The flow to passive management is one of the biggest talking points of the decade. With this shift came the daunting task, and responsibility, to better evaluate the abundance of index funds offered by the marketplace. Index funds seek to replicate the performance of a benchmark, making the idea of comparing returns appear counterintuitive.


This notion has led many to focus almost entirely on fees. During this time period the industry experienced significant fee compression, with the difference between a few of the most commonly utilized index funds as small as 0.002%. This amounts to $2 for every $100,000 invested. Relative to the administrative burden to switch funds, investment cost is not the best method of selecting funds especially considering that shortly after, a different fund may be the new lowest-cost option.


How else can an index fund differentiate itself from its competitors – If not fees, what should be evaluated? The best index fund managers provide tight benchmark tracking at a reasonable price, and two techniques they can incorporate into their investment process are cross trading and securities lending.


Through the application of certain trading techniques, index managers can reduce cost and improve tracking. Over time the composition of indexes change, yet the process funds undergo to match these changes are complex. For example, as companies grow, they may move from the small cap index into the large cap index. For the index, this is a simple process. One day the company is in the small cap index and the next day they are in the large cap index. No trading needs to occur, no commissions paid, no bid-ask spreads crossed, no trades routed – yet funds must overcome these hurdles if they want to match the index’s performance.


One technique to overcome these challenges is through the use of cross trading. Suppose a fund company offers a small cap index fund and a large cap index fund and “company X” is being moved from the small cap index to the large cap index. The fund company could sell all their shares of “company X” in the small cap fund. This incurs cost and drives the price down as they sell. Then they buy all the shares back in their large cap fund, driving the price up as they buy. Through cross trading, this process is more streamlined. The fund company transfers their shares of “company X” from their small cap fund to their large cap fund without incurring costs. This leads to reduced tracking error and improved performance. To conduct due diligence on an index manager’s cross trading capabilities examine the index fund company’s cross trading process and review percentages of trades crossed.


The second method by which an index fund can be evaluated is through their use of securities lending. Securities lending refers to the temporary lending of a stock, derivative, or bond by one party to another in exchange for collateral. The collateral can be reinvested to produce income for the lender. Securities lending is important to short sellers who profit when securities drop in value. If an active investor is looking to short “stock ABC”, currently worth $100, they can borrow “stock ABC” from an index fund, offering the fund $103 as collateral. The index fund can invest this cash until the stock is returned, generating extra return, helping offset the costs the fund faces.


It is important to remember this is not risk-free money for the fund. This process exposes the fund to counterparty risk – which is when the active investor does not return the stock owed. The second is reinvestment risk – when the fund invests the $103 and it loses value. To mitigate this risk many fund companies have adopted SEC or OCC money market guidelines that outline the maturity, credit ratings, and liquidity restrictions on the collateral investment. Well established index providers will furnish information on their counterparty and collateral guidelines.


How much extra return can securities lending generate? Looking at the graphs below we can see significant additional return through securities lending, sometimes in excess of the management fee charged by the fund.



Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT








State Street CIT










Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT








State Street CIT










Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT








State Street CIT










Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT








State Street CIT








 – 2018 Securities lending information


These complex features, prevalent amongst passive managers explain why RPAG tailored the scorecard to evaluate passive managers on analytics and metrics specific to, and important for, passive funds. On the surface it might seem counter intuitive to include an analytic on return rank for a passive fund designed to match the performance of a benchmark. However, by including return rank we evaluate a fund’s effectiveness in securities lending and cost reduction through cross trading.


Two analytics dedicated to tracking error may seem unnecessary, however performance matching is a primary objective of passive funds. It is critical for managers to utilize every tool in their toolbox. An emphasis on tracking error allows for better assessment of how well managers are meeting this objective. While fees are an important component of evaluating a passive manager, it is not the only data point, and the RPAG scorecard incorporates all significant components into the analysis.


For more information about cross trading and securities lending, reach out to your plan advisor.


About the Author, Ryan Hamilton

Ryan is an investment analyst for RPAG. He works closely with advisors and plan sponsors on manager due diligence and conducting market and fund research. Ryan is also a member of the RPAG Investment Committee, where all quantitative and qualitative aspects of the investment due diligence process are vetted and discussed when providing manager recommendations at the firm level for the firm’s entire client base. Ryan specializes in fixed income, cash vehicles, and alternative investments. Ryan graduated magna cum laude with a Bachelor of Arts from UCLA, and is a CFA Level III Candidate.


As human resource managers begin working on updating their benefits package, it’s important to remember that millennials are quitting their jobs faster than employers can hire them1 – which is especially problematic considering millennials now make up 50 percent of the workforce 2.


The reasons for resignations vary widely, but one retention solution may be to consider offering a student loan contribution program. In 1999, the amount of outstanding student loan debt was approximately $90 billion. In 2019, that amount that has grown to nearly $1.6 trillion – held mainly by millennials. It’s fair to say that this population is desperately looking for some relief from this heavy debt burden – which offers a unique opportunity for employers to recruit and retain millennial talent.


A recent survey by Laurel Road found that millennials who were offered a student loan contribution program in their benefits package stayed at companies five years longer than those who were not. Some surveys even concluded that a student loan contribution program can be more desirable than vacation days3.


A byproduct of the student debt problem is that millennials may not be saving enough for retirement. A recent study from Boston College’s Center for Retirement Research, found that college graduates with student debt, accumulate 50 percent less retirement wealth in their retirement plan by age 30 than those without4.


Many employees believe they must choose between paying off their loans and saving for retirement; however, a student loan repayment program allows employees to make considerable contributions to both their debt and retirement savings accounts.


Student loan contribution programs are offered at little to no cost by different providers, are fully tailored to most benefit programs and most importantly, may offer a solution to the student loan debt crisis. A majority of these innovative plans are set up in three unique ways:

  1. Refinancing Resources, which offer financial wellness tools as well as access to third-party loan refinancing.
  2. Loan Contribution Programs offer employer monthly contributions to employee student loans in addition to refinancing resources.
  3. Match Contributions, where employers make a retirement plan match when employees make a tuition loan payment. Again, refinancing resources are included.


These programs vary in shape and size, allowing companies to integrate this benefit with little interruption to company operations. The more competitive programs will offer refinancing, allowing workers to make smaller payments at less of an interest rate, with little to no cost to the employer. At its core, this program increases employee retention by reducing the financial strain brought on by student loans.


Consider implementing a student loan contribution program into your benefits strategy. You may find that your ability to recruit and retain millennial talent increases immensely!


Ever wondered why we use Russell instead of S&P for benchmarks in the RPAG system? Here are four important reasons:

  • Russell ranks each company in the investable universe according to its total market capitalization while S&P uses a committee to make these decisions. Market cap is the primary indicator to determine where a company belongs in the Russell Index.
  • Using a float adjustment methodology, Russell creates benchmarks that most accurately reflect the market, and Russell’s indices adjust each company’s capitalization ranking to eliminate closely held shares that aren’t likely to be traded.
  • By updating index holdings on a regular basis and reconstituting them annually, Russell provides a truer representation of the market.
  • Russell indices objectively allow the market to determine the index composition according to clear and published rules. The market determines which companies are included, not the subjective vote of a selection committee.

For more information the importance of a benchmark, contact your plan advisor.


This month’s employee memo informs participants about taking money out of their retirement plan. Download the memo from your Fiduciary Briefcase at and distribute to your participants. Please see an excerpt below.


PARTICIPATING IN THE COMPANY’S RETIREMENT PLAN is a smart and important decision. Smart because you are putting away small amounts today for a comfortable retirement later.


As your account begins to grow, it may be tempting to “dip into” your retirement savings by taking a loan against your  retirement plan to pay your annual taxes, repair a leaking roof, catch up your everyday pile of bills, and so on. And while the decision to take a plan loan is yours to make, we want to make sure that you consider what it will really cost.


With a retirement plan loan, you pay yourself back the amount plus interest. But the true cost can be shown with the loss in your retirement savings. You lose money when you borrow from your retirement account for several reasons:

  • You lose making money on the earnings, or compounding of those earnings.
  • You repay the loan with after-tax dollars.
  • There is (typically) an initial set-up and quarterly loan fee.
  • Most employees decrease or cease the amount they are contributing to compensate for the loan payment.
  • You may not be paying yourself back the same amount you would have earned if you left the money invested.


To further illustrate the costliness of taking a plan loan, consider the following hypothetical example*: Jane took a $10,000 loan at 7% interest from her retirement account; her account balance before the loan was $20,000. She previously made contributions of $150 per paycheck (including the employer match). Because she had to repay the loan, she decreased her contribution to $50. Additionally, prior to the loan, she was earning a 10% return. Now she will repay the loan over five years. If you take into account loss of interest, compounding, and tax on repayments, the actual retirement plan loan is costing Jane 13.77%! And don’t forget about those decreased contributions, which can add up to hundreds of thousands of dollars over many years.

*This example is hypothetical and intended for illustrative purposes only.


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.



It has been 13 years since Congress enacted the Pension Protection Act of 2006, the last piece of major legislation affecting retirement plans. Significant provisions affecting retirement plans were included in various versions of President Trump’s tax reform bill enacted in 2017, but Congress ultimately punted, and none of them made it into the final bill.


This past May, the House passed, by a near unanimous vote (417 – 3), the “Setting Every Community up for Retirement Enhancement Act” (The “SECURE Act”). Such strong support in the House suggests this legislation has an excellent chance of becoming a law before the end of the year. This is now contingent on Senate action. Although many of the provisions in this bill have strong support in the Senate, under the Senate’s arcane procedural rules, a single Senator could tie this legislation up in committee.


 A number of important provisions in this bill have appeared in past bills and have strong bipartisan support. Thus, regardless of whether the House bill becomes law this year, it is almost certain that the majority of these provisions will be enacted at some point in the not too distant future.


Some of the more important provisions of this bill include:

  • Multiple Employer Plans (“MEPs”) for Unrelated Employers – The bill would overturn Department of Labor guidance, preventing unrelated employers from establishing multiple employer plans. Many small employers do not sponsor retirement plans and this is yet another attempt by Congress to encourage them to do so by offering them a more efficient alternative to establishing individual plans.


  • Notice of Lifetime Income – Sponsors of defined contribution plans would be required to provide participants with an annual notice disclosing the estimated monthly annuity income their account balance could generate at retirement. The intent is to ensure that participants are better informed about how much they need to save for their retirement. Nationally, the average participant in a 401(k) plan is currently saving enough to replace less than 50 percent of his/her projected income at retirement, even when social security benefits are included.


  • Safe Harbor for Lifetime Income Option – Few defined contribution plans offer an annuity option that provides a lifetime income stream to participants commencing at retirement. One of the major reasons for this is plan sponsors’ concerns about fiduciary liability in the event that the insurance company becomes insolvent at a future date. In 2008, the Department of Labor published a safe harbor for selecting an annuity provider, but this was not viewed as providing sufficient protection to plan fiduciaries. The bill would specify the steps plan sponsors must take in selecting an annuity provider. If these steps are taken, the plan sponsor would be deemed to have satisfied its fiduciary responsibilities.


  • Part Time Employees – Current law permit plan sponsors to exclude part-time employees from retirement plans. The bill would require sponsors to allow long term part-time employees to participate. Long term part-time employees are defined as employees who work at least 500 hours in three consecutive years.


  • Tax Credit Increased for Plan Start-Up Costs – The bill would increase the existing tax credit for plan startup costs for small employers with no more than 100 employees. The credit will increase from $500 to $5,000 over three years. There would be an additional $500 credit if the plan includes an auto enroll feature.


  • Remove Age Limit for Traditional IRAs – Under current law, individuals cannot make deductible contributions to a traditional IRA after reaching age 70 1/2. There is no age restriction for Roth IRAs. The bill would repeal this age restriction.


  • Age for MRDs Pushed Back – The age at which minimum required distributions must commence would be pushed back from age 70 ½ to 72. This is a popular change, but it has been criticized as only benefitting wealthy tax payers with relatively large amounts of deferred tax savings who do not need to make withdrawals to cover living expenses.

President Trump has nominated Eugene Scalia to be the next Secretary of Labor. On July 12th, Alexander Acosta was forced to resign due to the controversy over a plea deal for Jeffery Epstein, who was recently charged with sex-trafficking crimes by the US Attorney for the Southern District of New York. At the time, Mr. Acosta was the US Attorney. The plea deal has been controversial because many viewed it as too lenient.


Mr. Scalia has held several government posts including Solicitor of Labor in the second Bush administration. This is the top legal position in the Department of Labor. He is viewed as more conservative than Mr. Acosta.


Before Mr. Acosta’s departure, the Department had announced that it is on track to publish a new fiduciary rule by year’s end, to replace the original rule struck down by the Fifth Circuit of the Federal Court of Appeals. The Fiduciary Rule was a complex regulation where persons working with retirement plans and participants are fiduciaries and may only make investment recommendations that are in the best interests of their clients. If Mr. Scalia is confirmed as the next Secretary of Labor, the possibility of a new fiduciary rule may be in doubt.


The House is considering a program of government loans and grants for financially troubled Taft Hartley multiemployer plans. Many multiemployer plans are on the verge of insolvency. The American Society of Actuaries estimates that by 2023, 21 multiemployer plans covering about 95,000 participants will be unable to continue paying benefits. The financial troubles of multiemployer plans are longstanding. The primary causes are:

  • most multiemployer plans cover employees in the smoke stack industries that have been in decline, meaning fewer and fewer contributing employers;
  • benefit liabilities have often been calculated using unrealistic actuarial assumptions; and
  • negotiated employer contributions have rarely been sufficient to fund the promised benefits.


In 2014, Congress attempted to address this problem by making an exception for multiemployer plans to ERISA’s longstanding rule that plan sponsors can never cut back on accrued benefits. In some cases, plans were permitted to cut benefits by more than 30 percent. However, this relief has not been sufficient. Under the proposed legislation, plans would be allowed to apply for 30-year loans along with outright grants. The most distressed plans would be required to participate in the program. Support for this legislation is sharply divided along party lines. Democrats see this as a necessary and temporary backstop. Republicans see this as a taxpayer funded bailout that does not address the underlying problems, especially mismanagement by plan trustees.


If Congress fails to act soon, the Pension Benefit Guarantee Corporation (“PBGC”) will be on the hook for benefits that multiemployer plans are unable to pay. The PBGC is a government agency established by ERISA that guarantees payment of all private pensions. The PBGC’s assets are insufficient to cover the liabilities of multiemployer plans. Thus, if Congress fails to come up with a legislative solution, it will be faced with the ugly choice of bailing out the PBGC to the tune of billions of dollars or standing by and watching a federal agency collapse.


Voluntary after-tax contributions are just what it sounds like. These contributions are made in after-tax dollars and the taxes on the earnings are deferred until the year of distribution. Most 401(k) plans do not allow voluntary after-tax contributions because there has been little interest from participants. However, interest in after-tax contributions is growing due to a recent Internal Revenue Notice that allows the rollover of after-tax contributions from a 401(k) plan to a Roth IRA while the earnings on such contributions are rolled to a traditional IRA.


After-tax contributions are generally of interest only to highly compensated employees bumping up against the annual limit on deferrals and Roth contributions (for 2019, $19,000 / $25,000 if 50 or older), and whose income level prevents them from contributing to a traditional or Roth IRA. The only remaining opportunity for such individuals to save on a tax-advantaged basis is nondeductible IRA contributions (annual limit is $6,000 / $7,000 if 50 or older). In a 401(k) plan that permits voluntary after-tax contributions, such individuals may contribute on an after-tax basis up to the annual limit on all contributions (for 2019, $56,000 / $62,000 if 50 or older). Thus, if an individual elects pretax deferrals up to the annual limit of $19,000, there is still an opportunity to make up to $37,000 in after-tax contributions.


When the individual is eligible for a distribution, the after-tax contributions may be rolled to a Roth IRA and their future earning may escape all taxation. However, there is a significant limit on the ability of highly compensated employees to contribute after-tax because these contributions are included in the actual contribution percentage test (“ACP test”) that applies to matching contributions. Since non-highly compensated employees rarely make after-tax contributions, most plans will fail the ACP test if more than a few highly compensated employees make significant after-tax contributions. Failing this test forces the return of much of the after-tax contributions.


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