ARP’s Get a Level Playing Field

PLANSPONSOR just reported on: The Department of Labor (DOL) has issued a final rule to help more employers offer retirement savings benefits through ‘Association Retirement Plans’ (ARPs).

The rule, which will go into effect on September 30, will permit employers to connect with associations of employers in a city, county, state, or a multi-state metropolitan area, or in a particular industry nationwide to provide retirement plans for their employees. The DOL says the rule will allow small and midsized plan sponsors to offer competitive benefits packages similar to those of larger organizations, a resource usually unattainable for smaller businesses due to high costs and overwhelming paperwork.

“Less than a year ago, President Donald J. Trump signed an Executive Order focused on expanding quality, affordable workplace retirement plan options for America’s small businesses and their employees,” said Acting Secretary of Labor Patrick Pizzella. “Many small businesses would like to offer retirement benefits to their employees but are discouraged by the cost and complexity of running their own plans. Association Retirement Plans offer valuable retirement security to small businesses’ employees through their retirement years.”

According to the DOL under the rule, retirement plans may also be sponsored through professional employer organizations (PEOs), third-party human resources providers offering services to small and midsized plan sponsors. The DOL adds that the rule creates a safe harbor for PEOs, which offers clarity in administering retirement plans and in their role as PEOs. This includes “recruiting, hiring and firing workers of its client-employers that adopt the MEP [multiple employer plan],” and assuming “responsibility for and has substantial control over the functions and activities of any employee benefits which the service contract may require the PEO to provide”.

With ARPs, businesses can join retirement plans without sorting through the filing and administration burdens, as the association handles this on behalf of small plans.

First State Trust Company is a directed trustee, custodian and paying agent for both traditional Defined Benefit Plans as well as Multiple Employer Plans. For more information, please feel free to contact us.

David Draper, Chief Operating Officer

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

August 6, 2019

After experiencing the worst quarterly performance since the financial crisis to end 2018, the S&P 500 has rebounded sharply posting positive returns in 5 of the first 6 months of the year and returning over 20% through the end of July.  Returns were bolstered by better than expected earnings and GDP growth in Q1, and also by the Federal Reserve’s pivot to end their rate hiking cycle in December and just recently opting to cut rates by 0.25%.

The Fed’s quick change in stance came as a surprise to economists, many of whom were projecting 2-3 additional rate hikes in 2019.  Their decision is definitely curious when you look at the data around two of the Fed’s primary mandates: controlling inflation and promoting maximum employment. Inflation has been at or below the Fed’s stated target of 2%, and unemployment has dropped to a 50-year low of 3.7%.  Additionally, there have been other positive signs in the economy including strong corporate earnings (77% of S&P 500 companies that have reported Q2 earnings through the end of July had a positive EPS surprise according to Factset) and consumer spending rose at an annual rate of 4.3% in the 2nd quarter, or the highest since 2017. 

So why did the Fed decide to cut rates despite all this positive economic data?  One rationale is that it was a proactive measure to lessen the risk of a recession in the US given the economic slowdown that has affected other developed nations around world.  While market performance and current economic data has been positive, the Fed’s actions are based on their forecasts and future projections on the direction of the economy.  Based on their comments those forecasts have been showing some potential headwinds for the US economy including the slowing growth abroad in areas like China and Europe.  Another reason for the rate cut is that many Fed members place particular importance on the term structure of the treasury yield curve, and believe that maintaining an upward sloping curve is critical for ensuring economic stability.  As you can see in the chart below, the 3-, 5-, and 7-year treasury yields were below both the 3-month and 1-year yields as of June 30, 2019.

 

Chart 1

 

While portions of the yield curve have inverted, the measure that many economists watch closest and tout as a recession indicator, the spread between the 10- & 2-year treasury yields, has yet to invert.  It’s a focus because that particular spread has inverted prior to the last four economic recessions.  If you’re a believer in that measure as a leading indicator for recessions, then there is good reason to believe there is a low risk of a recession in the US over the next 12 months.  The chart below demonstrates the timing from when those yields have inverted and the US enters a recession, which on average has been 14 months.  As of writing this, that spread has narrowed to +0.11% and the 10-year treasury is at its lowest level since 2016, so it will be something to watch.

Chart 2

While there certainly are risks facing the global economy that could have a negative impact on US equities, there are also cases to be made for further upside.  It’s true that this has been one of the longest expansions in history, the S&P 500 has more than tripled since the financial crisis, and equity valuations are slightly higher than their historical averages (fwd PE was 16.74x at 6/30/2019 vs the 25-yr average of 16.19x).  But environments like the one we are in currently with low inflation, low interest rates, and low treasury yields support even higher valuations and make equities more attractive.  It’s important to remember that the overall economy and markets are linked, but it’s the market participants which drive asset prices.  For those investors charged with the decision on where to allocate capital for themselves and their clients, traditional alternatives to equities look much worse than they have in other periods.  For example, the 10-year treasury yield is now well below 2%, and prior to the financial crisis that yield was over 4%.  The same can be said for corporate bond yields as well with the BC Aggregate Bond index only yielding around 2.4%. 

It will be important to watch the various risks that are present: slowing GDP and earnings growth, continued trade tensions with China, political instability in the US and abroad, and a slowdown in aggregate demand globally.  Thus, amongst these risks and uncertainty, it’s more important than ever to remain diversified and be prepared for the range of possible scenarios that may play out in both markets and the global economy. 

 

Andrew Gibson, CFA

 


The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

 

The First State is still the Best State

You often hear that Delaware is a “trust friendly state.”  The reason is because Delaware has focused on generational planning for high net worth families.  It has enacted fiduciary laws to allow for modifications within irrevocable documents.  It allows for trust assets to pass from one generation to the next in perpetuity.  It also defines what duties are performed by a corporate trustee versus individual advisors.  For example:   A grantor can appoint family members to be Trust Protectors with the role of changing trustees or amending irrevocable trust documents should there be changes in laws that would be advantageous to the family. Your trust can name Distribution Advisors to make distributions to family member’s or charities without specifying an amount.  The benefit is to allow for the changing needs of future beneficiaries or charities that are no longer in line with the family’s values. There is also a benefit to naming Investment Advisors.  An example of that is to instruct the trustee to hold a concentration of stock or closely held business interest.  Many families that I have dealt with, have had and wanted to continue to hold onto Coca-Cola stock.  A corporate fiduciary is typically required to sell down concentrated stocks that family members may want to hold onto.  By naming an investment advisor in your trust, the investment advisor could instruct the corporate trustee not to sell certain stocks.

Delaware law also allows for Non-Judicial Settlement Agreements.  This Agreement keeps family members and trustees from having to go to court for permissible modifications to a trust document. Through the use of a Non-Judicial Settlement Agreement, whereby all parties agree to certain changes, you can make a restrictive document more in line with the needs of current beneficiaries.   

A number of other states have followed Delaware’s lead in fiduciary planning, but Delaware was the first state to enact such favorable fiduciary laws.  There are numerous other reasons why individuals choose Delaware for their estate planning needs.  At First State Trust Company we administer both personal and institutional trusts and can help you navigate the many issues surrounding trusts.  Please let me know how I can help you with your estate planning needs.  Contact me at:  tmitchell@fs-trust.com.

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

End of the IRA Trust?

Recently the SECURE Act (Setting Every Community Up for Retirement Act of 2019) passed the House but the Act is currently stalled in the Senate.  It is expected to pass once a few provisions are ironed out.  One of the provisions in the bill does away with the ability to stretch your IRA after death over the lifetime of a designated beneficiary.  The “stretch” IRA is eliminated and is replaced with a requirement to pay out the IRA over a 10 year period - with a few exceptions.  RMD also gets bumped from age 70.5 to 72.

This severely hampers the benefits of IRA Trusts. The conduit trust is effectively eliminated and the discretionary trust becomes much less efficient.

There are still some options to help clients especially if they have a Roth IRA (no RMD requirements) or can convert to a Roth, want to set up a charitable trust or can qualify for life insurance.

Likely, more to come on this topic, especially if the SECURE Act is passed.  Regardless, FSTC will be able to help navigate the options.

Please reach out to our Business Development Officers for details.

Jim Okamura, President FSTC

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

One of the most important tools in your shed: The Follow Up

How do some people get things done while others don’t?  Don’t we all have the same 24 hours in a day?  What separates the successful from the rest of the pack?  How do you get people to respond?

I’ve come to realize that though the answer is pretty simple, most don’t do “it.”  You control it, it doesn’t cost anything, it doesn’t take much time or effort.  What is “it?"  It’s: the follow up.

No that is not a typo.  It is the FOLLOW UP!  Following up with the person, team, department, group or company that you wish to receive an answer, get a response from, develop a relationship with, win business is key to success.  Very often, our daily responsibilities require receiving information from another party.  We cannot complete our task until that information is received.  We are often dependent on others to perform a task.  We send an initial request and then either forget to, or don’t bother to, follow up with the person whom you requested information from.  Thus, your task or responsibility does not get completed. 

We have all heard stories of persistence paying off.  The business owner who grants the interview to the kid who contacted him every other day for a year.  The sales person who followed up months or years after initially not winning the business.  The relationship that was developed after initial non-responses (just ask my wife 😊). 

More often than not, the person you are waiting for became sidetracked with other priorities and just needed a gentle reminder.  “Hello, just following up with you on……” or perhaps “Hello, I recognize this is likely a busy time of the month for you, is there a particular time I could reach out to you to move this forward?”  That’s usually all that it takes.   Other times the request can be deeper and requires additional reminders and inquiries.  Let’s call that nudging.  But in the end, you get your response and you complete your task.

In business, a follow up every 2-3 days is sufficient.  I get it!  You don’t want to be a pest!  So let the situation dictate the frequency and need for the follow up.  Also, in this age of texts and emails, let’s not forget the power of the phone call!!  (This may be its own blog post later!)

If you observe the successful, they are not afraid to follow up but most importantly, they don’t forget to or leave it be.  Figure out the method that works for you to keep open items at the top of your list.  For some it is a calendar alert or a to do list or perhaps an email in your inbox that stays there until the item is brought to fruition.  This simple task takes rather little time, effort or cost but can be the difference between your success and other’s failures.

Jim Okamura, President FSTC

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.