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Cypen & Cypen
NEWSLETTER
for
September 10, 2020

Stephen H. Cypen, Esq., Editor

1.  TWO U.S. PUBLIC PENSION FUNDS TAKE DIFFERENT TACKS ON DIVERSITY:
U.S. asset owners are focusing more on diversity and inclusion within the money managers that run their money and in the portfolio companies in which they're investing.  Pension funds that are working to enhance the diversity of their money manager lineup include the $52.9 billion Teachers' Retirement System of Illinois, Springfield, and the Minnesota State Board of Investment, St. Paul, which manages the $71.1 billion combined fund of the state's public defined benefit plans.
 
Illinois Teachers has been investing with minority- and women-owned firms through its 15-year-old emerging manager program, which is one of the longest running among U.S. institutional investors and is one of the principal ways the retirement system brings minority- and women-owned business enterprise money managers into the portfolio.
 
As of June 30, 95% of the $675 million preliminary total of the emerging manager program was managed by 17 minority- and women-owned firms. Across the entire portfolio, 28 minority/women-owned firms, including those in the emerging manager program, managed a preliminary total of $9.5 billion, or 18.6% of total plan assets as of the same date, showed a report about the emerging manager program provided to trustees by Jose Gonzalez, investment officer for the program, during a remote investment committee meeting Aug. 27.
 
The Minnesota State Board of Investment closed its emerging manager program in the early 2000s after all of the managers graduated to full-sized mandates within the DB plan portfolio, said Mansco Perry III, the board's executive director and CIO, in an interview.
 
Like the Illinois teachers' fund, MSBI investment staff are considering how best to add more diverse money managers to the combined fund portfolio in response to a recent resolution from the board, Mr. Perry said.

Diverse-owned firms, including minority-owned EARNEST Partners LLC and women-owned Zevenbergen Capital Investments LLC, both graduates of the former emerging managers program, manage a significant portion of assets of the Minnesota portfolio, but the percentage of total assets they manage is not available, Mr. Perry said.
 
Fourth incarnation
Illinois Teachers is embarking on the fourth incarnation of the emerging managers program since it was started in 2005, which will include an additional $250 million to bring the program's portfolio up to $1 billion, the highest level to date, Mr. Gonzalez told trustees during the Aug. 27 investment committee meeting.
 
Mr. Gonzalez said the program will include more emphasis on high-conviction managers; a continued focus on private market strategies, including private equity and private credit; increased investment in real assets, hedge funds and other opportunistic strategies; and enhancements to the manager sourcing pipeline.
 
Diversity has been a hallmark of the emerging manager program since its inception when the focus was on hiring promising, newer money managers with small asset bases for modest public-market assignments of $25 million to $50 million.
 
The goal is to forge long-term relationships with these managers and eventually "graduate" emerging managers to larger allocations within the portfolio.
 
In 2010, the program was expanded to include money management firms running private market strategies.  Mr. Gonzalez told trustees during the virtual committee meeting that "my goal is to find diverse managers in every asset class."
 
In response to a question during the meeting from Devon Bruce, president of the board, Mr. Gonzalez explained that "part of my reunderwriting of the (emerging manager) program is to look at the diversity in workforce hiring within the managers we're considering, looking beyond the executives."
 
‘Out there every day'
R. Stanley Rupnik, CIO and interim executive director of the pension fund, stressed to trustees that "unlike what happens at other funds, Jose is out there every day finding (emerging) managers."
 
In his presentation, Mr. Gonzalez said, "Engaging with the MBWE community through network partners helps to build a pipeline of diverse managers and firms," and identified 100 Women in Finance, the Association of Asian American Investment Managers and the Women's Association of Venture & Equity as entities with which TRS works for manager sourcing.
 
The investment staff, led by Mr. Rupnik and Greg Turk, director of investments, have begun to incorporate analysis of diversity and inclusion in evaluating managers in the retirement system's private equity, real estate/real assets and diversifying strategies (hedge funds and alternative risk premium funds), according to discussion during the meeting.
 
Investment officers did not provide details about the new diversity and inclusion investment analysis during the trustee meeting and investment staff declined to comment beyond the meeting.
 
As the emerging manager presentation was ending, Andrew Hirshman, chairman of the investment committee, said diversity and inclusion concerns "aren't social issues. They are investment issues."
 
The investment advisory council of the Minnesota State Board of Investment also dug into diversity and inclusion issues at the request of council member Susanna Gibbons during a meeting conducted remotely.
 
In a recent letter to fellow members, Ms. Gibbons urged the board to act in accordance with a resolution passed by the board in February directing the staff and board "to promote efforts for greater diversity and inclusion on corporate boards and within the investment industry."
 
Ms. Gibbons said in her letter that "the MSBI has done an excellent job so far of bringing these issues to light as part of its broader ESG agenda and I applaud staff for their ongoing efforts. However, the murder of George Floyd and subsequent demonstrations are forcing all of us to confront the persistent and insidious racism that remains firmly embedded in our economic system."
 
Ms. Gibbons' suggestions for actions included developing diversity goals and better reporting from the MSBI's investment managers; developing proxy guidelines on board diversity with achievable goals in mind; and reviewing the work of the Intentional Endowments Network, a group of 160 mission-driven institutional investors that is collaborating to meet investment objectives "through investment actions that create a thriving, sustainable economy," according to its website.
 
In a memo to the full board, the investment advisory council said its members "generally agree that the MSBI should continue to expand its evaluation of managers and portfolio holdings with respect to diversity and inclusion."
 
Developing metrics
Mr. Perry said in the interview that the MSBI's 12-person investment staff is developing metrics for diversity and inclusion as they apply to external money managers. During due diligence, he noted, "we tell managers that D&I is important to us and we'll be encouraging managers to provide us with the appropriate metrics so we can monitor their D&I progress."
 
He said smaller money managers "are struggling to meet diversity and inclusivity standards, but my expectation is that over the next few years, this situation will be better."
 
Mr. Perry said the MSBI also is trying to increase its own workforce diversity, which isn't an easy task given the board's location in the Twin Cities where "it's a challenge to find diverse candidates."
 
The board is considering the launch of an internship program for high school and college students, Mr. Perry said, with the hope that young people of diverse backgrounds will choose to work there.
 
In addition to managing the combined pension plans fund, the Minnesota State Board of Investment as of June 30 also had oversight of $8.1 billion in public self-directed employee retirement funds and managed $23.2 billion in other state funds, for a total of $102.4 billion.  Christine Williamson, Pension & Investmentswww.pionline.com, September 4, 2020.

2.  SECURE ACT COMPLIANCE Q&A PUBLISHED BY IRS:
The IRS this week published supplemental guidance related to significant policy changes made as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
 
Presented in Q&A format, the guidance addresses issues under the following sections of the SECURE Act:

  • Section 105, which addresses the small employer automatic enrollment credit;
  • Section 107, which repeals the maximum age for traditional individual retirement account (IRA) contributions;
  • Section 112, which mandates that defined contribution (DC) plans be open to participation by long-term, part-time employees;
  • Section 113, which addresses qualified birth or adoption distributions; and
  • Section 116, which permits excluded “difficulty of care payments” to be taken into account as compensation for purposes of determining certain retirement contribution limitations.
The full document includes an extensive number of questions and stretches to 31 pages.
 
In discussing Section 105, the document clarifies that an eligible employer may receive a credit for taxable years only during a single three-year credit period that begins when the employer first includes an eligible automatic contribution arrangement (EACA) in any qualified employer plan.
 
“For example,” the guidance document states, “if an eligible employer (Employer W) first includes an EACA in one of its qualified employer plans (Plan A) during Employer W’s 2021 taxable year and also includes an EACA in a second qualified employer plan, Plan B, during the 2022, 2023 and 2024 taxable years, Employer W may receive no more than a $500 credit for each taxable year during the three-year credit period that begins with the 2021 taxable year and is not permitted to receive the credit for the 2024 taxable year.”
 
Regarding SECURE Act Section 107, the following question is asked: “Is a financial institution that serves as trustee, issuer or custodian for an IRA (financial institution) required to accept post-age 70.5 contributions in 2020 or subsequent taxable years?”
 
The IRS says the answer to this question is no. Simply put, a financial institution is not required to accept post-age 70.5 contributions, but it may choose to accept them. However, if a financial institution chooses to accept post-age 70.5 contributions, it must amend its IRA contracts to provide for those contributions. To this end, the IRS says it expects to issue revised model IRAs and prototype language addressing changes made to the relevant Internal Revenue Code (IRC) provisions under the SECURE Act.

The guidance document includes significant technical information about how the IRS views Section 112 of the SECURE Act, including the following key details: “Section 112(b) of the SECURE Act excludes 12-month periods beginning before January 1, 2021, for purposes of determining a long-term, part-time employee’s eligibility to participate under Section 401(k)(2)(D)(ii) of the code. However, Section 112(b) of the SECURE Act does not exclude 12-month periods beginning before January 1, 2021, for purposes of determining a long-term, part-time employee’s nonforfeitable right to employer contributions under Section 401(k)(15)(B)(iii) of the code. Therefore, unless a long-term, part-time employee’s years of service may be disregarded under Section 411(a)(4), all years of service with the employer or employers maintaining the plan must be taken into account for purposes of determining the long-term, part-time employee’s nonforfeitable right to employer contributions under Section 401(k)(15)(B)(iii), including 12-month periods beginning before January 1, 2021.”
 
Significant discussion of Section 113 is also included, while Section 116 receives relatively little elucidation.  John Manganaro, PLANSPONSORwww.plansponsor.com, September 4, 2020.
 
3.  PENNSYLVANIA TREASURER BACKS PENSION FUND’S DECISION TO CUT RISK PARITY:
Pennsylvania state Treasurer Joe Torsella commended the $55.8 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, for recently cutting its allocation to risk parity, a spokesman for the treasurer confirmed in an email.

"It's time that more pension funds wake up to the fact that Wall Street has, in many cases, sold them something close to modern-day snake oil," Mr. Torsella said in a news release, adding that "Wall Street managers" continue to charge plans large fees even if their strategies fail to perform.

"What so many active Wall Street managers have sold our nation's pension funds on is the idea that -- for a hefty set of fees -- they can help pensions experience almost all of the gains and none of the losses," he said. "We need to recognize that for the fantasy that it is."

As Pensions & Investments previously reported, the PennPSERS board agreed in August to eliminate its 8% allocation to risk parity. Within the pension plan's risk-parity allocation was roughly $2 billion allocated to four strategies managed by BlackRockBridgewater Associates and D.E. Shaw Group, which will be terminated.

Spokeswomen from BlackRock and D.E. Shaw declined to comment. Representatives from Bridgewater could not be immediately reached for comment. James Comtois, Pension & Investmentswww.pionline.com, September 4, 2020.

4.    PENSIONS NEED A ‘SAFETY VALVE,’ SAYS JPMORGAN:
Underfunded pension plans have been loading up on corporate credit and need somewhere else to put their capital, says JPMorgan’s head of institutional portfolio strategy.
 
Pensions entered the Covid-19 pandemic significantly exposed to corporate credit risk, relying on a traditional investment strategy that may be heading for failure, according to JPMorgan Chase & Co.’s asset management group. 
 
They’ve been hedging the volatility of their pension liabilities by taking on “a very concentrated exposure to corporate credit,” Jared Gross, the head of institutional portfolio strategy at J.P. Morgan Asset Management, said in a phone interview. Largely holding corporate bonds at risk of being downgraded to junk in the downturn, plus Treasuries with historically low yields, won’t work well for ensuring workers receive the pension benefits they’re owed, according to Gross.
 
“If a classic fixed-income portfolio is yielding 2 percent, that’s not going to get the job done,” he said. “You have a concentrated exposure in investment-grade corporate credit, which is both relatively low-yielding today and likely to be exposed to higher than normal levels of credit volatility.”
 
One of the most sensible ideas for pensions with liability-driven investments consisting of corporate debt and Treasuries is to move some portion into securitized mortgages -- a high-quality, long-duration asset class they’ve been avoiding for the past ten to 15 years, according to Gross. He said that would create a “safety valve” for LDI portfolios designed to help pensions meet their long-term obligations to workers. 
 
“It really kind of neatly fits in the middle in a very useful way,” Gross said. “It is higher quality than corporates and you probably give up a little bit of yield -- but not much,” he explained. And “it has significantly higher yield than Treasuries.” 
 
Gross estimates that pensions typically hold about 75 percent of their LDI portfolios in investment-grade corporate bonds and 25 percent in Treasuries. Having a third place to put capital would provide more flexibility in changing markets, he said, particularly as the pandemic weighs on company earnings and after the Federal Reserve’s emergency intervention in credit markets drove down yields.
 
“Managing an underfunded pension plan relative to its liabilities is like walking up a down escalator,” said Gross. “At a high level, institutional investors do need to reassess the asset-allocation framework.”
 
The aggregate funded ratio for U.S. corporate pensions fell 1.3 percentage points in July to about 80 percent, according to Wilshire Associates. That compares with a funding ratio of 88.8 percent a year earlier.
 
“July marks the first monthly decrease in funded ratio since the market recovery that started in April,” Ned McGuire, a Wilshire managing director and member of the firm’s investment management and research group, said in a statement last month. The drop resulted from rising liability values tied to declining Treasury yields and tighter corporate bond spreads, he said. While the funding ratio improved in August, increasing to 84.7 percent, Wilshire said Wednesday that it remains down in 2020 due to rising liabilities.
 
Pensions typically pay out between 6 percent and 10 percent of their assets each year, according to Gross, who has long worked with this group of investors. He is filling a newly created role at JPMorgan in New York.
 
J.P. Morgan Asset Management announced in July that it hired Gross from Pacific Investment Management Co., where he had worked for more than a decade, most recently as the head of institutional business development. Before Pimco, Gross co-headed pension strategy at Lehman Brothers Holdings and worked on the pension solutions team at Goldman Sachs Group. Beyond Wall Street, he has advised investment policy at the Pension Benefit Guaranty Corp. and served as a senior advisor for domestic finance at the U.S. Department of the Treasury.
 
“I wound up at Pimco during the financial crisis, which was to a large extent, the starting gun for broad-based adoption of LDI investing,” said Gross. “You could buy portfolios at seven or eight percent returns.” 
 
While a “a great entry point for a lot of LDI investors” at the time, Gross believes the strategy now has to evolve, and that securitized mortgages in commercial and residential real estate should become part of portfolios. “Most of these are AAA-rated,” he said of the components of securitized mortgages he sees fitting well into their holdings.
 
Beyond LDI portfolios, institutional investors should also consider owning income-producing hard assets, such as real estate, transportation, and infrastructure, according to Gross. He also suggested that pensions -- in a world of low rates and stocks trading around record highs -- hunt for more yield in private markets.  “There are no free lunches,” Gross said. “We have to take risk somewhere.”  Christine Idzelis, Institutional Investorwww.institutionalinvestor.com, September 2, 2020.

5.    THREE COMMON MISCONCEPTIONS ABOUT PENSIONS:
Since the COVID-19 pandemic began, pension opponents have continued spreading misinformation about public pensions. Today we’re going to challenge three misconceptions they frequently cite to try to damage public workers’ retirement security. 
  • Unfunded liabilities for pensions are crowding out spending on other government services. 

One of the most frequent claims pension opponents make is that unfunded liabilities for pension plans are increasing, leaving less money for states to spend on other government services. Upon closer examination, this claim does not hold up to reputable evidence. 

According to a new report from the Center for State and Local Government Excellence and the Boston College Center for Retirement Research, the vast majority of pension plans are well-funded and will be able to continue paying out benefits during the coronavirus-induced economic crisis and beyond. The report shows that the average funded ratio for local plans in the fiscal year 2020 was 70.8 percent, and it was 72.4 percent for state plans. These funded ratios are roughly the same as they were in the last fiscal year, despite the economic slowdown in March. 

  • Since most private-sector workers primarily use a 401(k), policymakers should switch public employees to one, too. 

In the first two to three decades after World War II, most private-sector workers in the United States had access to a defined benefit pension plan. However, after Congress passed the Revenue Act in 1978, most corporations switched their employees to defined-contribution accounts, such as 401(k)s. 

As a result of this switch, more than 58 million Americans participated in a 401(k) in 2018. These accounts, however, have been less than ideal for these workers’ retirement security. As we’ve covered before, 401k(s) were marketed as a way for workers to save on their own for retirement. However, a rising cost of living prevents most Americans from being able to save enough for retirement; the median amount in Fidelity Investments’ 401(k)s is $24,500

Research shows that defined-benefit pensions are a valuable resource for the public workforce. According to the National Institute on Retirement Security (NIRS), 94 percent of state and local public employees said offering a defined benefit pension is an effective tool for recruiting and retaining public employees. 73 percent of those in the same survey also said they would be more likely to leave their job if their defined benefit pension was cut. NIRS has also found that 401(k)s are more expensive to implement compared to defined-benefit pension plans and that they do not provide the same amount of security in retirement, making them a better bang for the buck for both public employers and employees. 

  • State and local pensions need a bailout from taxpayers.

A potential “bailout” for state and local pensions is another falsehood that pension critics have been peddling ever since Senate Majority Leader Mitch McConnell said in an interview on April 22 that state and local governments should just declare bankruptcy during the coronavirus-induced economic recession, instead of asking the federal government for assistance. 

This fabrication is incorrect for a number of reasons, the first being, as referenced above, that the vast majority of public pensions were able to weather the financial storm during the beginning of this pandemic. Secondly, as we previously highlighted, state and local governments spend little taxpayer money on funding pensions. According to the National Association of State Retirement Administrators (NASRA), state and local governments spent less than five percent of their overall spending on pension funding in the fiscal year 2017. Public pensions also receive the majority of their funding from investment earnings, not from employer contributions. Finally, pension expenditures help taxpayers, as NIRS has found that they supported more than $200 billion in federal, state, and local tax revenue in the fiscal year 2016. 

Furthermore, a lack of federal assistance is not going to cause systems to go belly up, that is just misdirection. Without receiving additional resources, states find it much more difficult for our essential public workers to provide services. For example, if we want children to return to the classroom, schools need resources to provide a safe environment for students, caretakers and employees.  

All three of these claims are misconceptions for a reason. They do not line up with the evidence which shows that public pensions are well-funded, benefit both employers and taxpayers, and provide a secure retirement for public employees.   Tristan Fitzpatrick, National Public Pension Colaition, https://protectpensions.org, September 2, 2020.  

6.  BEST & WORST PLACES TO RETIRE IN 2020:
After putting in decades of hard work, we naturally expect to have financial security in our golden years. But not all Americans can look forward to a relaxing retirement. According to the Employee Benefit Research Institute’s 2020 Retirement Confidence Survey, 6 in 10 workers reported feeling at least somewhat confident that they will have enough money to retire comfortably, but only 24 percent said they were “very confident.”

If so many American workers are worried about their financial future, what other options provide a pathway to a comfortable retirement? For some, the only solution is to keep working. According to Gallup polling, workers in 2019 planned to retire at age 65 on average, compared to age 60 in 1995. The alternative? Relocate to an area where you can stretch your dollar without sacrificing your lifestyle.

Retirement isn’t all about the money, though. Retirees want to live in a place where they enjoy safety and access to good healthcare, especially with the COVID-19 pandemic taking its toll on the U.S. The ideal city will also have lots of ways to spend leisure time, along with good weather.

To help Americans plan an affordable retirement while maintaining the best quality of life, WalletHub compared the retiree-friendliness of more than 180 U.S. cities across 46 key metrics. Our data set ranges from the cost of living to retired taxpayer-friendliness to the state’s health infrastructure. Click here to read the findings.  If you’re considering retiring out of state, make sure to check out WalletHub’s “Best & Worst States to Retire” ranking, too.  Adam McCann, Wallet News, https://wallethub.com, September 8, 2020.
 
7.    DON’T LET THE PANDEMIC EXTINGUISH YOUR EARLY-RETIREMENT PLANS. CONSIDER THESE 4 TWEAKS:
Financial independence for many means being able to coast through rough economic times with few worries. But for those planning to retire early, even those who have plenty of savings, the pandemic and unstable economy can stir anxieties about leaving the workforce.

Yet a rocky investing environment doesn’t mean those pursuing a strategy of financial independence/retiring early need to scrap plans, says Mackenzie “Mack” Bekeza, a certified financial planner at Denver-based Millennial Wealth Management. Such investors just need to structure their portfolio accordingly.

“You should never assume things are going to be hunky-dory when there’s still uncertainty in the air,” says Bekeza, who specializes in helping FIRE adherents plan for lengthy retirements. “People who do FIRE are going to have really diverse portfolios.”

Maintain some liquidity: For those looking to hit FIRE within five years, Bekeza first recommends having at least one year’s worth of expenses available in cash reserves. Though that money won’t bring in meaningful returns, it can provide a safety net to prevent an investor from having to draw from investments in a crisis. If possible, Bekeza advises investors to always have up to 10% of their assets in cash or cash equivalents.

Rely on income-generating investments: Once there are robust cash reserves, Bekeza says, FIRE pursuants should then put half their portfolio in fixed-income investments that can generate reliable returns even during turbulent markets. Consider investment-grade government and corporate bonds of varying terms, he adds.

Those planning for FIRE also often invest in assets such as their own small businesses and real estate. Assets like these can help round out the type of large and diverse portfolio investors need to weather periods of volatility and for a long retirement.

For investors who don’t want the responsibility of maintaining a physical property and dealing with tenants, Bekeza says real-estate funds and real-estate investment trusts are a good alternative. Dividend yields vary, hovering around 5% or 6%, he says. These relatively high yields can either provide regular cash flow or get reinvested for compound growth.

Diversify equity holdings: Investors also need vehicles for long-term growth, Bekeza says, which is where stocks come in. He recommends those pursuing a FIRE strategy to put 40% of their portfolio toward higher-risk stocks that offer potential for aggressive growth. While large-cap companies have the kind of reserves that generally make them safe bets, midcap stocks tend to outperform their larger counterparts over the long term, says Bekeza. But they can also be more vulnerable to crises.

Likewise, small-cap stocks, though often excellent performers over the long term, tend to be particularly volatile, making them less appealing to the FIRE set. “I don’t want to expose a client too much to the vulnerabilities those companies have,” the advisor says. “It’s an enhancement, but not a main act.”

Flip the script: If hitting FIRE is further off--a decade or more away--Bekeza recommends flipping the proportions he otherwise suggests: Keep 40% in fixed-income assets and 60% in riskier assets like stocks and real estate. This will let investors benefit from the longer runway to retirement even if there are bumps in markets or the economy along the way, he says: “Your greatest asset is time.”  Donna Sellinger, Barron's,  www.barrons.com, August 29, 2020.

8.   IS BITCOIN A PRUDENT INVESTMENT FOR RETIREMENT?:
While Kingdom Trust is the custodian for the Bitwage 401(k) offering, Radloff says the firm is focusing right now on its individual retirement account (IRA) offering called Choice IRA, which gives retirement investors the ability to access both legacy market and emerging digital market assets, as well as alternatives such as gold, in one account. Radloff says his firm holds about 150 retirement accounts.

“With Choice, we flipped the agenda of the firm to not only cater to RIAs [registered investment advisers] but to individual savers,” he says. “We also have various technologies and service providers helping us bring the best product to market for savers.” Radloff says the Choice IRA uses Fidelity Digital’s institutional grade custody solution for Bitcoin. “We use its storage facility to power our retirement market to store bitcoin. It’s a sub-custody agreement with a technical solutions provider for holding bitcoin,” he explains. Radloff adds that with the weight of the Fidelity name, Kingdom Trust has seen thousands join the wait list for opening a Choice IRA since the program was announced.

Radloff says most people coming to the Choice IRA website already own bitcoin. “More than 10 million people have bitcoin, and more than 7 million also have a retirement account. They believe in its value, but they are not able to own in it in their retirement account,” he says.

Radloff says people interacting with bitcoin in retirement accounts are expressing the view that, just like Apple and Tesla stock, bitcoin will be more valuable in 10 years. “When they are ready to exit their position [in bitcoin], they will sell if for dollars, just like they would sell stock,” he says. “The reason the price goes up for bitcoin is more and more people are demanding it. Those who have bought bitcoin know that and it is causing them to be bullish on bitcoin.”

However, Radloff notes, “if you ask 10 professional fund managers, you won’t have all 10 believe in bitcoin.” And any internet search about the return on investment of bitcoin will produce many articles about how volatile and risky bitcoin is as an investment.

Curry says 401(k) service providers and plan sponsors have historically shied away from allowing non-traditional investments in a 401(k) plan for a few reasons, one being risk. However, she notes, “Bitcoin continues to become more mainstream, with the Office of the Comptroller of the Currency [OCC] ruling as recently as July that national banks can hold cryptocurrency, including in a fiduciary capacity, and would have the authority to manage bitcoin in the same way that a bank can manage other assets.”

The Employee Retirement Income Security Act (ERISA) does not generally prohibit a 401(k) plan from providing access to a particular type of asset, so long as the asset is made available to participants who should be eligible to invest in it, Curry says. “Thus, ERISA does not prohibit bitcoin as an available investment option in a 401(k) plan.”

Rather, Curry says, ERISA prescribes what is required when offering access to investments. “When adding bitcoin as an available investment option there are ERISA requirements, including disclosure requirements, that apply just as they do to traditional assets like mutual funds,” Curry says. “Plan participants should be provided with timely and appropriate notice that this type of digital asset is available as an investment opportunity. The risk, performance, cost and more should be properly disclosed to participants so they can make informed decisions as to investing in this type of asset.”

Radloff says Kingdom Trust’s 401(k) plan offers bitcoin as an investment option. “Employees can use those assets or not. It’s a choice,” he says.  Rebecca Moore, PLANSPONSORwww.plansponsor.com, September 1, 2020.

9.   THE FED’S INFLATION SHIFT; HERE’S HOW YOUR EARLY RETIREMENT TACTICS MAY CHANGE:
The Federal Reserve isn’t known for making rash moves. So when it recently announced a shift in decades-long inflation strategy - via Zoom, no less - you can expect it to have ripple effects, seen now and into the future. This could have impact on how you plan your early retirement.

The Federal Reserve has long striven to keep inflation from rising too fast, often focusing on preventing it from going above 2% by increasing or decreasing interest rates. With the jobless rate continuing to sit near record highs, inflation remains exceptionally low – even lower than their target – despite interest rates sitting at near zero, they’ve decided to switch course.

Chairman Jerome Powell announced that instead of heading off inflation that might creep beyond 2%, the Fed would hold interest rates lower if other areas of the economy, like jobs, continue to need an additional boost. It’s a recognition of the need for a robust labor market.

While it’s a new initiative for how the Fed views inflation, it isn’t new to how the Fed has operated through the crisis. But the decision to systemize the policy will have far-reaching impact, as Fed decisions determine the price of borrowing, the cost of stock ownership and your savings rate.  Your retirement – or early retirement plans – aren’t immune from this reach.

Here’s what to think about, now that we know interest rates will remain low for the foreseeable future.

Hold Less Cash
High yield savings accounts are a great way to squeeze out a little interest income for your cash reserves. While it’s important for you to hold a few months’ worth of income in your reserves as you’re building up your retirement stock, if you have any extra funds in this account, you may want to send it somewhere else.

The interest rates on these savings accounts, which have fallen from often above 2% to just above 1% during the COVID-19 crisis, will have to remain low, since the rates rise and fall, depending on the Fed rate. If you have more than six months of expenses in this account, you may want to use it on other goals.

For those nearing early retirement, it’s often prudent to hold a year or two worth of expenses in these cash reserves. Expect less extra interest income to build, even if you still plan to hold that much cash in a short-term account.

Invest in Stocks
Since you have less income coming in from safer vehicles, like the high-yield savings account or even bonds, you’ll have to take on more risk by owning more stocks. By doing so, you should expect more volatility in your portfolio.

Since many that plan and invest for early retirement seek stock exposure in total market indexes or the S&P 500, this won’t impact the types of companies you’re likely already selecting. But it does impact the percentage that this stock portfolio will hold within your account. Instead of a 60% stock, 40% bond portfolio, you may need to switch that to 70%, if you’re trying to reach a certain percentage gain, on an annualized basis to retire by 50, for example.

The increase in the stock portfolio is an effort to make up for the poor performing bond portfolio. But, by doing so, you’re needing to take on more risk, which could result in larger swings within the portfolio.

Save More
With interest rates remaining low, it will require more saving to achieve your goals, especially if you’re unwilling to take on more risk. It’s simply math. If you can’t gain more interest income through bonds or high-yield savings accounts, you either need to take on more risk – hence more stocks – or save more of your income to reach your goals.

It’s also possible to downsize some of those goals. It’s a good time to recheck your priorities, to determine what you need in retirement, then save for those goals based on the expenses. Many people that retire early want to replace 25 times their expenses. In reality, you want closer to 30 times when planning for a 40 or 50-year retirement. If you can keep expenses down, you won’t have to save as much to get there.

Either way, you’ll have to save more until the Fed can raise rates again. And with job loss near record highs due to COVID-19, it isn’t likely to be anytime soon.  Ryan Derousseau, Forbeswww.forbes.com, August 31, 2020.

10.  TAKING STOCK - NEPC'S AUGUST 2020 PENSION MONITOR: 
NEPC’s monthly pension funded status monitor tracks the funded status of two hypothetical plans to gauge the impact of movements in markets, interest rates, and credit spreads on pension plans. The typical corporate pension plan increased its funded status in August, with total-return plans outperforming plans that hedge interest rate risk. The funded status for a typical total-return plan improved by a robust 7.3%, while an LDI-focused plan saw an increase of 3.7%, based on NEPC's hypothetical open- and frozen-pension plans. Gains were driven primarily by the continuing rally in equities and a decrease in liabilities as Treasury rates increased.

The funded status of the total-return plan increased by 7.3%, propelled by a strong rally in equities and an increase in Treasury rates which lowered liabilities.

The funded status of an LDI-focused plan increased by 3.7% as losses from long-duration fixed income were offset by gains in equities. The plan is currently 78% hedged as of August 31.  See the full report here.  NEPC, www.nepc.com, September 2, 2020.

11.  GET ALL YOUR FEDERAL BENEFIT PAYMENTS IN ONE ACCOUNT USING DIRECT PAYMENT:
Direct deposit is the safest and most convenient way to receive your benefit payment. In 2013, the Department of the Treasury issued a mandate to move away from checks as a method to deliver federal benefit payments. Since then, almost 99 percent of our Social Security beneficiaries have their payments deposited directly into their bank accounts. We need to increase this number to 100 percent.

Some beneficiaries have not enrolled.  Others receive more than one federal payment, but don’t get all their benefits via direct deposit. In these times, with the COVID-19 pandemic, it is more important than ever to know that your payments are there when you expect them. If you receive more than one federal benefit, but don’t have all your payments directly deposited, you may want to consider enrolling. Here are some reasons why:

  • It is safer to use and less costly.
  • Your benefit payment will be on time, every time, and ready to use.
  • You’ll be free of the hassles or delays with paper checks.
  • You won’t need to leave the comfort of your home to cash a check again.
  • It’s easy to enroll, change, or update your direct deposit information.

You can sign up for direct deposit with Social Security from your preferred location using your personal my Social Security account. If you don’t have a personal account, you can create one today. Once you create your account, you can add your bank information to start your direct deposit. You can make changes to your information any time through your personal account.

Another way to start or change your direct deposit is by calling us toll free at 1-800-772-1213 (TTY 1-800-325-0778).

We want to put you in control of your benefits while providing the best experience and service, no matter where, when, or how you decide to do business with us.   Joanne Gasparini, Social Security Administration, www.ssa.gov, September 3, 2020.

12.  SOME TAXPAYERS MAY NEED TO MAKE ESTIMATED TAX PAYMENTS:
Some taxpayers earn income not subject to withholding. For small business owners and self-employed people this can mean making quarterly estimated tax payments.

Anyone in this situation should check their withholding using the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4 to their employer.

Here are some important things taxpayers should know about estimated tax payments:
  • Taxpayers generally must make estimated tax payments if they expect to owe $1,000 or more when they file their 2020 tax return.
  • Aside from business owners and self-employed individuals, people who might also need to make estimated payments include sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
  • Estimated tax requirements are different for farmers and fishermen.
  • Corporations generally must make these payments if they expect to owe $500 or more on their 2019 tax return.
    The remaining deadlines for paying 2020 estimated taxes are September 15, 2020 and January 15, 2021.
  • Taxpayers can review these forms for help figuring their estimated payments:
  • Taxpayers have options for paying estimated taxes. These include:
Taxpayers who don’t pay enough tax throughout the year may have to pay an underpayment penalty.  IRS Tax Tip 2020-115, www.irs.gov, September 8, 2020.

13.  SOCIAL SECURITY ANNOUNCES NEW ONLINE VIDEO HEARINGS:
The Social Security Administration announced a new service for people awaiting a hearing decision. In addition to telephone hearings, Social Security will offer the opportunity for an online video hearing using the Microsoft Teams platform beginning this fall. This new free service will allow applicants and their representatives to participate in the hearing from anywhere they have access to a camera-enabled smartphone, tablet, or computer. This stable and secure online platform allows the Social Security judge to see and interact with applicants and their representatives just like an in-person hearing, while maintaining privacy of the claimant’s information. Other hearing experts, such as medical or vocational experts, may participate as well.

“The COVID-19 pandemic has highlighted the importance of finding new ways to serve the public,” said Commissioner of Social Security Andrew Saul. “For over a decade, the agency has used video hearings to get applicants their hearing decisions sooner. This advancement builds on that effort, making it easier and more convenient to attend a hearing remotely, particularly during the COVID-19 pandemic. To continue to ensure all participants’ safety, we expect online video hearings and telephone hearings will be the only two hearing options for the foreseeable future.”

Social Security has been conducting appeal hearings with Administrative Law Judges (ALJ) via telephone only since March, while offices remain closed to the public to protect the health and safety of the public and employees. The agency’s ALJs have held more than 180,000 telephone hearings since March, allowing the agency to continue to deliver critical customer service.

For the new online video hearings, whether the device is a laptop, smartphone, or tablet on either iPhone or Android, people will experience a clear picture and audio of the ALJ and their representative during their hearing.

For updates on the implementation and expansion of this new hearing service, and other Social Security information, please visit the agency’s COVID-19 web page at, www.socialsecurity.gov/coronavirus/.  Mark Hinkle, Social Security Administration, www.ssa.gov, September 3, 2020.

14.  FOR THOSE WHO LOVE WORDS:   
Need an ark to save two of every animal?  I Noah guy.
 
15.  EVER WONDER?: 
Why don't sheep shrink when it rains?

16.  INSPIRATIONAL QUOTE:  
“Just one small positive thought in the morning can change your whole day.” -Dalai Lama

17.  TODAY IN HISTORY:  
On this day in 2012, Teachers in Chicago strike effecting 350,000 students.

18.  REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.

Copyright, 1996-2020, all rights reserved.

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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