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Cypen & Cypen
January 9, 2020

Stephen H. Cypen, Esq., Editor

You may need to take a required minimum distribution from your IRA or retirement plan account by the end of the year:

  • If you’re at least age 70½ this year, or
  • If you’ve inherited an IRA or retirement account.

Recent legislation, known as the Secure Act, does not affect required minimum distributions for the 2019 tax year.
The Secure Act
Recent legislation, commonly known as the Secure Act, raises the age for required minimum distributions to 72 beginning in 2020. It also removes the age limit for contributions to traditional IRAs beginning in 2020. This legislation does not affect the rules for 2019. If you’re at least 70½ in 2019, you must take a required minimum distribution. And you’re not allowed to make contributions to your traditional IRA for 2019 after age 70½.
403(b) plans
403(b) plans have until March 31, 2020, to update their 403(b) plan documents for all current law. Revenue Procedure 2019-39 (PDF) establishes a remedial amendment period for individually designed plans after March 31.
Plan amendment deadlines set for new hardship rules 
The IRS released the annual required amendment list for individually designed qualified plans and 403(b) plans in Notice 2019-64 (PDF). Sponsors of individually designed 401(k) and 403(b) plans have until December 31, 2021, to adopt amendments to meet the requirements of the final hardship regulations. Rev. Proc. 2020-9 (PDF) extended the deadline for adopters of pre-approved plans until December 31, 2021, to adopt an interim amendment for the final hardship regulations.
Withholding from periodic payments
Notice 2020-03 (PDF) provides guidance for withholding from periodic payments for pensions, annuities, and certain other deferred income in 2020. The IRS is also requesting comments on the potential adoption of a new default rate of withholding after 2020.
IRS Advisory Council issues 2019 Annual Report
The Internal Revenue Service Advisory Council (IRSAC) issued its 2019 annual report, including recommendations to the IRS on tax administration. 
Employee Plans NewsIRS.gov, December 23, 2019.
High investment returns did not radically improve the funded status for most corporate pension funds in 2019, according to a new analysis from Willis Towers Watson. The consulting firm found that funded status ticked up just slightly year-over-year, reaching 87 percent in 2019, as compared with 86 percent in 2018. This was as overall investment returns were estimated to average 19.8 percent for the year. According to the firm, interest rates are to blame for the stagnant funded status. “I think many people would have thought that with the equity markets having done so well, there would be better improvements,” said Jennifer Lewis, senior director of retirement at the firm, by phone Thursday. “Interest rate drops were so significant that it really wiped things out last year.” Interest rates experienced the largest one-year drop in two decades last year, said Joseph Gamzon, senior director of retirement at Willis Towers Watson. According to Lewis, this is important because interest rates affect how liabilities are calculated. When they fall, liabilities increase, which affects a pension’s funded status. Pension obligations increased 9 percent year over year, from $1.58 trillion in 2018 to an estimated $1.72 trillion in 2019, the analysis showed. Willis Towers Watson compiled the analysis by looking at data from 376 Fortune 1000 companies that sponsor U.S. defined benefit pension plans and have a December fiscal-year-end date. Funds with allocations tilted toward fixed income in 2019 did not perform as well as those with a large equity allocation, Lewis said. Aggregate bonds produced gains of nine percent in 2019, while long corporate and government bonds, which are typically used in liability-driven strategies, returned 23 percent and 15 percent, respectively. By comparison, large-cap domestic equities returned 32 percent for the year, while domestic small and mid-cap equities gained 28 percent, the analysis said. “I think it really is a time for corporate sponsors to keep an eye on interest rates,” Lewis said. In the years ahead, corporate pension plans will be facing more challenges when it comes to interest rates, Lewis said, because the funding relief offered by the IRS after the financial crisis will soon expire, which means the adjusted interest rates that corporate pension plans use to calculate their liabilities will fall. The IRS’s website shows that after 2020, the interest rates used to calculate liabilities will change. This means that in the coming years, corporate pension funds will have higher cash requirements, according to Lewis. “Companies should to consider their long-term cash funding requirements, especially as the IRS’s funding relief goes away,” Lewis said. Alicia McElhaney, Institutional Investor, January 2, 2020.
While awaiting action from the government to shore up Social Security, plan sponsors can do their part by educating employees. Reliability for Social Security has diminished in the past decade. Some people believe the benefit will be unavailable by the time retirement hits, while others think monthly checks will see a hefty cut. The rumors shouldn’t be measured too much, says William Meyer, CEO of Social Security Solutions. In fact, he believes Social Security reform will likely be a priority in the new year, especially due to the upcoming presidential election. “Given the underfunding of the current system, everyone knows that a change is needed,” he adds. “We are starting to hear proposals from future presidential candidates and I’m hopeful that Social Security reform will be a priority in the next presidential term.” Increasing awareness when it comes to claiming strategies is another trend Meyer foresees for 2020. He reasons that participants must evaluate options and understand how to maximize their own benefit claims. “The coordination of Social Security with your 401(k) will be the biggest financial decision Americans will make,” he says. “Those that take time to find a claiming strategy to maximize their benefits will be able to make their retirement savings last longer.” Plan sponsors and their advisers can help employees with their understanding of Social Security. Understanding behavioral biases is also key to helping employees make the right decisions. In 2019, Plansponsor spoke with several sources to offer actionable insights to plan sponsors.
Social Security: The Facts vs. Fiction
Educate older workers on Social Security and other such benefits, to help stretch their savings in retirement, experts say. Read more.
Social Security Education a Must-Have for Retirement Plan Participants General education is helpful, but getting personal will help employees establish a plan for income in retirement. Read more.
Behavioral Insights About Retirement Income Decisions
A professor at the UCLA Anderson School of Management discussed biases that must be considered when helping people make retirement income decisions. Read more.
Amanda Umpierrez, Plansponsor, January 2, 2020.
Are you looking for new ways to save time this new year? Social Security offers many of its services online by signing up for a secure my Social Security account. Once you create an account, you can review your work history and see an estimate of your future Social Security benefits. We recently made several enhancements and introduced new features to my Social Security. With your personal my Social Security account, you can also:

  • Estimate future benefits with a Retirement Calculator that allows you to compare different retirement dates and include future earnings estimates (NEW)
  • Request a replacement Social Security card
  • Check the status of your Social Security application

If you already receive benefits, you can:

  • Get a benefit verification or proof of income letter
  • Set up or change direct deposit
  • Change your address
  • Request a replacement Social Security or Medicare card
  • Get a Social Security 1099 form (SSA-1099)
  • Opt out of certain mailed notices (NEW)

The Message Center is a secure, convenient portal where you can receive secure, sensitive communications. The Message Center now allows you to opt out of receiving some mailed notices. You can now choose to receive the annual cost-of-living adjustments and the income-related monthly adjustment amount online. Unless you opt out of receiving notices by mail that are available online, you will receive both mailed and online notices. All of these features can help you save time by doing business with us online. Create a mySocial Security account today! We also offer many other online resources. Let friends and family know they can access them from the comfort of their home or office and on the go from their mobile phone. Darlynda Bogle, Assistant Deputy Commissioner, Social Security Administration, January 2, 2020.

Vanguard kicked off the new year with the latest move in the fee wars, expanding its commission-free trading platform to include stocks and options for brokerage clients. In the summer of 2018, Vanguard announced it would eliminate commissions on most exchange traded funds, including many sold by its competitors. This latest move expands that to stocks and options trading. The move follows announcements by other major brokerages in the fall to eliminate commissions for ETFs, stocks and options, including Charles Schwab, TD Ameritrade, E*Trade and Fidelity. Those moves had many advisors questioning how the firms were going to make up the revenue lost. Schwab, for instance, makes up the revenue on selling order flow and net interest revenue from the cash it holds in client accounts. In its announcement, Vanguard said it does not sell order flow, and its brokerage clients are automatically swept into the Vanguard Federal Money Market Fund, with a current yield of 1.55% and an expense ratio of 11 basis points. Brokerage firms typically place the cash portion of a client’s portfolio into a so-called “sweep” account, usually with an affiliated bank, that earns the client very little, with yields hovering around .04% to .13% at the major brokerages for small amounts of cash. Fidelity has had a long-standing policy of automatically placing excess client cash in retail brokerage and retirement accounts into its government money market fund. "As we move to an environment in which 'zeros' dominate the headlines and explicit fees become implicit, we encourage investors to look more deeply at the total cost picture," said Karin Risi, managing director of Vanguard’s retail investor group. “Vanguard remains a vocal proponent of clear and transparent fee disclosure." Diana Britton, WealthManagement.com, January 02, 2020.
Starting a work-at-home business can give you the flexibility to set your own hours and be your own boss. But when you search online or get ads by email, you’ll often find scammers instead of a real opportunity. Take, for example, Effen Ads. The FTC says this company tricked more than 50,000 people into paying for fake work-at-home opportunities. According to the FTC’s complaint, the company ran ads with made-up news stories and fake celebrity endorsements. Those ads promised people they could make easy money by posting advertising links on websites. The catch? First, people had to pay $97 in upfront fees. Then, Effen gave people basic online training materials -- but no money-making links, the FTC says. Even worse, some people lost tens of thousands of dollars after Effen Ads allegedly sold their information to telemarketing companies. Which then convinced people to buy bogus business coaching and other services, according to the FTC’s complaint. The FTC settled its case against Effen Ads and certain individuals involved in the scheme. The settlements impose strong restrictions on their future activity and require the defendants to pay nearly $1.5 million, which will go back to people who lost money. If you want to start a business from home, first research the company’s name online with the words “complaint,” “scam,” or “review.” Here are tips for spotting and stopping potential investment scams:

Lisa Lake, Consumer Education Specialist, FTC, Federal Trade Commission, December 30, 2019.
For all the headlines dedicated to the topic of environmental, social and governance (ESG) investing, there remains considerable uncertainty over what exactly it means, says George Michael Gerstein, co-chair of the fiduciary governance group at Stradley Ronon. In a recent blog post and in previous conversations with Planadviser, Gerstein has called this fact unfortunate, “not least because it is hard to comply with fiduciary duties if the conduct at issue is a moving target.” “The fact is, with proper structuring, a fiduciary to an ERISA [Employee Retirement Income Security Act] plan, or a governmental plan, for that matter, can favorably respond to requests for ESG issues to be part of the investment mandate without losing much sleep over fiduciary duty risk,” Gerstein says. According to Gerstein, slow but steady progress is being made by ESG investing advocates, who make the case that ESG risks are already material to investing decisions. At this stage, he explains, there are four primary techniques for addressing ESG risk. “First, one can screen out from investment consideration those portfolio companies that fail to satisfy one more ESG risk-related criteria, known as negative screening. For convenience, divestment, can be included in this category because it is effectively screening out existing holdings,” Gerstein says. The second technique is to limit the investible universe to those “best-in-class” portfolio companies that satisfy ESG risk-related criteria. Gerstein explains this technique is known as “positive screening.” The third technique is treating an ESG risk like any other material risk to investment performance, “no more and no less.” This is known as integration, Gerstein says. The fourth technique is to address ESG risk through proxy voting and other forms of shareholder engagement. “At this stage, we now recognize that ESG is an umbrella term that encompasses myriad environmental, social and governance risks,” Gerstein adds. “We appreciate that ESG can be boiled down to discrete risk areas, such as cybersecurity or board diversity, and that [investors and their advisers] can focus on only one of these risks as part of their mandate.” Gerstein says it is worth noting at this point that the DOL’s most recent guidance on ESG, Field Assistance Bulletin 2018-01, expressly reaffirmed the notion that ESG issues can present material risks (and opportunities) for retirement plans, and, consequently, could be treated the same way as any other factors a fiduciary would consider as part of a prudent process. “The DOL cautioned fiduciaries against making too many assumptions and against not relying on the evolving data linking one or more ESG issues with investment performance,” Gerstein notes. “This makes sense and should not present too much of an operational nuisance, considering that more fine-tuned data is available reportedly showing one or more ESG issues as being material to performance.”

Positive Compensation?
Michael Hunstad, head of quantitative strategies at Northern Trust Asset Management (NTAM), also spoke extensively this year with Planadviser about the evolving ESG topic. According to Hunstad, outside of the U.S., almost all the institutional business NTAM engages in already involves the ESG lens to some capacity. He says institutions in Europe, Asia and Latin America have come to accept that ESG is a material issue when it comes to long-term asset performance--both as a source of risk and a potential source of return. “Is ESG a factor, say, in the way of stock value or momentum?” Hunstad asks. “There are two ways to look at this question.”  The first is to say that ESG is an independent source of risk that must be addressed. “In my opinion, you simply cannot argue against this,” Hunstad says. “Consider what happened with Volkswagen’s stock when the emissions cheating scandal came out. That is bad governance, and it is absolutely a source of material risk today that will impact your portfolio, if ignored. So if you can measure governance, and you can control the risk around governance, that’s enough for me to say that ESG is a factor that should be addressed during portfolio construction.” The risk issue may be settled, Hunstad says, but it is equally important to ask the next question, i.e., whether ESG is a positively compensated factor? In other words, will an investor see excess returns for going overweight in ESG-conscious stocks? “We have to be careful in this analysis,” Hunstad suggests. “I like to say that the best case for higher performance of ESG stocks is over the long-term.” The case goes as follows. For those companies that have taken concrete steps to comply with environmental regulations or have strong cultures of governance and are globally and sustainably minded, they have already borne the cost of embracing this way of doing business. Crucially, the fact already shines through in their financial statements. On the other hand, those companies that have done nothing to consider ESG issues, their financials do not reflect these unknown future costs. “The important point is to say that these companies will eventually have to bear these costs in the future, which will inevitably be a headwind for their stock price and financial performance,” Hunstad says. “Additionally, we have found that ESG absolutely can be a compensated factor when you weed out low-quality companies from your portfolio. There are stocks out there that rank highly on the ESG perspective that you don’t want to own from a financial perspective. If you get rid of those, the stocks that are left over, the high-qualit,y high-ESG-rated stocks, tend to do very well.”

Which is most important, ‘E,’ ‘S,’ or ‘G’?
Although much of the global attention within the ESG sector of investing has been placed on the environmental component, the ESG Investor Sentiment Study from Allianz Life Insurance Company of North America found that in the U.S., social and governance issues are equally important as or more important than environmental record when consumers decide whether or not to invest in or do business with a company. Furthermore, the study found that a company’s ESG profile plays a significant role in its overall reputation as a majority of consumers believe companies focused on ESG issues have better long-term prospects. When asked about the importance of a variety of ESG topics in making a decision to invest in a company, 73% of American consumers noted environmental concerns like natural resource conservation or a company’s carbon footprint/impact on climate change. However, the same percentage emphasized social issues such as working conditions of employees or racial/gender equality, and 69% highlighted governance topics like transparency of business practices and finances, or level of executive compensation, as being significant in their decision making. Related research from Morningstar finds most investors, across ages and genders, have clear preferences for environmental, social and governance investment products. Using a research method the firm calls “the My Sustainability Profile,” which measured the sustainability preferences of some 1,000 investors, Morningstar found that, overall, 72% of the United States population expressed at least a moderate interest in sustainable investing. The research found that while women have a slightly stronger preference for sustainable investing than men, the difference between the weighted averages was small. In addition, this small difference disappeared after controlling for income, age, political ideology, religiosity, risk tolerance, financial literacy, and other sociodemographic variables. The results also bust the myth that different generations have substantially different preferences for sustainable investing. The average preference score for Millennials and Generation X were statistically equivalent, and while Millennials, on average, showed a slightly stronger preference for sustainable investing when compared to Baby Boomers, the difference didn’t exist after including sociodemographic variables. John Manganaro, Planadviser, December 27, 2019.

“Ability is all right but if it is not backed up by honesty and public confidence you will never be a successful person. The best a man can do is to arrive at the top in his chosen profession. I have always maintained that one profession is deserving of as much honor as another provided it is honorable.”
"The happiest people don't necessarily have the best of everything, they just make the best out of everything that comes their way." -- Unknown
On this day in 2007, Apple Inc. CEO Steve Jobs announces the iPhone.

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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