Tag Archives: open enrollment

Bonds Are Dead…Again?

Not trying to be a wet blanket here, but c’mon. Again? 

Maybe the line I’m walkin’ needs to be crossed. Too early to say. The pros in this business who believe the 10-year Treasury yield must breach 4% are piling on to one side of the boat.

The contrarian in me along with several data points compel me to maintain a preference to remain on the lonely side of the ship.

Most likely what you’re witnessing is a peak in intermediate and long-term interest rates, not the start of something big.

I share several reasons for my logic.

Most important, do not, I mean do not, get swayed by talking financial heads who warn that stocks will be the big winner when rates rise and bonds the loser. Simply, if rates rise too rapidly anywhere along the yield curve, stock prices will fall off a cliff while bond prices will slowly roll down a hill.

Why have rates possibly hit their zenith?

Consider the over-indebtedness of governments, corporations (corporate debt now stands at 45% of GDP), households, inflation as measured by the Dallas Fed’s Trimmed Mean PCE right at 2% – in union with the Fed’s nebulous target, and the ominous danger signs coming from housing – a leader of economic activity & forefront in a consumer’s “feel good” sensors of the psyche. Quite frankly, the economy just cannot handle rates much higher from here.

Recently, growth in the Economic Cycle Research Institute’s U.S. Leading Home Price Index turned in its worst reading since 2009. ECRI’s Index was spot on nailing the early stirs of the housing crisis in 2006.

According to ECRI’s head honcho Lakshman Achuthan, home price growth is set to fall in a sustained cyclical downturn.

Let’s not forget demographics. The U.S. population is aging which puts a lid on how high inflation-adjusted interest rates can go. If anything, there’s a point where older investors will seek to trim their stocks to capture juicer income yields from bonds.

Per research by the Federal Reserve Bank Of San Francisco:

  •  Changing demographics can affect the natural real rate of interest, r-star; the inflation-adjusted interest rate that is consistent with steady inflation at the Fed’s target and the economy growing at its potential. Demographic trends affect the equilibrium rate by changing incentives to save and consume. Lengthier retirement periods may raise some households’ desire to save rather than consume, lowering r-star. At the same time, declining population growth increases the share of older households in the economy, who generally have higher marginal propensities to consume, raising consumption and r-star.
  • As population growth declines, it could also reduce real GDP growth and productivity, thereby putting downward pressure on r-star.

Investors lament – “My bonds are losing money!” Wait: Are they? Not so simple.

First, bonds may have lost their mojo as far as price appreciation. I’ll concede that point. However, they’re far from dead. Generally, the income and diversification from high-quality and Treasury bonds act as buffers to portfolio volatility, especially through periods of significant corrections or bear markets in stocks.

Second, dig deeper into what appear to be capital losses on bonds. If you own almost any type of fixed income investment whether a mutual fund or individual bond, you’re witnessing negative numbers (losses in brackets), or online – a sea of red. Don’t panic. Don’t assume you’re losing money. Dig deeper.

If you own a bond and seeking to hold to maturity, ignore the paper losses. Unless planning to sell before maturity, a return of principal is in your future. Consider the return on the bond the yield or income being paid on the investment.

Last, if you own a bond mutual fund like most of us do in our company retirement plans, you’re going to need to play Columbo, or detective when it comes to isolating investing reality from observed losses. Recently, a friend of mine reached out. He was stressed that he “lost” $3,000 on his bond fund so far this year according to the information retrieved from his company’s retirement plan portal.

I helped him break it down.

Yes, he indeed was down $3,000. His investment of roughly $53,000 in the bond fund began the year at approximately $56,000.

When digging in and isolating his original investments vs. monthly income generated (and reinvested back into the fund), we discovered $41,000 was the sum of hard-earned money he placed in the fund, $13,000 was income and appreciation. So, on the surface, was $3,000 a reduction in the overall balance in the fund? Yes. Was he losing principal at this juncture? No.

Also, keep in mind, as bond mutual fund prices fall, yields should increase. As bonds mature, a portfolio manager should be investing new dollars in higher-yielding bonds or swapping into bonds with more attractive yields.

As my buddy is convinced rates “must go higher because the news tells him so,” I had him exchange into a fund with less interest rate sensitivity.

For investors like him who remain concerned about an increase in rates, a chance to control interest risk by shortening duration (think ultra-short or short-term bond funds), is at hand. If yields retrace and bond prices commensurately increase, it should provide a window of opportunity to swap longer duration positions with shorter duration alternatives.

Or, ask your broker for the latest rates on certificates of deposit. It’s like a candy store for conservative investors or savers out there. Yes, your broker should have access to CDs from major financial institutions, so no need to spend lots of time shopping around. For example, I discovered one-year CDs paying 2.3%, 2.8% for two years. At the end of the terms, principal is returned. These vehicles are FDIC-insured and pay interest monthly, semi-annually, or at maturity.

Bonds aren’t dead. Bonds are an important part of your portfolio. At 34X earnings for stocks, the last action a rational investor should take here is to dramatically reduce bond exposure to purchase stocks.

If you’re an investor with a primal brain who gets frustrated by investment account balances from month to month, doesn’t see progress, believes you’re missing out on the stock party and makes changes without regard to risk attitude, the current breakdown in housing and other cyclical stocks and current valuations, then frankly, you deserve what’s coming to you.

And it’s not going to be pretty.

3-Steps To A Successful Open Enrollment – Part 2

In Part 1,  I sought to help RIA readers understand the importance of selecting and rethinking a healthcare employer benefits option that should serve more as a “healthcare-in-retirement” account.

A Health Savings Account provides triple tax-free benefits; a unique feature that makes maximum annual funding to subsidize rising health-care costs in retirement, a no-brainer. Non-catastrophic current healthcare expenditures should be accounted for in a household budget, thus allowing the HSA to accumulate over time.

I reviewed the importance of taking advantage of employer-based long-term disability coverage; there’s a greater chance of becoming disabled than dying. To ignore this option is clearly reckless financial behavior.

Flexible Spending Accounts may be available for dependents and are ‘use it or lose it’ in nature.

Part 2 covers additional benefits. The following choices are not perfect. For most households, additional coverage will be required.

Life insurance:

It’s customary for employers to offer one-time annual salary life insurance as a freebie. AD&D or accidental death & dismemberment coverage as an add-on to traditional life insurance coverage may also be paid 100% by an employer. AD&D may cover death or the loss of a limb, eyesight, speech or hearing due to an accident.

I’m shocked by how many workers, especially those with dependents, who take the bare minimum when it comes to life insurance. Employers generally offer supplemental life insurance up to four times annual salary inexpensively with evidence of insurability. To determine how much life insurance is required for your personal circumstances utilize the life insurance calculator available at www.lifehappens.org. Better yet, establish a meeting with your financial partner to determine what your family requires.

Life insurance decisions must not be made in a vacuum. For example, I find that employees who do a commendable job purchasing life insurance for themselves, fail to consider the financial impact to a household at the loss of dependent spouses. Some policies offer dependent life insurance however, it’s generally inadequate to cover dependent spouses who remain home with children; it may be considered partial coverage at best.

According to Salary.com in their 19th annual Mom Salary Survey, a stay-at-home mother commands annual compensation of $162,581, up nearly $5,000 from 2017. For couples with young children who do not have the financial resources to hire a live-in caregiver, additional life insurance coverage will be mandatory to mitigate the risk of losing a dependent spouse for as long as children require assistance.

The greatest disadvantage of employer-provided life insurance and long-term disability options is lack of portability. In other words, lose your job, lose your coverage. Do not be lulled into complacency because life insurance is offered by your employer unless you’re in a rare career situation where job security exists. At Clarity, we assist workers to assess their insurance needs through holistic financial planning and suggest additional life insurance to compliment benefits offered by employers.

Retirement plan review time:

It’s possible your company retirement plan falls short – no match, limited choices, but it is what it is.

Open enrollment doesn’t necessarily include deadline decisions about an employer-provided retirement plan. However, take 30-40 additional minutes to review your investment mix, fund selections and current contribution rate.

Side note: According to MetLife’s 2018 Employee Benefit Trends Study, 70% of employees would be interested in converting sum or all of their retirement savings into lifetime income. Most employers offer defined contribution plans such as 401k plans.

In the good old days, in the ancient times of pensions (first time I heard the word ‘pension’ was during a rerun of an episode of The Little Rascals from the mid-1930s), the employer solely bore the risk of saving and investing for a worker’s retirement. In other words, you were provided an income for life in retirement as an employee of the organization for a specific period of time.

Bluntly, as shareholder greed and technology made workers less of an asset and more of a liability, the responsibility of saving for retirement was placed one-hundred percent on the shoulders of the employee.

In a 401(k) you, the employee, takes on high fees, limited investment selections and the risk of possible devastating stock losses, especially if over-allocated to company stock. A common pitfall is to ignore asset allocation and allow the stock portion of a portfolio to deviate dramatically from the emotional capacity to stomach volatility.

Tread carefully with target date mutual funds.  

In 2007, the Department of Labor placed a stamp of approval on target-date fund choices in 401(k) plans so plan providers have been quick to embrace them.

A target date fund is a mix of asset classes – large, small, international company stocks and fixed income that is adjusted over time or allocated conservatively the closer an employee is to the ‘target date’ identified.

For example, the Vanguard Target Retirement 2020 Fund is designed to increase its exposure to bonds the closer it gets to 2020. Let’s be clear – this is NOT a maturity date, which is part of the confusion of a target-date fund. The target never gets reached. The fund doesn’t go away. It’s always out there.

Also, as a rational human, in 2020, the so-called retirement or target year, wouldn’t you intuitively think this fund should be a conservative allocation? Perhaps 30% equities and 70% fixed income? Well, it all depends on a target date fund’s ‘glide path,’ or method of how the allocation is reshuffled the closer the time to the target date. Every fund group differs in philosophy, so you must read the fine print.

For example, the Vanguard Fund takes seven years AFTER 2020 to shift from a 60/40 stock & bond allocation to a 30/70 bond & stock mix. In reality, this is a 2027 fund.

Target date funds are not the best, but suitable choices as most 401(k) participants treat their plans like pensions. In other words, they deposit money into them, ignore allocations and wish for the best. Once money is placed into 401(k) plans it seems to fall into a psychological dark hole and rarely monitored or rebalanced. At least target date funds allocate and rebalance on autopilot (employees don’t need to do anything).

A growing, positive trend – Workplace wellness plans:

According to the Kaiser Family Foundation’s Employer Health Benefits Survey for 2017, 58% of small businesses and 85% of large companies offer health and wellness promotion plans which include smoking cessation, weight management, behavioral and lifestyle coaching. It would be shortsighted to ignore enrollment in these programs. Why?

Per Kaiser:

“Fifty-two percent of large firms with a health risk assessment program offer an incentive to encourage workers to complete the assessment. Among large firms with an incentive, the incentives include: gift cards, merchandise or similar incentives (50% of firms); requiring a completed health risk assessment to be eligible for other wellness incentives (46% of firms); lower premium contributions or cost sharing (46% of firms); and financial rewards such as cash, contributions to health-related savings accounts, or avoiding a payroll fee (40% of firms).”

Keep in mind, most wellness programs are offered throughout the year. However, many employees seem to focus on them on a limited basis or during open enrollment in November.

As I mention often, an employer’s benefits program is the first line of defense against financial vulnerability.

If you require an objective assessment of your employer’s benefits package and how to maximize options, do not hesitate to reach out to us here.

3-Steps To A Successful Open Enrollment – Part 1

It’s almost that time again.

Another year, another window of opportunity to select employer benefits options for the upcoming new year.

How do American workers feel about open enrollment season?

According to the latest Aflac Workforces Report, 67% of the 5,000 employees who participated in the study described benefit enrollment as complicated, long or stressful.

Amazingly, 83% of respondents spend less than hour researching available options; 20% do no research at all. An overwhelming 92% are on enrollment auto-pilot, simply choosing the same benefits year after year.

Employees tend to minimize the importance of employer-provided benefits; they rush through the process to ‘get it over with,’ instead of taking time to seek professional advice, whether from a financial planning partner or in-house human resource staff. Thankfully, over the years I’ve been able to assist workers with making the most of their benefits options.

The goal is to perceive open enrollment period as an annual window of opportunity to save money (Aflac found that 55% of workers waste up to $750 by making mistakes during open enrollment), minimize the financial impact of potential catastrophic risk and explore new options especially as employers increasingly shift the burden of rising healthcare insurance costs to employees.

Remember: Your first line of defense against financial fragility is the benefits offered to you by your employer.

November is customarily enrollment month. Before you submit your selections for 2019, take into consideration the following three money-savvy steps:

Embrace a high-deductible health insurance option.

Most likely, your employer has or will offer a high-deductible plan coupled with a Health Savings Account. A high-deductible healthcare plan is defined by the IRS as one with a deductible of at least $1,350 for an individual, $2,700 for a family. A HDHP limits total annual out-of-pocket expenses to $6,650 for an individual and $13,300 for families.

Based on data from the National Health Interview Survey which is conducted by the National Center for Health Statistics, enrollment in high-deductible health plans along with Health Savings Accounts increases with education and income level. Highly educated and affluent adults are more likely to enroll in high-deductible plans with an HSA and less likely to enroll in traditional healthcare plans. Per the long-term financial benefits of HSAs, this statistic makes perfect sense to me.

Unfortunately, future costs of healthcare including that of employer-provided coverage will continue to increase as a result of health insurer losses due to the Affordable Care Act. A growing number of companies are adding high-deductible plans along with health savings account options that need to be considered this enrollment season. This isn’t a trend that’s going away; it’s inevitable, you’ll have a high-deductible plan option if not now, then in the future.

A Health Savings Accounts is a powerful savings vehicle that allows triple tax benefits. Contributions are tax deductible, and if an employee, they’re funded pre-tax from payroll contributions. Growth or income is tax-free (yes, you should have mutual fund investment selections like in a company retirement plan.) Finally – distributions for qualified medical expenses are tax free.

HSA contribution limits (employer and employee total), for 2019 are $3,500 for a single filer, $7,000 for a family. Those over 55 may contribute an additional $1,000 as a ‘catch-up’ contribution.

If you only see a doctor once or twice a year, it may be beneficial to switch to your employer’s high-deductible plan offer with employer match (hopefully available) and save as much as possible in a Health Savings Account.

If you don’t have a high-deductible with HSA option yet, it’s coming. Over time, your employer is going to shift the burden of healthcare premium costs to you, the employee.

Think of a HSA as healthcare retirement plan. It’s not a ‘use or lose it’ account, either like a Flexible Spending Account. In other words, in a HSA, you can stockpile money, allocate across investments, usually mutual funds, allow the money to grow tax-deferred, then withdraw at retirement to subsidize rising healthcare costs or even pay Medicare premiums.

For a couple retiring in 2019, lifetime healthcare costs are estimated to be $280,000 based on Fidelity’s latest report. A third of the expenditures will be Medicare Part B premiums. In my opinion, healthcare costs are difficult to assess but one thing is certain – the healthcare cost burden is rising.

A study published in the Journal of The American Heart Association outlines that making time for exercise pays off. Literally. Researchers discovered how walking 30 minutes five days a week can save people $2,500 a year. A positive, monetary outcome of reduced medical expenditures.

There are documented benefits of fully funding a HSA as a priority. Even over a company retirement account as HSA benefits may be pre-tax, grow tax-deferred, and withdrawn tax free. A strong combination that does not exist in other savings and investment vehicles.

At Clarity, we advise workers to prioritize HSA contributions over retirement plan contributions, especially when employer 401k matches aren’t provided. According to healthcare account investment expert Devenir, an increasing number of employers are contributing to their workers’ HSAs. Per the Devenir Midyear HSA Research Report, nearly 32% of all HSA dollars contributed to an account came from an employer with the average contribution at $658.

This is going to sound counterintuitive, however, consider paying out-of-pocket health insurance deductibles and as many medical expenses as possible with after-tax dollars thus leaving savings in an HSA to accumulate long-term for medical, dental (Medicare doesn’t cover dental FYI), and vision treatments in retirement. Health Savings Account dollars may be allocated across mutual funds; accounts can’t be lost in the case of job loss and transportable to another HSA custodian or rolled over to a new HSA provider every 12 months.

Thoroughly understand your Flexible Spending Account options.

For comparison purposes, consider FSAs the ‘smaller sibling’ to the HSA. A Flexible Spending Account or FSA permits the accumulation of pre-tax dollars (although not to the extent allowed in HSAs) and allows tax-free distributions for healthcare, dental or vision expenses.

Unlike an HSA, FSA balances must be used by December 31 every year. Now, an employer may allow a grace period or carry over of $500 for 2 ½ months into a new year, however the general mandate is use it or lose it by the end of the calendar year. October is a good month to assess healthcare spending for the new year as to not overcontribute. Currently, an employee may sock away $2,650 annually that may be used for an individual or family.

Generally, employees are not offered both a HSA and FSA. Employers may compliment a HSA with a limited-purpose FSA, a type of Flexible Spending Account which allows tax-free withdrawals based on specific types of healthcare expenses like dental and vision.

A dependent care FSA is a pre-tax account that may be used to pay or reimburse for services such as child day or dependent adult care services. Employees eligible to claim disabled family members, elderly parents and children for tax purposes, can take advantage of this employer-offered benefit.

The current maximum contribution is $5,000 a year per household. With average national in-center child care costs running $9,589 annually according to Care.com, the ability to cover more than half these expenses tax free is a tremendous advantage.

What about employer long-term disability coverage?

Statistics outline that one out of four workers will become disabled before they retire.

Long-term disability insurance provides a level of income protection during extended periods if sidelined from working, especially at an employee’s own occupation. It’s one of the most inexpensive, comprehensive benefits employers provide yet I find many forgo signing up as they believe a long-term disability will never occur or healthcare insurance takes higher priority in the family budget. I observe this behavior especially with Millennial employees who ironically, haven’t yet built the financial stability necessary to withstand a long-term disability.

Without long-term disability coverage, a household is going to need to prepare to shoulder the financial burden of making up a gap in household cash flow for as long as a long-term disability exists. Or until the wage earner can return to his or her own occupation or at the least, any occupation, depending on how severe the disability may be. In some cases, LTD insurance payouts will last until the insured reaches age 65. On average, a long-term disability lasts two years.

Employer long-term disability generally offers varying levels of coverage, from a minimum of 20% of monthly salary, to the maximum which is closer to 65%. Keep in mind, these benefits if paid with after-tax dollars, would be paid received tax free, so receiving 60% of income isn’t as austere as believed.

At Clarity, we advise every employee to take advantage of maximum coverage. No excuses. Unless you have a decade’s worth of emergency cash for living expenses or invested enough for large expenses like a child’s college education, it isn’t worth passing on coverage.

In Part 2, I’ll review several of the lesser-known employer benefits workers should consider for 2019.