Student Loan Debt – The Latest Financial Bubble in a Series

More facts from a WSJ article on student debt. The average student loan balance for a graduate with a degree in Dance from New York University is $96,000. About 30% of student loans are in income-based repayment plans with another 20% in forbearance and another 10% past due.
The rate at which student loan debt is being paid off is 1%/year. Most will be defaulted on, written off under various programs or forgiven. About 12% of those in income-based repayment programs are seeing their loan balance grow even as they pay based on their income.
When people choose what to default on – a house, a car or a student loan – they choose not to lose the house or car, instead they go into an income-based repayment plan on their student loans.
Student loan debt is a burden to many adults, a huge drag on the economy, and a large and growing cost to the government whose involvement has largely enabled the explosion in debt. For any other consumer product, basic economics would have put an end to this long ago.
That a college degree has contributed to the economic betterment of many is beyond dispute. Should we make college free? We could. I guess it depends on how big you want government to be.
For nearly 20 years now the federal government has borrowed between a trillion dollars and half a trillion dollars every year, one of the many distortions tied to super-low interest rates. At some point it will become a very serious problem, especially if we opt for another national good by providing health coverage for everyone.
In a series of financial bubbles, government debt will be the last and biggest, but that is another story. Meanwhile, there are people running for office and more promises to be made.
This entry was posted on Wednesday, August 21st, 2019 at 10:27 am

Facebook’s New Cryptocurrency Could Work

Bitcoin was an experiment that didn’t quite work, mainly because the value fluctuated so that no one knew quite what they were really getting paid. But Facebook’s recently announced Libra may have solved that problem with tying it to a basket of popular international currencies.
Facebook and its partners, some of the biggest financial companies in the world have clearly done a good job of thinking through how to make a digital currency work and it really does have a chance of succeeding as a ubiquitous international currency that saves merchants a lot of credit card fees and does the same for many of the world’s citizens without a bank account who pay high fees to send money via Western Union or other means.
Here’s a video that does a good job of explaining how Libra works and why it may be the future of money. How Libra Works (see link on the CIS FB page)
Here’s a link for those not on Facebook.
This entry was posted on Friday, June 21st, 2019 at 3:48 pm

SEC Drops the Ball on “Regulation Best Interest”

Advisers working for registered investment advisory firms like mine have long been held to a higher standard of care for clients than those that work for brokerage firms, banks and insurance companies and are paid by commissions. I am proud of the higher standard and have had it written explicitly into my client agreements for years on all client accounts, not just retirement plans or retirement accounts.

After the Fiduciary Rule put out by the DOL a few years ago that applied only to retirement accounts was struck down in court, the SEC had a chance to do what Dodd-Frank instructed it to do nearly 10 years ago – investigate conflicts of interest and their costs and come up with a better set of requirements to protect clients. You may know that the DOL rule was really crafted because the SEC failed to put anything together within a reasonable time.

So now the SEC is finally out with its best interest rule. Alas, “Regulation Best Interest” requiring compliance by June 2020, is a weak effort, ground down by continued intense pressure from brokerage and insurance firms (hopefully, you learned a long time ago not to be fooled by the titles of legislation and regulations).

Brokerage firms will have to shelve the sales contests that have been a staple for so long and can no longer require their brokers to sell only the firm’s proprietary products. And, they must provide clients with a “relationship description” including conflicts of interest. But, I’ll tell you in advance what that will look like – another boring disclosure document that the client won’t read – “Just sign here.”

And, while the SEC proudly announced that all advisers will have to put the client’s interests ahead of their own, it then proceeded to essentially say that if the financial person sells products for commissions and only incidentally provides investment advice, they are not advisers and are not held to the best interest standard. There’s the loophole through which you can drive just about the whole commissioned financial services industry. Victory! for Wall St. and the insurance industry, or so it is said.

Ask yourself why it is so hard for many of the big financial companies to agree to act in the clients’ best interest. Then ask yourself why aside from lots of expensive advertising and mainly intelligent and winsome salespeople anyone would choose to deal with them instead of an independent investment adviser that does put client interests first, not only because it is the law for registered investment advisers, but because most of us believe it is the right way to do business.

It’s a shame the SEC, who had the mandate and the ability, caved again to money and power and fell short of the protection it could and should have given investors.

This entry was posted on Thursday, June 6th, 2019 at 4:12 pm

Best Practices for Plan Sponsors – Fred Reish #2

I am going to start posting a series of short articles by other writers whom I follow that I think would be beneficial to my readers. The first of these is from Fred Reish, an ERISA attorney with Drinker Biddle who is a frequent speaker at retirement plan conferences. This is part of his series on best practices for plan sponsors.

Best Practices for Plan Sponsors #2

Posted on October 3, 2018, by Fred Reish in 401(k)403(b)best practicesfiduciary. Comments Off on Best Practices for Plan Sponsors #2

What is the Baseline for A Committee to Act in the Best Interest of Its Participants? (Part 1)

I am writing two series of articles that together are called “The Bests.” One is about Best Practices for plan sponsors, while the other is about the Best Interest Standard of Care for advisors. Each series is numbered separately to make it easier to identify the subject that is most relevant to you.

This is the second of the series about Best Practices for Plan Sponsors.

The recent decision in the case of Sacerdote v. New York University is a classic story of the good and bad of plan committees. Let’s start with the bad.

Five current and former committee members testified at the trial. But not all of the testimony was helpful.

In the opinion, the Court said that the testimony of one of the co-chairs “was concerning.” The court went on to say:

She made it clear that she viewed her role as primarily concerned with scheduling, paper movement, and logistics; she displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary. In a number of instances, she appeared to believe it was sufficient for her to have relied rather blindly on [the investment advisor’s] expertise. As a matter of law, blind reliance is inappropriate.

The court further noted that:

She bluntly testified that “[i]t’s not my job to determine whether the fees are appropriate” for the Plans.

With regard to another committee member, the court said that she “was similarly unfamiliar with the basic concepts relating to the Plan, such as who fulfilled the role of administrator for the Faculty Plan. When asked about her inability to remember Plan details, [the committee member] responded that she has a ‘big job’ (referring to her human resources role, not her Committee membership) and her role on the Committee is one of many responsibilities she has. This suggested that [the committee member] does not view herself as having adequate time to serve effectively on the Committee.”

The court also said, about another committee member, “that he did not even know whether he was, at the time of the trial (in April 2018), still a member of the Committee—and thus whether he bore a fiduciary responsibility to thousands of NYU participants.”

And, finally, the court said “Several Committee members stated that they did not independently seek to verify the quality of ‘investment advisors’ advice; rather, they simply relied on it.”

If this were the end of the story, this article would be about bad practices, rather than best practices. However, there is more.

The court went on to say: “While the Court finds the level of involvement and seriousness with which several Committee members treated their fiduciary duty troubling, it does not find that this rose to a level of failure to fulfill fiduciary obligations.”

How is that possible?

Sadly, I will leave you hanging for a week, until I post Part 2 of this article. However, I don’t want you to be disappointed. So, let me give you a preview. There were other committee members, some of whom were fairly sophisticated and very engaged. However, there is even more than that. The court noted two or three other steps taken by the committee that saved NYU and the committee members from a litigation disaster. My next article will cover that.

POSTSCRIPT: One lesson from this case, independent of the committee actions that saved the day for NYU, is that committees should have formal programs for fiduciary education. The fiduciary education should cover, at the least: Who is a fiduciary and what are the fiduciary responsibilities? How do fiduciaries fulfill those duties in the real world? How do fiduciaries review and examine the advice that they receive? And, how do fiduciaries monitor the costs and compensation related to their service providers and plan investments? That education should be reinforced at least annually, together with updates on current developments. Finally, new committee members should be educated about their roles and responsibilities when they start serving.

To automatically receive these articles in your in box, you can sign up on my blog at Just enter your name and email address under the “sign up for our e-newsletter” option, and click on the button to subscribe.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

This entry was posted on Tuesday, June 4th, 2019 at 10:11 am

DOL to Come Up With New Fiduciary Rule

The DOL Fiduciary Rule that was so controversial was in its intention very good. There is no excuse for anyone in the financial services industry to put their interests above their own. The problems were in the paperwork it required and that it was not coordinated with the SEC and only covered retirement accounts. Now that the two agencies are working together, I am hopeful that the new rule will be better.

Under questioning at a May 1 hearing on Capitol Hill, Secretary of Labor Alexander Acosta appeared to confirm that the Department of Labor will issue a new fiduciary rule.

Acosta appeared before the House Education and Labor Committee for a hearing to examine the policies and priorities of the DOL. While Acosta’s written testimony did not address the DOL issuing a new rule, under questioning by Rep. Marcia Fudge (D-OH), he indicated that DOL is in discussions with the SEC as it works on its proposed investment advice rule.

Fudge grilled Acosta on what his plans are to protect workers from retirement advisors who “put their interest above their clients.” Acosta responded that the DOL is communicating with the SEC and that “based on our collaborative work, we will be issuing new rules in this area.”

When pressed further by Fudge as to timing, Acosta didn’t say specifically when the DOL would issue a rule, other than to say that the “SEC is in the process of producing those rules” and that his agency is “working with an independent agency.”

After the 5th U.S. Circuit Court of Appeals struck down the DOL’s previous fiduciary rule and the SEC moved forward with its own package, indications were that the SEC would take the lead and the DOL would issue guidance based on the SEC’s final rules. For example, at the April 7 opening general session of the 2019 NAPA 401(k) Summit in Las Vegas, Preston Rutledge, head of the DOL’s Employee Benefit Security Administration, commented that the SEC’s proposed rule was “a very welcome development,” adding that the DOL’s goal “is to align our rule with the SEC’s rule.”

In his May 1 testimony, Acosta touted the DOL’s October 2018 proposed regulation clarifying the circumstances under which a group or association of employers, or a professional employer organization (PEO) can act as an employer and sponsor workplace retirement plans under ERISA. He noted that the DOL is currently reviewing the public comments on that proposed rule.


This entry was posted on Thursday, May 2nd, 2019 at 11:47 am

Failing One’s Duty to Monitor

Any employer offering a qualified retirement plan like a 401(k) has a duty to monitor the plan, including the plan fees and the performance of the funds in the plan lineup.

That does not mean that those who oversee the plan can be sued for underperformance as such. But, when funds remain in the lineup that consistently underperform relevant indexes and similar funds it can be viewed by regulators and judges as a sign that proper monitoring is not being done. That can cost money, embarrassment, employee morale and time spent with attorneys.

I just read about another lawsuit getting sent along for trial for just that reason.

When I look at fund lineups I routinely find funds with poor track records. I also find index funds that have cheaper alternatives. These are good ways to get into trouble.

Often I find that no meeting minutes are being taken, maybe no meetings even being held, or that the minutes don’t document a process of recognizing a fund’s underperformance, discussing it and giving solid reasons why it should remain in the plan or not. Why would a judge or regulator conclude that the employer had done a good job of oversight? There’s no evidence of it. This is serious business.

I also talk to CFOs and CEOs, doctors and dentists and such that don’t know what their fees are or how they compare with similar plans. This is negligence that can cost them. Plan participants are relying on them to fulfill their fiduciary duties to keep expenses reasonable and to provide good investment options that are at least competitive. But, those duties are being neglected. Don’t think that a judge won’t take that seriously because you don’t have a mega-size plan.

Please make sure you do regular benchmarking of your costs and keep meeting minutes that detail a solid oversight process. If you don’t have a formal oversight process, you are really asking for trouble, whether your plan is $1 million or $100 million.

This is part of what I do for plans. Don’t get yourself in trouble. Have me talk with you about how to get on track and stay out of serious trouble.

This entry was posted on Thursday, April 18th, 2019 at 12:16 pm

10-Year Party Over for Stocks?

Party Over?

I sold some stock positions the other day in many accounts for individual clients, positions that were declining more rapidly than the benchmark S&P 500 Index, which is now down over 8% over the last month and has lost all its gains for the year. This is not an attempt at short-term market timing. Rather, it is reducing risk during a market decline while we re-think long-term allocations and adjust our holdings from growth to value. Models in 401(k) plans will be adjusted shortly. I’ll explain why below.

Market Correction or Bear Market?

Every so often the stock market declines 5%-12% as a way of wringing out excess greediness and too little respect for risk. Often, this occurs when the S&P 500 gets too far above its long-term moving average, like a hunting dog that gets too far afield and is called back in. I use 15% either side of the long-term average as a pretty good rule of thumb as to whether it is a correction or likely to be a bear market. If a correction, the stock market then resumes its upward march a little more cautiously.

The Way it Was

If I thought that’s what was going on, we would just keep things the same. I don’t think that is what we have here. I think rather it is the end of a long party that started when the stock market announced a half-off sale in March of 2009 and politicians and government banks threw everything they had at stimulating economies and markets. You remember the huge spending increases under President Obama that were continued with President Trump, the Federal Reserve’s strategy of flooding the world with excess money that found its way into stock and bond markets begun by Ben Bernanke and continued with Janet Yellen.

The money from the Central Bank pushed markets higher because with more to spend came more demand. You remember the long stretch of record-breaking low interest rates that far outlived the crisis and caused massive borrowing and thus spending. The result was a tremendous growth in profits for companies from higher sales and lower costs. Add to that stimulus tax cuts and regulatory easing and repatriation of overseas money and you have a tremendous boost for profits and stock prices.

The Way It Is

That was enough to send markets much higher. But, as often happens, when citizens see the market making a lot of money, it becomes more popular and people become willing to pay more for earnings. So, stocks go up because their profits are going up and they go up more because people are willing to pay more for those profits. The second can be measured by what is called the price to earnings ratio, or P/E for short. The stock market recently sold for a P/E of 24. Ignoring the spikes in P/Es that you get in recessions, that 24 P/E last month was only exceeded by the 30 P/E in 1999. In other words, only once in the last nearly 90 years have investors been willing to pay more, and that didn’t end very well, as you remember.

The Way it Will Be

But, as Bob Dylan put it in his offbeat, nasal voice, The Times, They Are a’Changin’. Profit growth for companies is slowing down a lot, from 20%+ growth earlier this year to more like 7%. More companies are disappointing investors so far this reporting season. That growth may come down even more and you may find that we are close to the peak in earnings. Here’s why.

The long run of extremely low, almost free money is over and rates are on their way back up toward normal. Normal is quite a bit higher, and Jerome Powell, the fairly new chair of the Federal Reserve Bank, thinks normal rates may be higher rates than many forecasters are saying, so get set for several more rate increases. My guess is that short rates will go up enough to be higher than long rates, a situation that normally triggers a recession.

At the same time, the Federal Reserve has stopped flooding the world with money. Instead of massively buying bonds, the Fed is letting its bond portfolio shrink. That removes from circulation money people were spending on stocks and bonds. This is often referred to as “taking away the punch bowl.” So, less money for buying stocks and bonds plus higher interest rates.

Higher rates mean less spending on cars and houses and those slowdowns are already evident, but it also means that business costs are going up in many industries and that means lower profits for many companies. Wage inflation and inflation on goods, especially with President Trump’s backfiring trade war with its growing list of tariffs, means costs are going up for consumers and businesses, and that means less spending for both and lower corporate profits. Slowing and even falling profits means stocks and bonds should fall too and with that will come less infatuation with stocks, which means lower prices.


Could the market jump up tomorrow? Sure. It could also accelerate its decline. Day to day, who knows?

Could I just be wrong about the overall theme? It’s possible, but I don’t think so. I didn’t just start doing this yesterday. If I’m wrong, the most likely error is being early. As you know if you’ve been with me for a while, I try to think long-term and in the end, that pays good dividends.

There are other ways to make 7%-10% returns aside from stocks. Real estate, now made much more liquid by what are called interval funds, that is, limited partnerships set up so that they have frequent tender offers (some as often as monthly or quarterly), is one possible way. Another is alternative energy partnerships with long-term leases. I plan to direct more client money to these areas for those clients not already fully invested there. I am looking at other alternatives as well.

Stocks will still have a place, but it will likely be value investing’s time to shine again after ten years of growth investing outperforming it. Small and international stocks will have a place again too, but I’d like to see them much cheaper.

Floating rate and short-term bond funds, which have absolutely been the place to be this year in fixed income will continue to be good holdings for us. Good old cash may get an allocation again. I will also continue to recommend alternative income funds.

There will be some counter-trend rallies in stocks. But, this year’s high fliers still have a good ways to come down before they are bargains again. It will pay to strongly consider what you’re paying for growth.

We Make Money the Old-Fashioned Way

The end of that old commercial, is “we earn it.” This is a time for guidance. This is when a financial advisor is most valuable. The sun is setting on the days of picking low-cost index funds and doing fine. Just like it was easy in the 1990s and tough in the 2000s, then easy in the 2010s, the pendulum has swung back again.

So, I will be meeting with all clients over the next couple months to adjust strategy. If you have any questions or concerns, call me. Thanks.

This entry was posted on Friday, October 26th, 2018 at 11:56 am

How to Avoid Losing the 20% QBI Deduction on Pass-Through Income (New Tax Law)

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.

This entry was posted on Tuesday, August 28th, 2018 at 3:03 pm

The #1 Issue With 401(k) Plans – Nothing Else is Close

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.

This entry was posted on Friday, August 24th, 2018 at 3:44 pm

Differentiation the Right Way

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. 

This entry was posted on Monday, August 13th, 2018 at 2:06 pm