Party Over?

The new tax law added a limit to the income owners of many kinds of professional corporations (like many medical practices) can earn and still keep the 20% qualified business income deduction this year. For those filing jointly, the phaseout of eligibility starts at $315,000 and ends completely at $415,000 in 2018 income. Losing that deduction will cost them tens of thousands in extra income tax, so many are asking how to avoid that.

They need to lower their taxable income and two ways to do that are to:

1. Start a cash balance plan and contribute as much as $300,000 a year, sheltering the money in a qualified retirement plan and reporting less income for taxes
2. If the 401(k) profit sharing plan is not age-weighted with respect to profit sharing contributions, the plan can be modified to allow that. As in the cash balance plan, if there is a significant age difference between owners and staff, the vast majority of the contribution will go to the owners

Of the two, the cash balance plan can be more more efficient in how much goes to the owners, maybe as much as 95%, but the change to the 401(k) is much quicker to do and the deadline for doing this in 2018 is either Sept. 15 or Oct. 15, depending on the structure of the business, so time is very short.

If you’re interested, let me know immediately so we can try to beat the deadline and save you or your partners a great deal of tax.

What is the #1 issue with the oversight of 401(k) plans? No question, it is APATHY on the part of plan sponsors. Nothing else is even in the ballpark.

In a typical plan, Joe, who’s been the guy providing the plan for years, stops in once or maybe twice a year, bypasses the HR Dept. and goes straight to the owner’s office or sits down with the CEO and CFO, shoots the bull for 30 minutes, talks for 30 minutes about how the plan is doing well and goes home.

His compensation – $20,000 – $60,000 or more for just that plan, just that one hour. Typically, there is no formal, documented process, no real oversight, no meeting minutes taken, no benchmarking of plan costs and no mention of the fact that his fee is 4X what it was 10 years ago for the same level of service and no improvement in the plan. In fact, Joe’s main business is insurance. He doesn’t even get regular continuing ed on retirement plans. Why? His clients never ask about it.

I called a plan last week that had the highest administrative cost of any plan its size in the whole area code. They were paying $200,000 to $300,000 per year more than average. And, while their participant count is up 2X over the last 10 years, the plan fees have gone up 800%, not just on investment management, on everything because it’s a one provider plan, like most are. They’re a sitting duck for a lawsuit or a DOL civil action.

The response of the CFO to that news? A big yawn and have a nice day.

Another plan I know with admin costs 2X what they should be has an 8-fund lineup underperforming relevant indexes by an average of 3%/year over the last 5 years. The doc in charge of the plan’s response? “We’ve had a strong relationship with our guy for 30 years. We’re not interested in talking to anyone.” No wonder their costs are too high.

Think they do required regular benchmarking? Think they know what their costs are? Think they have a sound, documented process for overseeing the plan and the vendor? No, no and no.

I could tell these stories all day long. Participants in both these plans are being harmed. In the second plan, participants are compounding their return 3% a year less than it should be. That’s a shortfall of potentially hundreds of thousands of dollars over a working lifetime for each plan participant. The real problem – their employer’s APATHY.

As a fiduciary, these men are failing miserably, much to the harm of the people relying on them. I’m not a fan of lawsuits, but these men deserve to be sued.

If you are a participant, insist that your plan demonstrate that it does regular benchmarking and takes the responsibilities of a fiduciary seriously. If they are open to it, call me. If they don’t, write the DOL or call a lawyer. Seriously. Don’t let a fiduciary that doesn’t care ruin your retirement and others.

Differentiation – Maybe instead of telling others that we are different, we ought to show them the difference by not focusing so much on our success as on enabling their success. In the end, we are successful because we contribute to the success of others.

When we make pitches based on how great we are, we are missing an important truth – it’s not about us, it’s about them. Brag or serve – I know which I would choose if I were hiring someone and I know which I want to live out. There’s no fulfillment in boasting, only in valuable service. 

Hopefully, you have a will, a medical directive, a health care power of attorney, a general power of attorney, a detailed list of medications, medical conditions and allergies and a list of emergency contacts, all in case you end up in a serious medical situation. I’m guessing that less than half of my clients have these, despite my encouragement and them being critical documents.

The question is – do you have all these on you at all times, easily discoverable, and the information easily accessible by emergency personnel? If you don’t, what good are they in an emergency if you are not able to communicate clearly or at all and the medical personnel don’t how or where to access them? A password-locked phone with that information will not suffice because the EMT will not know your password or whom to contact.

To answer that question indirectly, consider that the 3rd leading cause of death in the U.S. is medical mistakes, more than pneumonia, more than accidents. It sits behind cardiac issues and cancer, and according to MD Magazine accounts for 200,000 – 400,000 deaths a year and a much larger number of complications.

For example, what blood type do you need if you are bleeding profusely? What medical conditions, allergies or meds do you have that might play poorly with a medication given in the ER?  Even you and I don’t often know what medications might be a bad thing or our health profile. For example, someone getting a nitroglycerin tablet for a heart attack when he still has Cialis in his bloodstream can experience a life-threatening drop in blood pressure. Not good. Add a painkiller for the heart attack pain and further interactions come into play.

And, HIPPA regulations may prevent a loved one who needs to know about your situation from being able to get any information at all if they are not listed as being authorized to receive it on a document you carry.

I am recommending that at a bare minimum you have a card in your wallet or purse that lists your medications, allergies, blood type, medical conditions and contact information for your emergency contact and the person named in your health care power of attorney.

You can get a free ICE wallet card by going to https://geticecard.com/ It has a template into which you can briefly enter the information. It will save as a PDF that you can print out in business card size. Being typed is extremely helpful for legibility and to fit in a small space. I suggest you also write in the health care POA contact and then laminate the card at any office supply store for a buck or two so it stays legible.

Even better is a slim little key that will go on your keychain and which has ICE in bold letters, the universal symbol for IN CASE OF EMERGENCY. It is actually a miniature thumb drive that will have your necessary documents for a medical emergency, including a medical directive, doctors’ contact info, the signed paper appointing someone as having POA if you are incapacitated and much more medical detail than will fit on a small card.

Because this is so important, I am sending my clients a USB key with the universal ICE symbol on it. It will have forms pre-loaded for inputting your information. If you are not a client and would like a medical information key, contact me and I will send you one for a nominal amount. You can also save your healthcare power of attorney and medical directive to it. If you don’t have those, please see an attorney quickly. This is not a promotional item. To avoid confusion, my name and company name are not on it. 

With a card in your wallet and more detail on your keychain you should feel confident that emergency personnel will have what they need. Just reply to this email that you would like me to send you one.

A third precaution for my clients is to go to their Cornerstone Investment Services client portal and upload pdfs into a document vault. They can make that folder accessible to anyone that they give the login info to, either the emergency contact and loved ones or written on the wallet card.

Remington, one the oldest names in the outdoor industry is going bankrupt. This might seem odd because gun makers sold a ton of guns and ammo during the Obama presidency and stocks in that industry did exceptionally well.

Some of you know I write articles for outdoor magazines as a hobby, so I have some good connections there. What I’m hearing is that Remington is going under because over the last couple decades it kept lowering the quality of its product.

One of the things that drives me nuts is that coffee makers and lawn trimmers and such seem to have a life that is continually getting shorter. Our Keurig has to be “spanked” after not very long or it gets gunked up and pours small cups. Our SS electric can opener broke after a year because the critical part was plastic. My power landscaping tools lasted a few years, but I have learned which brands to buy. You feel like when you get 5 years out of a product you did well. That’s sad.

You and I have seen this movie before. It was called Wall Street.

The business of Wall St. that buys out companies it feels are making too little profit and “turns them around” falls under private equity and it is prospering today like never before. Gordon Gecko lives.

The way it typically works is that a private equity firm like Cerberus, KKR, Apollo or Blackstone raises a lot of money by promising investors big returns. The sooner they can realize those profits, the more money the buyout fund general partner can raise and the more fees it can earn.

Here’s how they do that on companies that are already trading on the stock exchanges.

First, they buy enough of the company’s stock to get control. Quickly, they pay themselves back by having the company take on debt, often a lot of debt. So, they love to buy companies that have been reluctant to take on debt before. Since debt payments increase the company’s expenses and lowers profit, they next execute their plan to cut costs,” make the company lean,” i.e. efficient.

That means selling off “underperforming” divisions that don’t generate much cash, which may be the ones in which management has been investing for future growth. Then they cut costs by laying off employees, by moving production overseas, by lowering the cost of the products in any other way they can, like making the candy bar smaller, replacing metal with plastic, maybe by raising machining tolerances to reject fewer parts. If they cut costs enough, they may even lower prices to get more sales.

The consumer, not knowing what is going on behind the scenes, loves it. “Man, you mean I get can get a Remington for that price? I’m buying. What a deal!”

Because the company has taken on debt, called “leveraging up,” when costs start going down because of these “greater efficiencies” the reported quarterly profits soar and start beating expectations, the value of the company in Wall Street’s eyes goes up because of how fast profits are increasing. “They really turned that old company around.” The private equity firm then sells the shares they bought for a large profit, having “improved” the company. A lot of the profits go to the partners in the buyout fund and they do it all over again. They have cost people their jobs, given us all lower quality products, saddled a low-debt company with a lot of debt, started “monetizing” the company’s reputation (essentially selling it as they lower product quality to get more sales at lower prices before consumers adjust their perception of the brand’s falling quality). All for short term profits.

That’s the worst case. In other cases, they may actually improve truly mismanaged companies. And a big part of private equity ($700 billion out of $1.7 trillion) is still to buy companies that have not yet issued publicly traded stock, including young, innovative tech firms that may become the tech giants of tomorrow, e.g. Google and Facebook. I’m talking about when the firms buy out already publicly traded companies.

Here’s what most people don’t know and what concerns me – how much of America they own. Amazon is the 2nd biggest employer in the U.S. with 540,000 employees worldwide. But, buyout firm KKR currently owns companies with total employment of 650,000. The only company with more is WalMart, the retailer of many of these cheaper products.

Buying out companies is now a $1 trillion industry and has become the majority of what private equity firms do as opposed to taking promising companies public. And because it is so profitable, the money keeps pouring in. Apollo just raised the largest pool of money for doing buyouts ever – $25 billion in just one partnership.

So, expect more products with lowered costs. As a whole, America has turned from how it built its dominance in industry, by innovation and high quality and for the most part narrowed that to one area – technology. I might make exceptions for aircraft, vehicles and medical products, including pharmaceuticals. Much of the rest of what we buy is becoming junk. That’s why the majority of individual stocks I buy for clients are in tech and health care.

What companies can you name that are unflinching in their commitment to quality? What companies do you know that are making exceptional products and are not aggressively raising prices?

Your 401(k) account was up 10-20% in 2017? Good, but so were your fees. If costs are paid as a % of plan size, whenever your plan grows, fees grow, automatically.

It’s outrageous. It’s automatic & nearly silent.

You’ll likely never get an invoice. You’ll just get a required disclosure that few CEOs and CFOs ever read carefully. That’s how it works in the vast majority of plans under $25 million.

It’s likely that no other expense you have went up double digits last year.

Even worse, if you have a large share of the plan assets and fees are paid out of participant balances, which is the norm, thousands of dollars in fees came out of YOUR retirement account last year and will again.

Let me help you and your employees by shining a light on your plan costs, including those that are hard to find. I don’t charge for the service and it takes very little of your time. It’s a prudent practice that the DOL says should be done on a regular basis. Not doing it can be a breach of fiduciary responsibility.

Give me a call if you care about fees. 704-698-1040 DaveH@CornerstoneInvestment.com
Dave Hoshour

The federal tax bill was signed by the president last week, squeezed in just before year-end. That gives you an extremely short window to take advantage of the greater value of losses or expenses this year.

Tax brackets are dropping in January (next week), standard deductions are increasing, the pass-through rate for small business owners is dropping and all those make expenses and capital gains losses much more valuable this year. Taxable investment accounts should take losses this year and time is almost up.

Talk to me, or if you are with another advisor, talk to them advisor ASAP if there are any available losses on taxable investments you can take before Jan. 1.

You should also consider contributing more to charity before year-end or making your normal monthly charitable contributions for January this week instead, when if you’re like most people, your deductions and credits are worth more this year than next.