Castle Rock Investment Company

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Legislation

State Farm and Edward Jones React to the Fiduciary Rule

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By Mack Bekeza

With April 10th, 2017 quickly approaching, a large number of investment firms and insurance agencies are scrambling to comply with the DOL fiduciary regulation. However, some firms believe they have found a solution to the upcoming rule. Knowing that their representatives cannot put their clients’ interest first, State Farm and Edward Jones have announced plans to prevent their employees from selling mutual funds when the new fiduciary rule takes effect next April.

So how will they be able to do this without significantly reducing their revenue? State Farm plans to only sell and service their mutual funds, variable products, and tax-qualified bank deposit products by a self-directed call center, as opposed to having their agents sell the products directly. In other words, State Farm still wants their customers to purchase these products while being able to avoid liability if the product turns out not being in a customer’s best interest.

Edward Jones’s solution involves curtailing retirement savers’ access to mutual funds in commission based accounts and lowering their investment minimums. Basically, Edward Jones is planning to shift completely into the fee only side of compensation for retirement accounts and allow more investors to move their money to them.

Although it will be interesting to see how State Farm’s self-directed call center will play out, at least they have a strategy to deal with the upcoming rule. As for Edward Jones, going completely towards the fee-only side for retirement accounts is a good move as they are eliminating a major conflict of interest for recommending certain products.

Although there are a number of firms still trying to strategize to comply with the DOL rule, we are still waiting to hear plans of other advisers that sell investments that may not be in their clients’ best interest. However, we will attempt to keep you posted as more firms finalize their strategies.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

The DOL Rule and Why Brokers and Insurance Agents Should be Concerned

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By Mack Bekeza

Are you currently a Registered Representative or an Insurance agent? If so, you will want to keep reading!

As you may know, the Department of Labor will have new regulations in effect on April 10, 2017, which will change how Brokers and Insurance agents conduct business with retirement investors.

For starters, when dealing with retirement investors, the broker or insurance agent cannot receive variable compensation. This means that someone receiving commissions, asset based fees, 12b-1 fees, etc. must create a uniform method of compensation.

Additionally, any investment recommendations must be in the retirement investor’s best interest, meaning that the agent or broker must have a thorough understanding of the client’s overall financial picture and cannot just rely on FINRA’s suitability standards.

Finally, if you still want to receive variable forms of compensation, you must be able to comply with something called the Best Interest Contract Exemption, aka the “BICE.” And, in order to truly comply, you have to be certain that recommending a product that will pay you variable compensation is in the retirement investor’s best interest.

The major caveat with complying with the BICE is that even though the client is fully aware of how you are compensated, if he or she believes the product is not their best interest, he or she can file a lawsuit against you. In other words, you can still sell commission based products, but don’t expect the BICE to bail you out if you are sued!

So, who is considered to be a retirement investor? To make this simple, do you sell or make investment recommendations for the following accounts?

  • ERISA governed Retirement Plans (with less than $50 million)
  • Non-ERISA Retirement Plans (e.g., Keogh, Solo Plans)
  • IRAs
  • Health Savings Accounts, Archer MSAs, and Coverdell ESAs

If you fall into one of these categories, you will want to seek advice on where to go from here! If you reside in the Greater Denver Area, Castle Rock Investment Company and The Law Offices of Ed Frado, LLC are hosting an event to educate Brokers and Insurance Agents on the details of the new DOL regulation on September 20th at Maggiano’s in the Denver Tech Center. If you would like to register, click here

We hope to see you at the event!

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

The People’s Best Interest…The Battle Continues

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By Mack Bekeza

The official ruling for “fiduciaries,” meaning people who are legally bound in the best interest of retirement investors, will not take effect until April of 2017. However, the Department of Labor (“The DOL”) has been bombarded by lawsuits. This brings us to the recent filing from the National Association for Fixed Annuities (“NAFA”) in June 2016 with regards to how the ruling is defining a “fiduciary,” along with other material in the ruling.

Before we get into what exactly NAFA is complaining about, let’s review how the DOL defines a “fiduciary, which is:

“Any person who exercises any discretionary authority or control respecting the management or disposition of its assets or has any discretionary authority or responsibility in the administration of the plan” as well as “any person who renders investment advice for a fee”. [1]

So, what exactly is NAFA complaining about? According to them, “Congress intended ERISA fiduciary duties to apply only to those who participate in ongoing management of a plan or its assets.” As we mentioned in the previous paragraph, this is not the case. NAFA completely disregarded that fiduciaries are those who render investment advice for a fee. Put it this way, an annuity can play a large role in someone’s retirement, so how would selling annuities to people not be considered rendering investment advice?

Another claim made by NAFA was in regards to how the DOL is allegedly “exceeding its authority by imposing ERISA fiduciary obligation on parties to transactions involving IRAs.” Again, NAFA has it wrong. Although investment advisors to IRAs are considered fiduciaries, those individuals are not subject to the same scrutiny that an ERISA fiduciary would be.

This case is an excellent example of how people who work in the commission-based side of the financial services industry are trying to keep their industry alive. They realize that (as of late April 2017) their ways will no longer work for them in the marketplace, so they are desperate to fight this. Keeping things how they are now can lead to many retirement investors losing billions of their hard earned dollars from commissions and expensive products.

Attached is a link to the article that we used as a reference. And, for those who want to see the DOL’s official response to NAFA, click here! However, just a warning, the official response is about 105 pages long.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

[1] As a note, Castle Rock Investment Company falls under the DOL’s definition of a fiduciary for both ERISA plans and IRAs.

Brexit: What’s the Big Deal and What You Should Know About it?

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By Mack Bekeza

As you may or may not know, The United Kingdom (”UK”) has voted to leave the European Union (“EU”). For decades, the UK has argued left and right whether or not their relationship with the EU is worthwhile. Think of this as an old couple who have been constantly bickering at each other and all of a sudden one of them throws water at the other person telling them to take a hike but then asks them if they can still be friends. In other words, the UK will no longer be a part of the EU but still needs them as a crucial trading partner.

In the midst of this, global markets have experienced some wacky volatility. As of June 27th 12 P.M EST, the British Pound was trading nearly 16% less than it did on the previous Friday morning. The S&P 500 has also experienced a 4% decline as of June 27th 12 P.M EST compared to the previous Friday morning, not to mention that the next jobs report is expected to be dismal, causing further volatility. On the other hand, Gold has shot up and Treasury yields dropped as investors flee to safety, this is usually expected when currencies drop drastically like this.

So what does this all mean to us as investors? Is this the beginning of a global recession? The answer is that we cannot make these assumptions just yet. However, it is crucial to remind ourselves that we should invest for the long term and keep in mind our retirement goals. It is also important to keep in mind that this will be a great opportunity for those who Dollar-Cost Average to take advantage of the lower prices as we should expect a rebound to happen eventually. And always remember the famous quote from the British Government during WW2, “Keep Calm and Carry on!”

© 2016 Castle Rock Investment Company. All Rights Reserved. Please share your insights and comments with us at mack@castlerockinvesting.com or call us at 303-719-7523.

Coming Up: Recently Announced Money Market Reform

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Friday, August 15, Michele Suriano (President of Castle Rock Investment Company) and I spoke with an industry insider and expert about the recently adopted SEC money market funds reforms. We covered the following key subjects:

  • Floating Net Asset Value
  • Redemption fees (discretionary and default)
  • Discretionary redemption restrictions
  • Disclosures to retirement plan participants
  • Definition of “retail” MMFs

Look for our blog post Tuesday about the reforms.

Do you have questions about what the “key subjects” even mean? Are you an expert with your own opinion about these reforms? Reach out to me at Katherine@CastleRockInvesting.com! We look forward to sharing more with you.

— Katherine Brown, Research Associate at Castle Rock Investment Company

Water Cooler Wisdom

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By: Katherine Brown, Research Associate, Castle Rock Investment Company

Water Cooler WisdomThe end of the 2nd quarter of 2014 left the global banking sector bracing from the fallout of a weak quarter. In moments of weak growth, we are reminded of the need to diversify our portfolios. Just as it is important to eat a balanced meal, it is important to balance your investment plate.

The US economy grew only 2.9% during the second quarter, which was a result of costly weather conditions, negative global trade relationships, and state and local government spending habits (often due to the extreme weather conditions). An investment portfolio is challenged – but not inherently devastated – by this kind of quarterly strife. For our purposes, more reliable data come from cyclical indicators because they provide more dependable data on economic behavior and trajectory. Capital spending, consumer confidence, orders vs. inventory and PMI indices all indicate good conditions for the economy to pick up. In other words, our markets are doing well, despite the special difficulty in the second quarter.

The Federal Reserve reoriented its goals to respond to the significant gain in jobs this past quarter. Unemployment, which reached 6.1%, is ever-nearing the long-run full employment waterline of 5.4%. While we should expect that economic growth is consistent with unemployment, if we push past full employment at 5.4%, we could face inflation. Instead, the government will work to improve total factor productivity in addition to the labor market’s full employment. This means more capital equipment and greater output per worker.

Since we have already attained 6.1% unemployment, the unemployment goal for 2014, the Fed downgraded the growth forecast for the next year to 2.2% from 3%. The comparison between Inflation and Core Inflation indicates pressures for wage growth and an increase in rental cost that creates a condition where a shift in policy will be necessary. Core inflation is at 1.95%, while bond yields are 0.6%. The economy is tightening and inflation is rising, so long-term rates should go up.

Concerns in the bond market are that Owners of US Treasury Bonds are not as concerned with the pricing of bonds as natural actors would be in an unimpeded market. The Federal Reserve adjusts investments in the bond market monthly through Quantitative Easing (QE2), which is anticipated to end in October 2014. The tapering out of Fed bond purchases means that bond rates will go up. Other distortions in the market will be due to major investors such as the Bank of Japan, which maintains excessive bond holdings that can destabilize the market should it sell off a significant amount. However, these behaviors are unlikely because of the impact it would have on their own economies, not to mention on diplomatic relations.

The bond market is a good place to invest as a defensive structure since a sharp rise in bond yields is unlikely in the future. Quantitative Easing is designed by the Fed to keep bond rates low for the long term, approximately 2% interest rate goals for this coming year. The bond market should be a reliable part of your portfolio this year, but as the economy grows, the equities market will likely exceed bond market growth.

The equities market has the best potential for year-to-year growth, despite holding the greatest risk to investors. The returns and valuations by style indicate the year-to-year earnings remain strong. The fourth quarter has the greatest potential to be the strongest of all this year. Overall recovery from 2009 market lows indicate continued recovery as the expanding data available to research stable market activity show greater returns, but do not indicate bubbles similar to the boom and bust of the last recession.

The rise in interest rates and confidence show that both should rise even further over the next 12 – 18 months, although cyclical sectors are best offset by investment in 10-year treasury bonds as a stabilizing measure to varying performance in equity markets.

Other economies spent the last quarter dealing with their own problems. In a unique twist, the EU’s growth was softened by France’s macroeconomic strife, while the European periphery provided the hopeful signs for growth. China picked up market growth after a rough first quarter, as Japan similarly indicated recovery from the sales tax increase, though neither will likely overcome the first quarter’s poor growth unscathed.

As we approach full employment, traditional investment strategies generally begin to hedge against inflation by including investments in commodities and real estate where GDP growth is perceived to be less influential than in other sectors. Quantitative Easing provides some “carbohydrates” to the US economy, thus allowing bond and equity markets to both grow in the short run. However, this promise is impermanent and may lead to trouble ahead. For a balanced meal, we turn to the foreign bond and equity markets. Thus, we foresee that the most robust investment palette will diversify not only across markets, between American equities and bonds, but across borders to take advantage of equities and bonds abroad.

Katherine Brown completed a Master’s degree in Global Finance, Trade, and Economic Integration from the University of Denver. Her research and writing focus on international monetary economics and central banking. She can be reached at Katherine@castlerockinvesting.com.

Water Cooler Wisdom – First Quarter 2014

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Water Cooler Wisdom 1Q12Water Cooler Wisdom 1Q12A great deal happened in the world during the first quarter of 2014. The ECB may be pursuing quantitative easing, the Federal Reserve continues to send mixed messages about tapering, China is slowing down, the U.K. is set to grow the faster than any other advanced nation, and Gwyneth and Chris have split…or have they? According to the International Monetary Fund, the global growth outlook is positive, although the recovery is somewhat shaky and uneven. While there is a widespread fear of deflation worldwide, the hawks still stand by their position that uncontrolled inflation may still be in the future. In this economic environment, it is necessary to sift through a significant amount of noise to see the real economic picture.

The United States economy continues to grow but it is not going gangbusters. The polar vortex, along with the seemingly unending winter weather in the Eastern part of the United States, slowed economic growth during the first quarter of 2014. Regional economic indicators, including vehicle sales and employment, increased during the somewhat more temperate month of March, undoubtedly leaving residents and businesses looking forward to sunnier weather ahead. The unemployment rate remained unchanged at 6.7% and GDP increased by 2.6%. According to some analysts, the current inflation rate of 1.6% (see: Consumer Price Index) represents a lower bound to US inflation, The Federal Reserve continues to be committed to tapering but it seems somewhat reluctant to say ‘when’ due to continued concern about inflation. While the market will likely continue to experience spasms at every word Janet Yellen breathes, it may be more business as usual for the Fed in the near future.

Equities (see: Returns and Valuations by Style) have increased slightly but remain in what some would consider normal territory. It is important to note, however, that some sectors of the equities market have increased by 275.2% since the market low in March 2009. Overall, the market growth is not enough to risk substantial changes in inflation or interest rates but also not slow enough to decelerate overall growth. Essentially, it’s smooth-sailing.

As of April 9, 2014, the Office of the Comptroller of the Currency, the Federal Reserve and the FDIC approved a new rule requiring the eight largest U.S. banks to greatly increase their leverage ratio (essentially, they need to hold more capital). This rule is in response to the increased emphasis on macro-prudential regulation and the fact that many are still shaking in their boots from the aftershocks of the Global Financial Crisis. This rule will help to ensure that systemically important banks have the capital to lend in any economic environment, guarding against a credit contraction if market conditions were to negatively change. This may mean easier lending for smaller banks whose leverage ratio is not quite as high but since this rule does not take effect until 2018, the real results are yet to be seen.

Since the start of 2014, the discussion of unconventional monetary policies has been more, well, unconventional. The European Central Bank may be in the process of become policy bedfellows with the Federal Reserve, Bank of Japan and Bank of England by implementing quantitative easing as a monetary policy tool. The ECB has been considering this as well as negative interest rates to protect from decreasing inflation. These negative interest rates would affect deposits at the ECB since these banks would be required to actually pay to park their money. The monetary policy motive for this would be that these banks, avoiding the extra ‘tax,’ would rather lend out their money to the private sector. This would spur growth and ideally protect against the low inflation. Quantitative easing is a little trickier for the Eurozone. Whereas the US and UK can purchase bonds from their own individual markets, the ECB has 18 countries to choose from. Buying from France could give an unfair advantage, whereas purchasing bonds from Greece could throw Germany into an uproar. Some economists suggest that the ECB purchase Treasuries from the Fed to help unwind our rounds of quantitative easing. What a ‘taper tantrum’ that might cause.

While the economy is improving, there is still a long road ahead. However, given that holding cash yields a 0% return, it is still an attractive time to invest, regardless of the current interest rate climate (see: Asset Class Returns). So, go out, get invested, become diversified and have a wonderful spring.

Laurel Mazur is Castle Rock Investment Company’s Research Associate. Laurel Mazur is a graduate student at the University of Denver pursuing a dual Master’s degree in Economics and Global Finance, Trade, and Economic Integration. Most of her research and writing focuses on international monetary economics and central banking. She can be reached at Laurel@CastleRockInvesting.com.

 

U.S. Supreme Court Decisions on Same-Sex Marriages Impact Employee Benefits

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Given the recent Supreme Court rulings regarding same-sex marriages, Castle Rock Investment Company wanted to shed some light on the impact it will have employee benefits. So, we turned to the experts. Thank you to Brownstein Hyatt Farber Schreck, LLP for the informative information below:

On June 26, 2013, the U.S. Supreme Court (the “Court”) issued two decisions, finding that federal and California laws on same-sex marriages are unconstitutional. These decisions will have far-reaching and wide-ranging consequences on employee benefits programs. This Alert highlights some of the benefits-related issues employers will need to address in the very near future in light of the Court’s decisions.

THE COURT’S DECISIONS

  • Section 3 of DOMA Is Unconstitutional. In U.S. v. Windsor, the Court ruled that section 3 of the federal Defense of Marriage Act of 1996 (“DOMA”) is unconstitutional because it does not provide equal protection rights under the Fifth Amendment to the U.S. Constitution. Section 3 of DOMA amended federal law to exclude same-sex partners from the terms “marriage” and “spouse” as used in over 1,000 federal laws and related regulations.
  • The Court’s decision did not address section 2 of DOMA because it was not a part of this case. Section 2 allows each state to decide whether to recognize same-sex marriages performed under the laws of other jurisdictions.  Some members of Congress already are seeking to repeal Section 2.
  • California’s Proposition 8 Is Unconstitutional. In Hollingsworth v. Perry, the Court ruled only on the procedural issue of whether the proponents of California’s Proposition 8 (“Prop 8”) had “standing” to appeal in federal court a California state court’s decision finding Prop 8 to be unconstitutional. Prop 8, a state ballot initiative, had amended California’s constitution to define marriage as a union between a man and a woman. The proponents of Prop 8 took over defending Prop 8 when California state officials refused to do so following the district court’s decision. The Court held that the proponents of Prop 8 did not have standing to litigate the issues in federal court.
  • The Court did not address whether Prop 8 was constitutional. However, the Court’s decision means that the California district court decision, which had found Prop 8 to be unconstitutional, will be the controlling decision.

IMPACT ON EMPLOYEE BENEFITS

  • The Court’s decisions mean that employers must take numerous actions with regard to the benefits available to their employees. Many of the actions are prospective, while some may be retroactive. In addition, some of the ramifications of the Court’s decisions are unclear, and more guidance will be needed before employers can act. A number of federal agencies already have indicated that they will be expediting the issuance of guidance to address the impact of DOMA following the Court’s decision.

As an initial course of action, employers should consider the following:

  • Determine Which Employees Are In Same-Sex Marriages. Employers should begin to administer employee benefits plans, programs and policies in a manner that recognizes the same-sex marriages of employees who (i) were married in a state that recognizes same-sex marriages and live in that state or (ii) were married in one jurisdiction but live in another jurisdiction that recognizes same-sex marriages performed in other jurisdictions. This will not necessarily be an easy task. Only 12 states (California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington) and the District of Columbia currently recognize same-sex marriages. Where a same-sex couple is married in a state that recognizes same-sex marriages and lives in that state, we would expect the same verification procedures that are applied to opposite-sex marriages would apply. However, because DOMA section 2 remains in effect for now, employers will need to develop administrative procedures for determining whether an employee’s same-sex marriage should be recognized when the marriage occurred in a jurisdiction other than that in which the employee currently resides. Administrative procedures will need to take into account the laws of the state governing the benefit plans, the laws of the states where employees were married, the laws of the states where employees reside, and the terms of the benefit plans. Without doubt, more guidance is needed to assist employers in dealing with these multijurisdictional issues.  Brownstein Comment: Many other states have approved civil unions. We do not expect that civil unions generally will be recognized as same-sex marriages, but this will depend on whether applicable state law considers civil unions to be the same as marriage. For example, Colorado’s Civil Union Act specifically states that it is not granting same-sex couples the right to marry.
  • Plan Administration Changes. Changes in benefit plan administration certainly will be required.  Examples of administrative changes needed in benefit plans include the following:

Retirement Plans (such as 401(k) and defined benefit pension plans):

  • An employee’s same-sex spouse will have to consent to the participant’s naming of a nonspouse beneficiary.
  • An employee’s same-sex spouse will have to consent to the participant’s distribution elections — including hardship distributions, loans, and the selection of the form of benefit distribution upon retirement, if the participant wants to be paid in a form other than a joint and survivor annuity with the spouse as the surviving annuitant.
  • An employee’s same-sex spouse must be treated as an alternate payee under a QDRO.
  • Health and Welfare Plans (such as medical, dental, vision, life insurance, cafeteria, flexible spending accounts, health savings accounts, etc.):
  • Employees can now pay for their share of the cost of providing health coverage to their same-sex spouses on a pre-tax basis. No longer must an employer’s share of the cost of providing health coverage to an employee’s same-sex spouse be imputed as income to the employee. (Note: we believe that this does not result in changes for domestic partners.)
  • The Court’s decisions likely are a status change event, which could allow employees to make mid-year changes to their health FSA elections to take into account health expenses of their same-sex spouses.
  • Same-sex spouses are now entitled to elect COBRA health care continuation coverage.
  • Employees can elect dependent life coverage for same-sex spouses.

Other Benefits Programs:

  • Employees have the right to take FMLA leave to care for a sick same-sex spouse.
  • Same-sex spouses should be required to give consent to employee-spouses’ exercise to purchase stock under the employer’s stock option or other equity ownership programs.
  • These administrative changes will require changes in plan documents, employee communications, administrative forms and procedures.
  • Brownstein Comment: Employers should work with their third party administrators and legal counsel to ensure that their benefit plans become fully-compliant with the law.
  • Plan Design Considerations. Since the provision of benefits to employees and their dependents is largely discretionary, subject only to certain nondiscrimination and other regulatory constraints, employers will need to consider whether any benefits program revisions are necessary or desired in response to the Court’s decisions.Plan Amendments. Both the administrative and design changes mentioned above may require plan amendments. For example:
    • Employee Communications. Employers can expect many questions from employees who are in, or may be entering into, same-sex marriages and should consider preparing an initial communication to tell employees that the impact of the Court’s decisions on the employer’s benefit programs will be addressed. Employers should ask for employees’ patience while employers work through all of the implications and explain that additional guidance may be needed from governmental entities because there are many unanswered questions at this time. We think that communications regarding the details of changes implemented in response to the Court’s decisions should be prepared and distributed only after employers have fully considered the broad range of implications of the Court’s decisions and after reviewing the anticipated government guidance.
  • Respond to Future Statutory Changes and Regulatory Guidance. Employers must be prepared to react to future changes. We can expect that proponents, both for and against same-sex marriage, will be active in trying to change their state’s marriage laws. As indicated above, regulatory guidance will be forthcoming. As laws change and guidance is issued, employers will need to make coordinating changes in their benefits programs.

RETROACTIVE APPLICATION

Since DOMA section 3 has been found to be unconstitutional, it is as if the law never existed. This raises numerous plan administration issues. For example, do participants and their same-sex spouses have the right to make claims for benefits on a retroactive basis? Will plan administrators have to invalidate distribution elections made by participants without same-sex spousal consent? If these types of actions are required, how must they be accomplished? Future guidance may provide some direction on these and other issues but such guidance will take time. Employers and plan administrators will need to determine what this retroactive invalidation of DOMA means for their benefit plans and what actions may be required to undo or redo prior administrative decisions and actions.

If you have any questions about, or would like assistance in analyzing the impact of, the Court’s decisions on your benefit plans, please contact one of the Brownstein benefits group members, including Nancy Strelau, via e-mail at nstrelau@bhfs.com, or call her at 303.223.1151.