Charting the Course

Amid continued uncertainty over the future of Social Security, Congress is taking proactive steps to encourage retirement savings. Lawmakers passed the SECURE Act in 2019 to further incentivize retirement planning, and they followed with the SECURE 2.0 Act in December.

In a recent analysis, Bloomberg Law called SECURE 2.0 one of the most significant pension reform bills in recent history because it offers incentives for employers to establish and maintain retirement plans and creates more opportunities for the participant.

While the SECURE Act softened rules around saving and withdrawing from retirement accounts, the SECURE 2.0 Act is a further enhancement that creates more flexibility and accessibility.

For example, if a retirement plan participant is between 60 to 63, they can now add up to $10,000 to their account as a special catch-up contribution. However, if an individual has annual earnings of $145,000 or more, the catch-up must be after-tax and placed into a Roth account. And for higher earners, that is a positive development because of future tax benefits possible through Roth programs.

Another interesting provision increases the required minimum distributions age from 72 to 73, and in 2033, the age increases again to 75. This will create more flexibility for millions who want to further delay retirement-fund distributions without facing penalties.

The legislation also includes an automatic enrollment requirement for eligible employees, which goes into effect on any new retirement plan created after Dec. 29, 2022, Starting in 2025, those employees will be enrolled at a minimum contribution rate of 3%. In addition, a new auto-escalation feature must be added to this same demographic of plans.

Anyone who is paying attention knows that student-loan debt is a growing concern across the country, and SECURE 2.0 addresses the problem head on. Beginning in 2024, companies can “match” employee student loan payments with matching contributions to employee retirement accounts.

If there is anything worse than a lack of savings, it would be high debt. This new rule is a major benefit to any person currently making student loan payments instead of making 401k contributions. Now, a company can incentivize and reward an employee who is working hard to pay off debt.

Meanwhile, the new law contains an enhanced tax incentive that may be hard for employers to pass up. An existing tax credit for retirement-plan-related administrative costs was increased from 50% to 100% under the new law. The provision applies to businesses with up to 50 workers, and those employers could receive up to $5,000 in benefit.

In all, the SECURE 2.0 Act contains 92 provisions to promote savings and to incentivize employers to offer plans. As with any new law surrounding finances, investors and businesses should consult with financial professionals before implementing changes. It’s hard to know what the future holds for Social Security. But whatever happens, the importance of retirement savings could not be more critical, and it is good to see the path to long-term savings just got a little easier.

Imagine being lost in the mountains without a map or a compass. What a scary thought, not knowing where you are, where you’re going, or how much energy it will take to find safety. Thankfully, most of us don’t put ourselves in those situations because of the potential dangers, and we’ve all heard the stories.

The investment world is a little like being in the mountains. There are plenty of directions we can go, and there are lots of ways we can get lost. We may not use compasses to navigate the markets, but, just like the mountains, it’s a good idea to have a plan and a map. Because the potential dangers are out there, and we’ve all heard the stories.

We work with charitable organizations, retirement plans, institutions, families, and individuals throughout the year, and before venturing into the markets, we can prepare for the journey by creating an Investment Policy Statement (IPS). That may sound like a dry, clerical term, but its anything but mundane.

In the investment world, an IPS is like a map and a plan, and it helps the client and investment advisor have a clear understanding of financial goals, objectives, and risk tolerances from the beginning. The IPS is a long-term document that can live on through the different phases of life. Needs evolve and an IPS can evolve with them, but the foundational values and objectives often remain the same and can be passed down from generation to generation.      

For example, an IPS might explain your reason for investing, and how much money you would like to invest each year. The document might identify what you want to accomplish through your investments, and an IPS might even list your top five money goals, such as eliminating debt, saving for retirement, funding charitable giving, paying for college or covering other life events, like weddings.

Goals like these aren’t always easy to reach. They require patience and perseverance, sort of like climbing a tall mountain. Think of an investment advisor as a trail guide and the IPS is like an instruction sheet from the hikers. The sheet might say, “We want to hike up Mt. Evans and we want to get to the summit and back in three days. We don’t mind walking across creeks, but we don’t climb rocks.” That gives the trail guide a better idea of the hikers’ objectives, and what their risk tolerances are, so they can plan a route to achieve a successful journey.

Along with understanding risk tolerances and objectives, the investment advisor’s role is to watch out for the client’s best interests. The investment world is full of dead-end trails and risky terrain. That’s why advisors are important. They know the landscape and can hold clients accountable, helping investors identify hazards and stay on course toward their financial goals. Conversations can be difficult and what an advisor says may not be what you want to hear. That’s why you shouldn’t hire just any individual to be your investment advisor.

Rather, look for an advisor with a clear vision and a tight focus, someone who is required by law to act in their clients’ best interest. There are a growing number of them, so they’re not hard to find, and in the financial industry, they’re called fiduciaries. Just like any good trail guide, they don’t leave home without a map and a plan.

OKLAHOMA CITY – What’s it like to start a business from scratch, be the chief executive of a large corporation or to turn an idea into an enterprise?

Entrepreneurs are the marrow of the business world, and they are the subject of a new series of podcasts titled “At The Helm,” offered by Full Sail Capital, an Oklahoma City financial advisory firm.

Full Sail Capital is launching the series with an interview featuring Bailey Gordon, owner of Bailey Gordon Consulting LLC, an agency that helps nonprofits grow.

At The Helm is part of an ongoing series of Full Sail Capital podcasts featuring interviews and discussions on investing, business, real estate and more. This newest podcast and more than 30 others are available to view free of charge at http://18.118.65.25/resources/.

“Entrepreneurs have incredible stories to tell, and we are excited to highlight them through this new series of interviews,” said Tyler Grubbs, Full Sail Capital financial advisor. “To kick us off, we asked Bailey Gordon to sit down and tell her story, which led to the creation of her nonprofit consulting business.”

“Katherine Vanlandingham, Full Sail director of operations, community volunteer and nonprofit board member, will join Bailey and I as we delve into the business of helping others,” Grubbs said.

There has been plenty to worry about over the past year-and-a-half. With the virus, the lockdowns, the economy, and all the illness, it is not surprising that many have placed 401(k) plans and retirement savings on the sidelines until things calm down.

While the pandemic is still in the news, the economy is moving forward again as businesses regain their traction, so this fall may be a good time to either dust off those existing retirement plans or to consider establishing one. After all, employers are going to need them if they want to keep employees and recruit new ones in today’s tight labor market.

If there is one thing that I have missed the most during the pandemic, it has been getting out and talking with employees and employers about their plans. I love to educate employees about why retirement savings is so vital, and I like to encourage businesses to establish plans and to make 401(k) education a priority.

For employers, retirement plans are living, breathing entities that require continuous maintenance and management. While retirement plans hold vast savings opportunity for employees, there are many options and important decisions to be made, even for those with existing accounts.

Many successful retirement plans are managed through a team of partners composed of company representatives along with an independent fiduciary adviser, and an investment platform provider, such as Fidelity or Empower. Some teams also have an independent third-party administrator.

And once the team is up and running, its members must be in continuous communication to ensure that no aspect of the plan gets overlooked or is mismanaged, creating a system of checks and balances that protect employees and employers.

If it’s been a few years since you had your plan design reviewed, now may be a good time to go through the process. Businesses should look at features such as auto-enroll and Roth contributions. They might also consider a safe-harbor match, which is a form of mandatory employer contribution to employee retirement accounts.

Next, employers should consider forming a retirement plan committee, consisting of a few C-level executives, a manager or two, and a general employee. These committees meet to consider employee concerns and feedback, review their investment policy, and manage other internal functions.

Employees who have never had a 401(k) plan should remember to start small and build from there, and they should make sure they understand the company match, if it is offered. When companies match contributions, it can be a tremendous benefit, so employees should contribute enough to earn the full match.

For those who already have a 401(k) plan, there may still be work to do. They should consider signing up for the auto-increase feature, which automatically increases an employee’s annual contribution by a specific percentage point. For example, an employee could have their contribution increased by 1% on Jan. 1 of every year.

For employees who are novice investors or are simply too busy to keep up with the day-to-day dynamics of the financial markets, there is an array of target-date funds available to help keep retirement investors on track. These funds consider the investor’s age and years until retirement, and they adjust their asset mix over time, moving into less risky asset classes as retirement nears.

So, as the storm clouds of 2020 clear, it may be time to refocus on the future of our businesses, the future of our employees and to remember that retirement savings programs deliver solid returns for both.

The holiday season is always a popular time for giving to worthy causes and to those who are less fortunate than we are.

It seems like the natural thing to do around Christmas and research appears to confirm that with about 30% of annual giving taking place in December. Studies even say that the simple act of giving makes us happier.

The benefits of charitable giving can also carry through to the following year when we see a lower tax bill. But these days, tax advantages from charitable giving are harder to manage than they used to be.

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for individuals and those filing jointly. As a result, donors must give significantly more to receive tax deductions that are greater than the new standard deduction, prompting many to reconsider their philanthropic strategies.

But changes in the law should not stop us from giving to those great causes that depend on our generosity. A long-standing investment vehicle established by the Tax Reform Act of 1969 provides a strategy for donors to keep giving without surrendering their tax benefits. Seldom used in the 1970s and ’80s, Donor-Advised Funds (DAFs) picked up popularity in the 1990s and gained more interest when the Tax Cuts and Jobs Act became law.

Think of a DAF the same way you might think of a foundation. They both take contributions; they both invest the money and they both distribute grants to various charities over time. The difference is that DAFs are owned by individuals or families and they do not need the staff, the overhead, and the regulatory oversight that foundations require.

Once a DAF is established, donors can receive immediate tax deductions from their contributions. When assets are transferred into a DAF, they can grow tax-free, but the contributions are irrevocable, which means they can only be used for grantmaking. However, they are easy to manage and donors can make grants in any given year to virtually all IRS-qualified public charities.

Now, the strategy gaining in popularity due to the new tax environment is bundling charitable gifts every two years. By utilizing a DAF, donors can reap a greater tax benefit when they itemize their tax returns and bundle their DAF contributions every other year. In off years, donors can then take the standard deduction and hold their charitable donations, allowing them to accumulate for the next tax year.

In addition to its tax advantages, a DAF can provide a more deliberate approach to charitable giving. Members of the entire family can be included in grantmaking decisions. Some families name their DAFs, and even write mission statements to help guide them across years of giving. For those focused on leaving a legacy, this can be an incredible way to impart a family’s core values to the next generation.

Before setting up a DAF, consult with a tax adviser and a Registered Investment Advisor to help with the process. Their training, experience, and commitment to act in their clients’ best interests will help ensure a successful outcome.

So, in the midst of the holidays, a DAF may be the key to a more meaningful and tax advantageous charitable giving strategy. So, go ahead and give this Christmas. It will be good for the community, good for your tax bill and it’s likely to make the season a little merrier for you.

Tyler Grubbs is an accredited investment fiduciary, providing financial advising services at Oklahoma City-based Full Sail Capital, working with individuals, families, and companies of all sizes to implement financial planning strategies.

It’s hard to find good help these days.

There is little doubt that’s true as thousands of companies across the nation struggle to find the right people amid a sizzling U.S. job market. With today’s unemployment rate at a 50-year low, finding the right people can be a major achievement, and when an employer finds the right person, hanging on to them may be more complicated than a competitive salary.

To attract and hold the best employees, the most competitive companies offer ways for their people to save for the future, such as 401(k) plans, profit-sharing plans, defined benefit plans and health savings accounts.

But establishing a good retirement plan for employees is not that easy, and companies that have already checked that box can’t just walk away. Retirement programs are living, breathing entities that must be monitored and maintained. Benchmarking is necessary, a prudent process must be established, and adjustments must be made as federal rules change and financial markets fluctuate.

Registered investment advisers are in a good position to help employers develop and maintain programs that facilitate retirement savings and provide peace of mind to employees and their families.

While CEOs, CFOs, company presidents and HR directors are focusing on the day-to-day of operating a business, advisers are watching the financial markets, keeping up with regulatory changes and managing investment portfolios.

The financial environment is evolving, and big changes can occur, seemingly overnight, causing headaches for those who aren’t paying attention.

For example, the biggest change in retirement savings law in more than a decade was signed by President Trump over the Christmas holiday, but few people noticed, and that’s understandable. The law, known as the Secure Act, was one of several measures included in an omnibus spending bill Congress approved and sent to the president as the session drew to a close in December.

Many in the financial community have been watching the Secure Act evolve over the past year, and they knew approval was on the horizon. Now, they’re working with clients to update plans with new elements, such as inclusion of long-term, part-time employees in 401(k) plans. Until the Secure Act was passed, 401(k) programs were available to only full-time employees. The law also contains new disclosure requirements that now must be incorporated.

There are many moving parts in the world of retirement savings. While some companies navigate the landscape on their own, others turn to experts, but the process of finding the right team of advisers is not as easy as picking up the phone.

Employers might consider narrowing their search by focusing only on accredited financial fiduciaries, who are legally bound to act in their clients’ best interests. Next, employers should consider local firms who are familiar or seek recommendations from trusted contacts. Then, employers should interview prospective advisors to determine the cost of services, method of compensation and amount of experience with comparable clients. Also, seek a clear understanding of their process for enrollment, education, reviews, and due diligence.

Why is all this so important? For most people, retirement funds are the only type of savings they have, so imagine employees working for companies that don’t have retirement savings programs. The best companies need the best employees, so they want to treat them the best way they can. By offering efficient retirement programs, companies can empower people to impact future generations.

Tyler Grubbs is an accredited investment fiduciary at Full Sail Capital, an SEC-registered investment adviser located in Oklahoma City.

President Trump’s signing of the Secure Act just before Christmas marks the biggest change in retirement savings law in more than a decade. While several of the provisions may be worthy of celebration, there are others that are not necessarily good news.

For example, the law makes it easier for retirees to purchase expensive, potentially unnecessary products inside 401(k) plans. On the positive side, the new law eliminates the age limit for contributions to traditional individual retirement accounts, and long-term, part-time workers are now eligible to participate in 401(k) plans.

While people over 70½ can now contribute to IRAs, only earned income can be contributed. That means income from assets, such as stocks, bonds or real estate are prohibited. Meanwhile, retirees can now wait longer before taking money out of their IRAs. Previously, the age was 70½. Now, people can wait until they’re 72. This change benefits wealthier retirees who don’t need to draw on IRA balances for living expenses and want to see funds grow as long as possible within a tax-deferred vehicle.

One of the more unfavorable changes to IRA accounts comes from a “stretch” provision modification. Under the new law, beneficiaries who are more than 10 years younger than the deceased owner must withdraw the entire inherited IRA balance over a period of 10 years and pay taxes on the money unless they qualify as one of the act’s defined exceptions. The tax consequences could be significant for lower-income inheritors, who may be bumped into a higher tax bracket. Those planning to use IRAs in a wealth transfer strategy should consult with their tax, legal and financial advisers about alternative strategies.

Another provision in the new law allows part-time workers to participate in 401(k) programs, which is of particular benefit to women, who make up the majority of the nation’s part-time workforce. Previously, IRAs were the only retirement savings option available to part-timers. Now, they’ll have access to accounts with better investment funds and perhaps a matching benefit from employers. The new law also allows employees to withdraw up to $5,000 – penalty-free but not tax-free – in the case of birth or adoption.

As for plan sponsors, the new 401(k) provision contains advantageous changes to safe harbor rules, allowing the ability to apply for tax credits when starting a 401(k) plan or adding an automatic enrollment provision.

The new law also expands the way 529 savings accounts can be used to help pay for college. Now, up to $10,000 from a 529 account can be used to retire some types of student loan debt.

The most troubling provision in this new law will make it easier for 401(k) plan sponsors to offer annuities within retirement programs. The new law requires a “lifetime income disclosure” at least once a year on employee statements, which could lead many into buying an annuity product. While appropriate in some circumstances, annuities are typically more expensive than low-cost, index funds and are often sold by commission-driven advisers.

As more Americans find themselves unprepared for retirement, some provisions in the new law will be beneficial, but investors should be aware of the red flags. Those who need help navigating the new landscape may want to consider working with a fee-only, fiduciary financial adviser, who is required to put the client’s interests ahead of their own.

Tyler Grubbs is an accredited investment fiduciary at Full Sail Capital, an SEC registered investment adviser in Oklahoma City.