A roundup of the latest news and reports of interest to financial advisers.
Fake crypto offerings pose biggest investor threat, regulators say: Scams involving self-directed individual retirement accounts are another area of concern, according to an annual survey by the North American Securities Administrators Association.
Pension plans cheaper overall than 401(k)s, researchers find: Taking into account costs incurred by both employers and workers, the expenses of a pension plan are about half that of an average 401(k), according to a report from the National Institute on Retirement Security.
ESG investing is about to get a lot easier: Both the Labor Department and the SEC are working on proposals whose thrust is to encourage the use of ESG factors, an abrupt reversal of Trump administration policy, writes InvestmentNews.
Investment Advice is not Financial Planning: Investment advice is not financial planning, writes Rick Kahler. This is an important distinction to understand when someone goes shopping for financial advice. Do they only need help with investment decisions, or do they need guidance on all aspects of their financial life?
Bitcoin Death Cross Is Staring Down Bulls After a Painful Retreat: After one of the roughest patches ever for Bitcoin enthusiasts, holders of the largest digital currency are facing an ominous technical price pattern with a name that suggests more pain ahead, write Vildana Hajric and Emily Graffeo.
Regulators Aim to Curb Medicare Plan Lead-Generation Firms: The Centers for Medicare and Medicaid Services says some Medicare plan lead-generation firms are confusing and infuriating consumers and the federal agency wants plan issuers to take charge of making third-party marketing organizations, or TPMOs, behave, writes ThinkAdvisor.
Fitch Worries About Medicare Plan Market Price Wars: An analyst at Fitch Ratings fears that health insurers may be loving the Medicare Advantage plan market too much, writes ThinkAdvisor.
Standard Asset Allocation Models Are Wrong: Dalbar— Financial advisers who allocate client assets based on clients’ cash needs for two to three years in the future are making a mistake, according to Dalbar, a financial services research firm.
Retirement Pros Hit Back at Study Finding Target Date Fund Flaws: Do target date funds need to be rethought? The authors of a recent National Bureau of Economic Research report argued that the funds produce suboptimal results for most investors. In the working paper, the authors found that TDFs’ equity allocation in retirement was too low for most retirees.
'Great Retirement' In U.S. Is Driven By Older Female Baby Boomers: The surge in U.S. retirements during the Covid-19 pandemic was led by older white women without a college education, according to research by the St. Louis Federal Reserve.
Vanguard And Nuveen See Dimmer 2022 Muni Outlook: The two biggest muni managers during last year’s record breaking wave of issuance and demand expect the next 12 months to be less sunny, according to FinancialAdvisor.
Help Your Clients Weather Inflation: With tax-wise advice, you're showing investors how not just to weather inflation but also how to thrive, writes Paul R. Samuelson.
Smart Estate Planning Moves For Married Couples' IRAs And 401(k)s: Five reasons for spouses to consider utilizing a bypass trust in their estate planning, writes James G. Blase.
UBS’ Mass Affluent Push Centers on Digital Advice: UBS’ focus on digital advice to tap mass affluent clients puts the Swiss-based firm in direct competition with Fidelity and Charles Schwab as well as Morgan Stanley, according to news reports.
Why Not to Do a Roth Conversion in 2022: Here are Steven Jarvis’s five reasons not to recommend a Roth conversion to your clients.
Fearless Forecasts for 2022: Bob Veres predicted that 2021 would be a transitional year for managing an advisory business, and he expects this transition to accelerate and become fully formed in 2022.
A Consumer’s Guide to Selecting a Wealth Advisor: Finding the right professional to manage your finances is challenging, write Zachary Brody and David A. Tomczyk. Financial professionals have many different titles, certifications and qualifications, but which type is right for you?
MMT’s Fatal Flaw: MMT offers a new "logic" that allows the government to spend without facing the traditional constraints of debts and deficits. Michael Lebowitz asks: Is MMT too good to be true?
Research of Interest
The Great American Retirement Fraud
Over the past 25 years, Congress has enacted several major reforms for employer-sponsored retirement plans and individual retirement accounts, always with large bipartisan, bicameral majorities, writes Michael Doran. In each case, legislators have claimed that the reforms would improve retirement security for millions of Americans, especially rank-and-file workers. But the supposed interest in helping lower-income and middle-income earners has been a stalking horse for the real objective of expanding the tax subsidies available to higher-income earners. The legislation has repeatedly raised the statutory limits on contributions and benefits for retirement plans and IRAs, delayed the start of required distributions, and weakened statutory non-discrimination rules – all to the benefit of affluent workers and the financial-services companies that collect asset-based fees from retirement savings. The result has been spectacular growth in the retirement accounts of higher-income earners but modest or even negative growth in the accounts of middle-income and lower-income earners. Despite the benign but misleading rhetoric about enhancing retirement security for everyone, the real beneficiaries of the retirement-reform legislation have been higher-income earners, who would save for retirement even without tax subsidies, and the financial services industry, whose lobbyists have driven the retirement-reform legislative agenda.
The Impact of Employer Defaults and Match Rates on Retirement Saving
This study evaluates the interaction between employer match and default rates on savings outcomes among new employees. Selecting a higher default rate has the largest impact on employee savings rates. Plans with low default rates that match a high percentage of employee earnings induce higher-income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees. When default savings rates are set higher, fewer employees move away from the default resulting in higher and more equal savings rates. Additionally, the authors find evidence that higher default savings rates increase usage of plan default investments.
What Drives Variation in Investor Portfolios? Evidence from Retirement Plans
The authors study empirical patterns in investment behavior using a comprehensive data set of defined contribution plans. Using plan-level portfolio allocation data for the near universe of 401(k) plans over the period 2009-2019, the authors document substantial differences in investment behavior across plans. Plans with wealthier and more educated participants tend to have higher equity exposure while plans with more retirees and minorities tend to have lower equity exposure. These patterns cannot be explained by differences in 401(k) menus or participation costs. To help interpret these facts, the authors use a revealed preference approach to estimate investors' expectations of stock market returns and risk aversion, where they allow investors to have heterogeneous risk aversion and subjective and potentially biased beliefs. The authors find that there is substantial variation in both beliefs and risk aversion across investors and over time, and that both sources of variation help explain investors' portfolio decisions. The authors also provide new evidence to understand how investors form beliefs. The authors find that investors extrapolate beliefs from past fund returns even when they initially allocate portfolios in new plans. The authors also find that investors extrapolate beliefs about the market from the past performance of their employer, which suggests that investor experience helps shape beliefs.
Missing the Target? Retirement Expectations and Target Date Funds
This paper measures the cost of biased retirement expectations for investors in target-date funds. Using survey data, the authors show that respondents systematically underestimate their long-run labor participation on average by 4.8 years, with errors having meaningful cross-sectional relationships. The authors use these insights to build a life-cycle model of target-date funds to measure the costs of biased expectations. Calibrations suggest that errors in expectations compound over time, costing the median respondent 4% of total wealth, equivalent to 0.2% a year. These estimates suggest that the choice architecture of target-date funds should be modified to improve the financial adequacy of future retirees.
Simple Allocation Rules and Optimal Portfolio Choice Over the Lifecycle
The authors develop a machine-learning solution algorithm to solve for optimal portfolio choice in a detailed and quantitatively-accurate lifecycle model that includes many features of reality modeled only separately in previous work. They use the quantitative model to evaluate the consumption-equivalent welfare losses from using simple rules for portfolio allocation across stocks, bonds, and liquid accounts instead of the optimal portfolio choices. They find that the consumption-equivalent losses from using an age-dependent rule as embedded in current target-date/lifecycle funds (TDFs) are substantial, around 2% to 3% of consumption, despite the fact that TDF rules mimic average optimal behavior by age closely until shortly before retirement. The authors’ model recommends higher average equity shares in the second half of life than the portfolio of the typical TDF, so that the typical TDF portfolio does not improve on investing an age-independent 2/3 share in equity. Finally, optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization of advice or TDFs in these dimensions.
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