fiduciary conduct breaches and prohibited transactions.

The IRS audit focuses on taxation issues and the IRS can enforce infractions under the Internal Revenue Code (Code). Infractions can result in additional taxes plus penalties, and interest. The IRS is concerned with compliance with the Code as it impacts on the plan’s tax qualified status. This can take the form of review of plan provisions, testing, controlled group issues, etc.

Both the DOL and the IRS select plans for audit primarily by random selection; but can also be initiated as a result of responses (or lack thereof) to certain questions on the Form 5500, failure to transmit participant contributions to their selected investments in a “timely manner,” participant complaints and other breaches of fiduciary or administrative duties. Current litigation activity, bankruptcy filings and media reports can also trigger DOL investigations. Also, the DOL may refer a case to the IRS if it discovers compliance infractions under the Code and vice versa if the IRS discovers what it believes to be potential fiduciary breaches impacting the plan under investigation.

The number of IRS/DOL audits are increasing dramatically as DC plans become more complex and statutes and regulations evolve.

Failure to respond to an IRS questionnaire or a DOL audit investigation or Information Request Letter is comparable to sending an invitation for the regulator to crack your plan open, make themselves comfortable, and spend weeks exploring all actions impacting the plan.

The DOL and the IRS will initiate an audit by sending an Information Request Letter indicating the date of its on-site visit to review documents and conduct interviews with individuals who have responsibilities in the administration of the plan. The letter will detail the information to be made available to for auditor – typically in advance of the on-site visit.

Currently, the most litigated fiduciary issue is the “reasonableness” of plan fees. As a result, not surprisingly, fees have also come under the scrutiny of the DOL. Evidencing (documenting) the reasonableness of fees paid by plan participants is quickly becoming the most frequently investigated fiduciary issue.

The following is a partial list indicating common items for potential review.

  • Corporate or plan committee minutes
  • Documentation of fees and expenses and of their reasonableness
  • Fiduciary training
  • Service agreements and engagement letters
  • Fee disclosure statements – 408(b)(2)
  • List of parties-in-interest and plan fiduciaries
  • List of plan fiduciaries and delegation of responsibilities
  • Trustee and/or investment committee minutes
  • Plan documents, SPD, trust agreements, investment policy statements, Committee Charter
  • Summary annual reports
  • Participant statement samples
  • Evidence of fidelity bond, fiduciary liability insurance policy, if any

Auditors are likely to ask if the plan fiduciaries are participating in ongoing fiduciary education programs.

 

Preparing for the audit

Upon receipt of an IRS or DOL Information Request Letter it would be beneficial to begin preparing early for the audit event in order to achieve the best and most efficient outcome.

The more cooperative and efficiently the audit progresses the more positive the experience is likely to be. Being defensive or uncooperative would be counterproductive and would likely alienate the auditor. Proper planning for the audit will leave you better prepared for questions and typically helps to avoid any further potential inquiries.

One important suggestion is to not seat the auditor in front of your plan filing cabinet and let them find whatever they may need. The auditor will be looking for specific items as indicated in their Information Request Letter. Providing the auditor exactly what they’ve requested, but only what they’ve requested, is your best course of compliance whilst simultaneously keeping the investigation narrow in scope. Suggesting they look through your files, in addition to being less efficient, can lead to the auditor uncovering issues that could result in more negative outcomes than those which they originally intended to review.

Consider adjusting your schedule to be available during the audit in the event of questions the auditor may have. You may want to delegate another team member to oversee the audit and deferring final decision-making to you. Notify other members of your plan administration team that your plan is being audited so they can be available to assist. Definitely notify your ERISA attorney, plan consultant, administrator, recordkeeper and investment advisor in the event that they may be helpful.

If the Information Request Letter identifies a significant potential concern a team meeting, prior to the audit, with appropriate attendees (internal or external) may be helpful to review the Information Request Letter, review plan provisions and procedures, and prepare for any questions.

Know that if you need more time to be fully prepared for the audit it is common for plan sponsors to request, and receive, a reasonable delay of the visit after providing an explanation as to why it may take more time to be fully prepared. Auditors recognize that it is not unusual to request additional time to obtain data that may not be immediately accessible.

Most DOL/IRS plan audits result in minimal issues or minor administrative errors that can be easily remedied. If a more substantial issue is found, know that it is probably much better to remedy it now than at some later date when it becomes more cumbersome administratively and/or more financially impactful to remedy.

PARTICIPANT CORNER: TAX SAVER'S CREDIT: GET THE "CREDIT" YOU DESERVE!

You may be eligible for a valuable incentive, which could reduce your federal income tax liability, for contributing to your company’s 401(k) or 403(b) plan. If you qualify, you may receive a Tax Saver’s Credit of up to $1,000 ($2,000 for married couples filing jointly) if you made eligible contributions to an employer sponsored retirement savings plan. The deduction is claimed in the form of a non-refundable tax credit, ranging from 10% to 50% of your annual contribution.

Remember, when you contribute a portion of each paycheck into the plan on a pre-tax basis, you are reducing the amount of your income subject to federal taxation. And those assets grow tax-deferred until you receive a distribution. If you qualify for the Tax Saver’s Credit, you may even further reduce your taxes.

Your eligibility depends on your adjusted gross income (AGI), your tax filing status, and your retirement contributions. To qualify for the credit, you must be age 18 or older and cannot be a full-time student or claimed as a dependent on someone else’s tax return.

Use this chart to calculate your credit for the tax year 2022. First, determine your AGI – your total income minus all qualified deductions. Then refer to the chart below to see how much you can claim as a tax credit if you qualify.

 

Filing Status/Adjusted Gross Income for 2022

Amount of Credit

Joint

Head of Household

Single/Others

50% of amount deferred

$0 to $41,000

$0 to $30,750

$0 to $20,500

20% of amount deferred

$41,001 to $43,000

$30,751 to $33,000

$20,501 to $22,000

10% of amount deferred

$43,001 to $68,000

$33,001 to $51,000

$21,501 to $34,000

Source: IRS Form 8880

For example:

  • A single employee whose AGI is $17,000 defers $2,000 to their retirement plan will qualify for a tax credit equal to 50% of their total contribution. That’s a tax savings of $1,000.
  • A married couple, filing jointly, with a combined AGI of $42,000 each contributes $1,000 to their respective retirement plans, for a total contribution of $2,000. They will receive a 20% credit that reduces their tax bill by $400.

With the Tax Saver’s Credit, you may owe less in federal taxes the next time you file by contributing to your retirement plan today!

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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