Laura H. Stover Financial Group LLC

The battle rages on. Legislators are loath to extend the payroll tax cut when there is no formalized plan in place to reduce government spending. The fact is, American taxpayers will have to absorb the cost of the government’s excess deficit either through more taxation or reduced entitlement programs…or both.¹

One area getting a good look is the tax-deferred status of employer-sponsored 401(k) contributions. That’s the bad news – and we’ll get to that in a bit. But first, some good news.

Spread the Wealth

There is recent evidence that employers are actively supporting worker’s retirement savings by restoring plan contributions that were suspended or reduced since the beginning of 2008. In fact, about 12% of plan sponsors have increased their employee contribution match or added a matching contribution. Many are revamping or adding to their investment options to strengthen performance potential for their plans’ returns.²

Apparently, this resurgence is unprecedented. So much so that the president of the Plan Sponsor Council of America observed that he has “not seen anything like this in 25 years of working with plan sponsors.”

[CLICK HERE to read a press release on the findings of the Plan Sponsor Council of America’s latest survey: 401(k) and Profit Sharing Plan Response to Current Conditions; November 29, 2011.]

More Good News: The Message to Save is Resonating

According to the same survey, about 40% of employer plans reported an increase in plan participation, up from a mere 3.9% increase in 2009.¹ And here’s an interesting tidbit: 23% of Gen X (born 1965-1980) and 25% of Gen Y (born 1980s-90s) and are funding both a 401(k) or 403(b) plan and an IRA – compared to only 16% of baby boomers.³

[CLICK HERE to read more about the results of the TD Ameritrade Survey from Reuters.com; December 20, 2011.]

401(k) Contribution Tax Debate

One of the tax issues up for debate is whether employee 401(k) contributions should be tax deductible. If that were to change, 401(k) investments could be taxed both before and after taxes, just like other taxable investments. Chances are this would apply only to new contributions – so any balance already in your plan would be taxed only at distribution.

The proposal has lots of opponents, as you can imagine. The Employee Benefit Research Institute (EBRI) reports that such a move would cause many lower-income workers to either decrease or discontinue contributions altogether. High-income earners wouldn’t be happy about it, either. It is also commonly noted that while the government may generate short term revenue by removing the tax deduction, it would likely see a decrease in long term revenues because lower contributions are likely to yield lower long-term investment returns (and, thus, taxable amounts) when distributions are made in retirement.

Another proposal recommends making employer contributions taxable and replacing the employee current 401(k) deduction with a flat-rate refundable credit (of either 18% or 30%) deposited directly into the employee’s account. This would save money for the government but cost employers more – many may even stop offering a retirement plan as a result.

[CLICK HERE to read “The Next Big Threat to Your 401(k): A Tax Break Shake Up;” at AOL’s DailyFinance.com; September 22, 2011.]

[CLICK HERE to read the Brooking Institution’s proposal to Restructure Retirement Saving Incentives; September 8, 2011.]

One of the advantages defined contribution plans (401k) offer over defined benefit plans (pension) is that Americans are better able to control their investments and their future, rather than depending so much on an employer. If you’d like to explore other ways you can save and invest for retirement with less reliance on the government or your employer, please give us a call.

¹Payroll Tax-Cut Extension Sets Up 2012 Fight Over Longer Plan. Litvan, Laura. WEBhttp://www.businessweek.com/news/2012-01-05/payroll-tax-cut-extension-sets-up-2012-fight-over-longer-plan.html

² Plan Sponsor Council of America; 401(k) and Profit Sharing Plan Response to Current Conditions; November 29, 2011.

³ TD Ameritrade Survey; December 20, 2011.

Here’s a story that’s been going on in the background for a few years now. The government is threatening to cut Medicare payments to doctors by 27%.¹

Already, doctors offices throughout the country are limiting how many Medicare patients they can take. Today, for most doctors, taking on Medicare patients at all represents a financial loss in their practice.²

If you reduce what Medicare pays even further by 27% (or any percentage for that matter), you may see a mass exodus of doctors leaving the business of treating anyone on Medicare. That means if you are over age 65, you may have a hard time finding a doctor. If you think it takes too long to see your doctor now (or a specialist), well, just wait and see what this could do to you!

Now, let’s all understand that Medicare is a complete debacle. It provides huge amounts of healthcare for very little out of pocket dollars for retirees. From a financial perspective, it may be the dumbest thing our Government has ever done. It has to be fixed and it needs to be fundamentally changed.

With that being said, the fix doesn’t come from punishing the providers. It comes from changing the costs and benefits. Simply put, we need to pay more and get less for Medicare to continue. Without that, Medicare will fail.

David Walker, former head of the GAO (General Accountability Office) was interviewed by 60 Minutes in March of 2007. In that interview, he said that the Medicare system as currently structured will sink our country financially. It’s blowing up in our faces right now.

The bottom line…be prepared to pay more for your healthcare in the future, and maybe a lot more.

¹ http://www.bloomberg.com/news/2011-12-20/doctors-27-medicare-pay-cut-won-t-be-unlinked-from-tax-bill-in-u-s-house.html

² http://hotair.com/archives/2010/06/21/shocker-doctors-taking-fewer-medicare-patients/

Do you feel like the stock market is on a roller coaster?  Economic fundamentals, earnings and dividends do not change dramatically enough over the span of a couple of days to generate the type of volatility we have seen recently.  While fundamentals may not change that quickly, headlines do. Given the current polarization in the media and in Washington, the markets have also taken on a binary outlook…everything is either black or white. While good news tends to rally the market in a positive direction, the bad news tends to bring it right back down.  

Since the U.S. debt downgrade on August 5, the average length of a directional trend of the market has been a mere three days, and then it reverses again. Stock prices, on average, have generated a gain or a loss of approximately five percent over the average three-day period.  This volatility has certainly been cause for concern with both investors and portfolio managers.  The result?  Global investors have become risk averse, something we have not seen in more than 30 years.

As a result of the dramatic economic crash that began in 2008, we now see a more conservative social attitude, one in which people are generally more risk averse.  I believe we are in a new era for investing.  The world is more globally connected and world headlines are causing significant swings in the market.  In this environment, pre-retirees and retirees should consider reevaluating their investment philosophies.  Understanding how to preserve principal and secure a retirement income is critical, as time is no longer on a retiree’s side for enduring significant market losses. 

But there are additional key components to consider as well.  Asset preservation has become a greater priority than growth.  A retirement income plan should not be too dependent on the market performing well, interest rates returning to attractive levels, or real estate prices making a big comeback. Also, remember that Wall Street is trying to turn a profit, so be aware that within various funds or products themselves there could be internal fees, many that are not always disclosed in the prospectus.  In addition to risk, these fees may drain the value of your retirement assets too.  

When approaching retirement, is it important not to become complacent and just accept that the market has not performed well over the last decade.  Reevaluate your investment philosophies and attitudes by gaining a comprehensive understanding of these key components, how they may be affecting your assets, and assess the amount of risk within your financial portfolio.  If you are a pre-retiree who is within that retirement red zone of five to seven years before retiring, these components can significantly role affect the amount of retirement income that will be available when you will need it the most.

Some market bears think very little has changed. They could be right.

Memories of 2008 are still fresh: The credit crisis; the collapse of Lehman Brothers and Washington Mutual; the federal takeover of Fannie and Freddie; the market downturn. There’s little doubt Wall Street would like to erase it all from its conscience, and maybe it has.

Part of the anger of the Occupy Wall Street movement comes from the perception that nothing has changed. While the Dodd-Frank Act (designed to make the financial system more accountable and transparent) is now taking effect, the Volcker Rule (intended to stop banks from trading for their own accounts) may be watered down or put off. Beyond that, the U.S. economic recovery from the Great Recession has sputtered and made people question the recent bullish sentiment.

Stocks have rebounded strongly since 2009, but there are still many factors to worry about; this may lead to a little contrarian thinking.

This bull market may be a diversion from a secular bear market. For most of 2011, the S&P 500 has been above 1,200 (a great rebound from the March 2009 low of 676). What was behind that? The short answer: a weak dollar. We haven’t exactly had a boom economy in that timeframe.

Some analysts look at Wall Street right now and see a rerun of the 1970s, when you had momentous rallies masking a bear market that went from 1967-82. In addition, researchers at the Federal Reserve Bank of San Francisco are concerned about the possibility of a generational sell off; a potential market “headwind” for 10 or 20 years stemming from greying Baby Boomers getting out of stocks as they get closer to retirement, countered only partly by overseas investment.

What has changed on Wall Street since 2008? Perhaps not much. The general perception that the CEOs of the big investment banks and mortgage companies whose thoughtlessness contributed to the Great Recession met with no real consequence seems to be taking hold, as evidenced by the Occupy Wall Street movement.

By the way, remember the furor directed at risky derivatives trading? In September 2011, the Comptroller of the Currency had recorded an 11% year-over-year increase in derivatives investment in the banking industry. Banks now hold almost $250 trillion of the contracts.

A truly severe punishment of Wall Street would come at a dear price for Washington. Some of the biggest names from Wall Street (and the real estate sector) have also been major lobbyists and campaign contributors. According to the nonpartisan Center for Responsive Politics, the National Association of Realtors has contributed more than $40 million to federal-level political campaigns since 1989; Goldman Sachs has contributed almost $36 million since then, and Citigroup nearly $29 million. The financial, insurance and real estate industries have collectively spent over $4.6 billion in lobbying efforts since 1998.

What is happening with the recovery? Not much. While unemployment is above 9%, underemployment is the real story – in September, 16.5% of Americans worked less than 40 hours a week. No wonder homes sit on the market and consumer spending increases mostly in response to rising food and energy prices. Wages even retreated 0.2% in September and incomes fell 0.1% – the first monthly decrease in income since October 2009. Assorted 2012 forecasts see slow or slowing growth in various European and Asian nations.

Is there a bright side for Wall Street? Actually, there could be. The European Union is making decisive moves to address its debt crisis. Indicators still show that our economy is growing, not contracting; September was the best month for U.S. retail sales since March. Many analysts think that the Dodd-Frank regulations will discernibly impact the Wall Street mindset. Lastly, the strength and duration of seemingly every major bull market has been questioned by the bears; history may record that a secular bull market began in 2009, after all.

Only time will tell. Over time, the stock market has faced some great challenges – and risen to meet them again and again. This time around, the hope is that Wall Street’s behavior (and behavioral assumptions) won’t sabotage the rally.

Citations.
1 – money.cnn.com/data/markets/sandp/ [10/13/11]  
2 – moneywatch.bnet.com/economic-news/blog/financial-decoder/jill-on-money-stock-anniversary-mortgages-cash/5308/ [10/8/11]         
3 – montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [10/13/11]      
4 – money.msn.com/retirement-investment/latest.aspx?post=9bb7f5b7-8c8a-4723-a543-7930cb51e2af [8/23/11]
5 – dealbook.nytimes.com/2011/09/23/banks-increase-holdings-in-derivatives/ [9/23/11]
6 – opensecrets.org/orgs/list.php?order=A [10/13/11] 
7 – opensecrets.org/lobby/top.php?indexType=c [10/13/11]       
8 – articles.latimes.com/2011/oct/08/business/la-fi-jobs-report-20111008 [10/8/11]               
9 – businessweek.com/news/2011-09-30/u-s-economy-consumer-spending-cooled-in-august-as-wages-fell.html [9/30/11]            
10 – latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11]

September 15, 2011 the European Central Bank (ECB) announced its intent – through a joint effort with the Federal Reserve Bank, the Bank of England, the Bank of Japan and the Swiss National Bank – to provide US dollars to European banks. This will help beleaguered banks continue operations and lending efforts with adequate liquidity, and temporarily subdue the ongoing threat of defaults in the euro region.

The news of the last two debt packages the ECU granted Greece, Ireland and Portugal created concern among US financial institutions and, in particular, money market fund managers. Reaction against potential overexposure to the European financial institutions bankrolling these countries’ debt led to a sell-off, further exacerbating the ECB’s liquidity issues.

The announcement calls for three separate loan auctions by year end (October 12, November 9 and December 7, 2011) for US dollars at a fixed rate for up to three months, allowing banks to purchase up to the amount of collateral they possess. The goal is to provide banks in the region with liquidity through the end of 2011.
(CLICK HERE for more details at Marketwatch.com, September 15, 2011)
(CLICK HERE for analysis of the Euro debt situation at CNNMoney.com, September 14, 2011)

This aid to European banks is a relatively low-cost instrument in the Fed’s tool chest that can also help enable US companies operating overseas to receive loans from the local banks. The move is largely considered a short-term measure, serving to calm global markets and buy the ECB – comprised of about 15 different legislative parliaments – time to properly address and agree on a longer-term solution.

Initially, there was a cautious wait-and-see sentiment among financial analysts. The fact that these banks united to take pre-emptive action is perceived as a positive sign, although no one seems to be under the impression it would carry significant impact any further than the end of the year. One analyst pointed out that past government stimulus efforts (i.e., US quantitative easing) also provided only temporary relief.

At issue is the fact that globally, growth is slowing down even further, making it difficult to produce real earnings. This is a tough environment to actually make money and create long-term solutions. However, as the coordinated central bank action indicates, perhaps for now it’s simply enough to demonstrate a united front to ward off worse case scenarios.
(CLICK HERE for analyst reaction to ECB announcement, Bloomberg.com, September 15, 2011)

Please feel free to contact us if you have specific concerns about exposure to European financial institutions.¹  We’re happy to discuss alternative options which may be better suited for your goals and risk tolerance.

1Not intended to give tax, accounting or legal advice. Please consult with those professionals to discuss the impact on your unique situation.