The Fed: Helping Us Save for Retirement

The government is responding to statistics showing that current generations are not saving for retirement. Unlike their thrifty parents, many baby boomers are alarmingly ill-prepared for retirement. Many other employees are more focused on present financial needs than future ones. The implications of generations of people who are unable to work–but without resources to live–present a potentially overwhelming burden on the government. Finding ways to help people prepare for retirement is in everyone’s best interest.

The recession gave birth to entrepreneurs and consultants

Remember the recession? Those who couldn’t get jobs started their own businesses. They learned they couldn’t depend on someone else for a job. This was especially true for older workers. Companies were looking for a younger, cheaper workforce. There’s a good chance those companies are not providing retirement plans, that they’re outsourcing work rather than hiring employees and having to pay for benefits.

• A study shows that only 51% of Americans are employed by companies withretirement plans.
• Of those employees, only 40% actually participate.
• In addition, experts say one in three Americans has less than $5,000 in retirement savings and 21% have none.

Financial planners recommend seniors save $1M before retiring

Because life expectancies are much longer than they were for previous generations, financial planners recommend that seniors save a minimum of $1 million before retirement. Clearly, many are falling short of that goal. In an effort to change this gloomy retirement forecast, the U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The bipartisan bill attempts to address the financial readiness of seniors for retirement.

The SECURE Act:

• Encourages small businesses to offer employee retirement plans.The bill lets small businesses cut through administrative red tape and ignore certain legislative mandates to tailor retirement plansto their needs. It also permits multiple small employers to band together and create 401k plans. Under the bill, some part-time employees may also have access to employer retirement plans.
• Permits retirees to accumulate more retirement savings over a longer period of time. The bill raises the required minimum distribution age for retirement plans from 70.5 to 72. In addition to permitting retirement plans to earn more over an extended period of time, the bill will also make retirement savings last longer. The year-and-a-half delay in distributions will result in a larger retirement account and prevent seniors from spending their savings sooner.
• Removes the age limits on contributions to IRAs.Previously, no contributions were permitted after age 70.5. The bill removes that restriction.
• Creates more payout options for annuities purchased through employer retirement plans.The SECURE Act would permit lifetime-income investments, such as annuities, to be paid out in monthly installments as well as in a one-time lump sum.
• Changes payout options for beneficiaries of retirement plans. Currently, beneficiaries of retirement plans can stretch out distributions over their expected lifetimes, permitting the funds to continue to grow tax-free. The SECURE Act eliminates this stretch-out option, requiring that nondesignated beneficiaries, such as Trusts, receive all retirement benefits within five years of the retirement fund owner’s death.
• Expands the use of 529 account funds.The House Ways and Means Committee removed a provision that would permit beneficiaries of 529 college saving plans to use such plans to pay for homeschooling, special needs students, and private education. However, the new bill does authorize penalty-free withdrawals of not more than $10,000 to pay for certain student loans and apprenticeships.

The U.S. Senate is considering its own financial retirement measure—The Retirement Enhancement and Savings Act (RESA similar to SECURE). The differences lie in proposed changes to the stretch-out rules. There is bipartisan support for the SECURE Act; it passed by 417 to 3 votes in the House and has the greatest chance of being enacted. The act must pass a vote in the Senate to become law.

Creating a Living Trust is an important part of financial planning

California Document Preparers assists our clients in the preparation of their Living Trusts. Our Living Trust portfolio includes a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

Peter Rothstein likes that his job has a social purpose. It expands clean energy to mitigate climate change. Best of all, he will soon be able to support that mission in his retirement plan. Socially conscious investing is gaining ground.

Identifying 401k offerings that support environmental, social and governance (ESG) factors

The Northeast Clean Energy Council, where Mr. Rothstein is president, will revise its 401k plan offerings to include mutual funds promoting those sustainability goals. The revamped plan will include a target date fund series that screens for environmental, social and governance factors, called ESG investing. The council, a nonprofit business alliance of 250 companies, will continue to offer traditional choices such as total-market index funds, but the ESG option will be the default investment choice for Mr. Rothstein’s staff of about a dozen employees.

“These new business models have the potential to be climate solutions and to grow the economy at the same time,” he said. “It makes sense for us to incorporate ESG investing for our retirement plan.”

The idea of investing with a social purpose is gaining ground

• Sustainable and responsible investing in the US grew 38% from 2016 to the start of 2018, to $12 trillion in assets under management, according to the US Sustainable and Responsible Investment Foundation (SIF). SIF is a US-based membership association that advances sustainable, responsible and impact investing across all asset classes.
• Morningstar reported that 2018 marked the third consecutive year of record flows into sustainable funds; the number of sustainable funds also jumped nearly 50%.

Most sustainable investments are held by institutional and high-net-worth investors

US SIF data showed that of the $12 trillion invested last year, 72% was held by pension funds, insurance companies and educational and philanthropic groups; 25% by high-net-worth clients or individual investors.

Many think 401k plans will play a larger role in ESG investing, driven partly by demand

• A Morningstar study published this year found that more than 70% of the US population has “at least a moderate interest” in sustainable investing.
• The appetite is especially strong among younger workers: 67% of millennials would be more likely to contribute, or increase their plan contributions, if they knew their investments were contributing to social good.

Most ESG mutual funds rely on ratings systems that score securities for their exposure to indirect financial factors, including a company’s environmental impact, governance policies or how they treat employees or monitor their supply chains.

Critics argue that investors must sacrifice strong returns in return for their socially responsible choices. But a growing body of evidence finds that ESG-screened equities were better than average on measures of quality, financial health and volatility.

A look at San Francisco’s Veritable Vegetable

Veritable Vegetable, an organic produce distributor in San Francisco with about 130 workers, has included socially responsible mutual funds in its 401k plan since 1995. “Since the beginning, we’ve been committed to promoting environmental sustainability in everything we do,” Shira Tannor, the company’s chief administrative officer, said. “We have a different vision of what profitability means,” Ms. Tannor said. “We pay a good living wage to our workers, and sustainable prices to the farmers we work with, and we help people eat healthy food. We’re a for-profit business, but if we have nothing left over after that, we consider that a success.”

Evidence that ESG can match or beat traditional investment options is sparking interest

“We’re getting more questions from plan sponsors — they’re asking if they should be adding this to their investment menus,” says Mikaylee O’Connor, head of defined contribution solutions at RVK, a New York-based investment firm that advises workplace retirement plans. “What’s driving many of the conversations is more research that supports consideration of sustainable investing.”

Fiduciary responsibilities come first

Federal law mandates that sponsors place economic interests of participants ahead of other considerations when making decisions about retirement benefits. But guidance issued in recent years by the Labor Department on whether ESG products meet that obligation has shifted repeatedly.

Some senior managers view their 401k plans simply as a cost center, rather than as a way to promote company values or retain employees. Mr. Rothstein, however, remains bullish. His council’s shift to a socially responsible 401k plan was resonating with employees. “Everyone working in this industry, and more people in general, are recognizing that this matters,” he said.

Creating a Living Trust is an important part of financial planning

California Document Preparers assists our clients in the preparation of Living Trusts. Our Living Trust portfolio includes a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.