The attempt to forge an economic stimulus bill in the Senate goes on. The President is getting impatient and is pushing hard. Harry Reid and Mitch McConnell are giving constant press briefings. A group of “moderates” around Susan Collins of Maine and Ben Nelson of Nebraska are trying to forge a compromise that can garner 60 votes. Everyone agrees that we need to do something to help get the economy moving again. They just can’t agree on what that should be.
The Republicans are strong on tax cuts which have the benefit of delivering their effects fast. The Democrats are pushing spending programs that can have a multiplier effect and thus deliver more bang for the buck. We need both. Small businesses which are the primary driver of new job creation are being hit hard. U.S. corporate taxes are among the highest in the world. What many in Congress can’t seem to figure out is that taxes are just another operating expense for a business. The company doesn’t pay taxes, the people that purchase its products pay them.
On the other hand any stimulus bill should include some spending programs. The multiplier effect notes above is one reason but not the only one. We need to spend (read invest) more in infrastructure. At all levels of government spending on infrastructure, whether road repair locally or building a more efficient national electrical grid has been the poor step-child for far too long. In the normal course of events, politicians spend money on things that help them get votes. Unless a bridge collapsed last week, entitlements trump infrastructure every time a budgetary choice has to be made. So let’s take advantage of the current situation and include some important infrastructure spending in the stimulus.
There is one other approach to stimulating the economy that nobody has mentioned yet: regulatory change. Anyone in the retirement plan business knows that when there is a change in the law or regulations, you get busy. It may be helping sponsors bring their plans into compliance (witness all the activity in the 403(b) market over the past year) or adding new plan features such as automatic enrollment or target date funds. All of this acts to spur business activity. And I’m sure there are parallels in other industries. Instead, we have a 60 day hold on any regulatory changes so that the new administration can review them. Identifying regulatory changes that can generate business activity and putting them on a fast track approval process can add another multiplier effect into efforts to stimulate the economy.
Well, we're one week into the new administration and what have we learned so far? The President appears to have his primary focus on the economy, where it should be. He has had a number of meetings with congressional leaders of both parties and it appears that the proposed stimulus package will be close to what he wants. Reports are that the President wanted 75% of the total stimulus to get into the economy by September 2010. As things stand now, it appears that he will wind up with slightly less, about two-thirds, of the spending falling before that date. As things usually go in Washington, this might be called a victory.
The initial report on the stimulus package issued by the Congressional Budget Office (CBO) stated that only 38% of the money appropriated would be spent early on. This analysis however was based only on the spending programs contained in the overall package. It omitted the tax cuts, unemployment benefits and state aid portions of the bill. A second report from the CBO explains the difference. It notes that the money appropriated for these purposes will get into the economy much faster. In fact about 85% of those dollars will be spent before September 2010. When combined, the overall result is the two-thirds, or more precisely 64%, of the overall stimulus package that will be put to work in the economy before 2010.
As noted above, that might be called a victory. Might. The problem is those infrastructure and other spending programs. The danger in electing any Democrat to the presidency was always that after twelve years of Republican control of the House and then two years when President Bush and the Republicans in the Senate could veto or block their efforts, the Congressional Democrats would ride roughshod over whichever Democrat was elected. I'd be more comfortable if President Obama had been able to hit his 75% target. As it is, the question of who will be the primary driver of spending decisions over the next four years is still up in the air.
Just when retirement plan participants all across the country are opening their year-end statements and learning the true extent of the damage to their accounts, we have a new president take office and, as is customary, put a delay on all new final regulations pending review by the new administration. The specific regulation in question here is the final rules regarding investment advice for retirement plan participants. In addition, Congressman George Miller, chairman of the House Education and Labor Committee has indicated strong opposition to the rules and said he will work to block implementation of the rules as written.
Spectrem Group has been conducting market research among plan participants for more than 15 years. One finding from this research that have been consistent over that time is that many participants want advice and help with making the decisions about how to invest their retirement savings and their preferred approach for getting this help is face-to-face with a financial advisor. The Pension Protection Act of 2006 sanctioned the delivery of investment advice in this way. A plan sponsor could enter into an arrangement with a "fiduciary investment advisor" and make advice available to participants subject to certain rules. To date, less than one-quarter of plan sponsors have added this type of investment advice program to their plans. Other provisions of the act, automatic enrollment in particular, have seen much a greater adoption rate. The lack of final regulations would appear to be at least part of the reason for the lower adoption of investment advice.
There may be very good reasons for looking at the final rules on investment advice again. Congressman Miller may have a better answer. But in the meantime, participants have to figure out how to address the losses they have suffered to date on their own. Somebody needs to get moving. Once the final rules are in place, plan sponsors are more likely to offer an advice program in their plans and participants will be able to get the assistance they want.
I read yet another article today about the Bernie Madoff scandal. This one was concerning the fact that a pension plan, that lost a sizable amount of money because of its investment in a Madoff fund, fired their consultant. It got me to thinking that I haven't seen much about the fallout on advisors from the Madoff mess. And that got me thinking about the processes that advisors use in conducting due diligence on the investment managers they recommend to clients.
If one considers Madoff just another managed account provider, he falls into a category that advisors recommend to their clients all the time. And if you consider how many RIAs are out there offering investment management services, probability would say that it's likely he is not the only crook in the neighborhood. Finally, Madoff is proof that being big is not a guarantee that the manager is honest, or for that matter, competent.
Clients look to their advisors to be the industry insider; the one who works full time in the investment business and knows who the players are, what each does well and can match the objectives of the client with the capabilities of the manager. If clients were satisfied relying on just the large household names, they wouldn't need advisors. If advisors didn't search out the start-ups and boutiques, there wouldn't be any firms that over time might grow into new household names.
The combination of the market crash and the Madoff scandal is likely to lead to some changes in the expectations clients have regarding their advisors. The due diligence that an advisor does before recommending an investment manager will become more important. Clients are going to want to be reassured that they won't find themselves holding an empty bag for another con artist. Many will want to know the steps taken to check out the manager. Some will want to see the raw data. Clients are now forewarned, and advisors need to be forearmed with the evidence that will reassure them that the investment managers the advisor recommends are firms they can trust with their money.
Sometime this month, 65 million individuals will receive the year-end retirement plan statements. Given that the largest portion of the decline in the market occurred during the fourth quarter, many participants are going to be surprised at the extent of the damage to their account balances. I'm certain that most advisors have been working closely with their retirement plan clients evaluating the need to add or replace investment options and helping them develop responses to participant concerns. There is, however, one issue that will require special attention: automatic enrollment.
Since automatic enrollment was sanctioned by the Pension Protection Act of 2006, a large number of plan sponsors have added this feature to their retirement plans. A smaller but still sizable number of sponsors also added automatic escalation of deferral rates. Sponsors like automatic enrollment because it increases participant in the plan. Participants appear to like it as well. Spectrem Group research shows that only a minority of those covered have made the effort to decline participation.
Automatically enrolled participants went along with program initially. Soon, however, they will get a statement that in many cases will show a balance that is less than they contributed since being enrolled. The question is, what proportion of automatically enrolled participants are now going to decide to opt out of the plan as soon as possible? And, what are they going to advise their newly hired co-workers who will also be putting money into the retirement plan unless they act to opt out? Advisors need to address this issue with their clients who have implemented an automatic enrollment program. They need to ensure that automatically enrolled participants are counseled about the long-term nature of retirement saving and encouraged to remain in the plan.
In addition to the impact on participants, the current investment climate may discourage some plan sponsors from adding or including automatic enrollment in their plans. Over time this feature will be good for employees and for the company. Advisors need to help their clients and prospects see this.
Blog 
The attempt to forge an economic stimulus bill in the Senate goes on. The President is getting impatient and is pushing hard. Harry Reid and Mitch McConnell are giving constant press briefings. A group of “moderates” around Susan Collins of Maine and Ben Nelson of Nebraska are trying to forge a compromise that can garner 60 votes. Everyone agrees that we need to do something to help get the economy moving again. They just can’t agree on what that should be.
Well, we're one week into the new administration and what have we learned so far? The President appears to have his primary focus on the economy, where it should be. He has had a number of meetings with congressional leaders of both parties and it appears that the proposed stimulus package will be close to what he wants. Reports are that the President wanted 75% of the total stimulus to get into the economy by September 2010. As things stand now, it appears that he will wind up with slightly less, about two-thirds, of the spending falling before that date. As things usually go in Washington, this might be called a victory.
Just when retirement plan participants all across the country are opening their year-end statements and learning the true extent of the damage to their accounts, we have a new president take office and, as is customary, put a delay on all new final regulations pending review by the new administration. The specific regulation in question here is the final rules regarding investment advice for retirement plan participants. In addition, Congressman George Miller, chairman of the House Education and Labor Committee has indicated strong opposition to the rules and said he will work to block implementation of the rules as written.
I read yet another article today about the Bernie Madoff scandal. This one was concerning the fact that a pension plan, that lost a sizable amount of money because of its investment in a Madoff fund, fired their consultant. It got me to thinking that I haven't seen much about the fallout on advisors from the Madoff mess. And that got me thinking about the processes that advisors use in conducting due diligence on the investment managers they recommend to clients.
Sometime this month, 65 million individuals will receive the year-end retirement plan statements. Given that the largest portion of the decline in the market occurred during the fourth quarter, many participants are going to be surprised at the extent of the damage to their account balances. I'm certain that most advisors have been working closely with their retirement plan clients evaluating the need to add or replace investment options and helping them develop responses to participant concerns. There is, however, one issue that will require special attention: automatic enrollment.