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White House Memo: A Moment of Opportunity for Fiduciaries to Retirement Plans

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Famous showdown between "Fast Eddie" Felson and “Minnesota Fats” in the iconic American film, The Hustler
Showdown between “Fast Eddie” Felson and “Minnesota Fats” in the iconic American film, The Hustler

If you think we’re letting go of the “fumbling children” reference made by FSI chairman Adam Antoniades, you have another thing coming. He reminds me of the proud “Minnesota Fats” character in the classic film The Hustler— he doesn’t want to recognize the truth and talent of the situation he’s faced with by “Fast Eddie” Felson (Paul Newman), because it means that his reign as best player has ended.

Mr Antoniades goes so far to call the leaked White House Memo from January 13 simplistic, though it refers to more PhD studies than his fumbling response could even spell, so he’ll have to try and respond again.

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Not that Complicated

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FSI Chairman Adam Antoniades, from Think Advisor
FSI Chairman Adam Antoniades, from ThinkAdvisor

In any fight, there are two sides waving their arms around.

The Financial Services Institute, or FSI, states in response to a recent White House memo that changing the way the delicate fiduciary system is run will ruin everything. The Financial Services Institute, or FSI, is in opposition to redefining the Fiduciary Standard as it is proposed because of various reasons, some more partisan than others. In general, the FSI puts investor advisors first, and the DOL puts workers and clients first.

How could increased or maintained responsibility of advisors lead to greater abuse of power? Among the first things said by the FSI is the atypical “hrrumph, well people outside the industry just don’t understand the complexities of how we deal with these things.” When in reality, it’s not that complicated: you protect the interest of your clients retirement if you are forced to put their interests first under the law, so why not stop dancing around this and just execute the priority anyway?

Demand protection for your retirement you deserve. Sign the petition to here at SaveOurRetirement.org: http://saveourretirement.com/take-action.html

 

Michele L. Suriano, Accredited Investment Fiduciary™, is president of Castle Rock Investment Company, a woman-owned SEC registered investment advisory firm serving qualified retirement plans. www.CastleRockInvesting.com

What’s Going On?

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Source: Bloomberg
Source: Bloomberg

A fiduciary duty, the obligation to uphold the clients’ interest above all else, is Phyllis Borzi’s long sought and tunneled for goal that we at Castle Rock uphold and agree whole-heartedly with. Together, our standards are the highest in the retirement industry. She says that, like in the movie Groundhog Day, bad policies keep being relived over and over. We want to stop the origin of the problem: the poor incentive structure.

Her aim is to make incentives to advisors as straightforward as possible in retirement plans so that the resulting fees will not surprise retirees and leave them with less than they planned.

When investment advisors do not sign up to be fiduciaries to the plans they advise, it leads to corruption and changes the fee structures of these plans so that the retirees no longer have the same security after 65 (typical retirement age). Liability to the Plan Sponsor also changes, and the integrity of the investment advisor themselves is challenged as well.

One example of how the Plan Sponsors are hung out to dry is the John Hancock case, where unreasonable fees were not seen as criminal because of this legal loophole.

Sign your support for reform here at SaveOurRetirement.com!

 

Michele L. Suriano, Accredited Investment Fiduciary™, is president of Castle Rock Investment Company, a woman-owned SEC registered investment advisory firm serving qualified retirement plans. www.CastleRockInvesting.com

In-plan Roth Rollovers: the latest topic

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Get out your red pen, folks: serious revisions to the rollover options for your plan. Today we’re looking at how you will need to revise your Plan Document in order to offer in-plan Roth rollovers and a few highlights.

In-plan Roth rollovers of otherwise non-distributable amounts are treated as eligible rollovers, meaning that no withholding applies. Since this amount is not distributable, no part of the rollover may be withheld for voluntary withholding. An employee making an in-plan Roth rollover may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty. Concerning the rollover process, here is a critical section to know from IRS Notice 2014-74:

 

If you do a rollover to a designated Roth account in the Plan

You cannot roll over a distribution to a designated Roth account in another employer’s plan. However, you can roll the distribution over into a designated Roth account in the distributing Plan. If you roll over a payment from the Plan to a designated Roth account in the Plan, the amount of the payment rolled over (reduced by any after-tax amounts directly rolled over) will be taxed. However, the 10% additional tax on early distributions will not apply (unless you take the amount rolled over out of the designated Roth account within the 5-year period that begins on January 1 of the year of the rollover).

If you roll over the payment to a designated Roth account in the Plan, later payments from the designated Roth account that are qualified distributions will not be taxed (including earnings after the rollover)…

Remember, if you’re making revisions to your Plan Document, then Best Practices direct you to get an ERISA attorney, and make sure you’re fulfilling your fiduciary responsibility.

 

Katherine Brown is a Research Associate at Castle Rock Investment Company with a Master’s degree in Global Finance, Trade, and Economic Integration from the University of Denver. She can be reached at Katherine@castlerockinvesting.com.

Much Ado About Fracking

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On Tuesday, September 17th, I attended a luncheon with the Denver Association of Business Economists (DABE) to hear Garret Nülle, an expert in Oil and Gas Economics speak. Mr. Nülle presented us with a comprehensive overview of the field, including projections of where fracking will go in the future. A few days later, I met with David Tameron, Senior Analyst for Wells Fargo Securities, regarding the role of fracking in the economy. The following post is the product of these conversations. 

From slides of Mr. Nülle's presentation
From slides of Mr. Nülle’s presentation

The popular term for Shale Drilling or Hydraulic Fracturing, “Fracking”, polarizes as many groups of people as other hot-button topics. But, like it or not, the energy investment community sees shale drilling as a permanent part of our energy source. The US has actually used fracking since the 1940s; as a part of oil and natural gas resources for the last 60-odd years, about 35,000 wells use the hydraulic fracturing method. An estimated 80% of natural gas is estimated to require hydraulic fracturing for extraction in the next decade. So, the number of rigs currently involved in production and the US market should continue as the most established for the next two decades.

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What if the global currency market stops using the dollar?

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For a more extensive response to this question, click here.

Some people fear that the US dollar will stop being so popular, and that will cause an intolerable rise in inflation.  If the US is to experience intolerable inflation, it will likely be as a result of both domestic and international forces; therefore, the international role of the dollar does not tell the whole story.

Inflation is the general increase in prices of goods and services in an economy. The annual percentage change in the general price index (the consumer price index) measures the inflation rate of an economy. As each unit of currency buys less in the market, the economy is experiencing positive inflation because the general price of goods in that economy rises.

The growth of the money supply itself is seen as a tool to cause inflation, though it is not always effective at doing so. When an economy experiences a “liquidity trap”, the increase in the money supply does not yield anticipated inflation. Liquidity traps are believed to be the reason that major money injections sometimes do not result in predictable consumer price index changes (thus, do not result in proportional inflation).[1]

Right now the global demand for the dollar eats up much of the monetary base that would otherwise cause core price inflation in the US. There are no expectations that international institutions will dump their dollar holdings into the market as this action would ruin their own currency value (which is measured against the dollar), and no precedent for a country acting so poorly in their own, and global, interest. If it were to happen, the international community as a whole would intervene to protect the US dollar and thus their currencies before inflation hit. Therefore, academia is reluctant to assign a numerical quantity that determines when the dollar stops being the reserve currency.[2]

 

Do you have questions about the currency, the economy, or other financial matters? If you have a question or topic in mind for our blog, reach out to us directly through our website, or through our LinkedIn page.

Katherine Brown is a Research Associate at Castle Rock Investment Company with a Master’s in Global Finance, Trade and Economic Integration from the University of Denver.


[1] For a sampling of Krugman’s work concerning liquidity traps, see: Krugman (1998) “Japan’s Trap” at https://www.princeton.edu/~pkrugman/japans_trap.pdf; Krugman and Eggertson (2011) “Debt, Deleveraging and the Liquidity Trap: A Fisher-Minsky-Koo Approach” for the Federal Reserve of New York and Princeton University at http://www.frbsf.org/economic-research/files/PKGE_Feb14.pdf;

[2] Institutions funding the research considered include: Princeton, the Department of the Treasury, IMF, National Bureau of Economic Research, the Federal Reserve, and the London School of Economics.

How the World Sees the Dollar

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Let’s talk about dollars. In response to interest by our clients and readers, we will develop an explicative account of the dollar’s role in world trade and exchanges. Our series about the role of the dollar among different parties, such as global investors, traders, and other economic actors, is the beginning of an ongoing pursuit to fully develop dollar discussion with our community.

Today, let’s talk about what makes the dollar appealing to international actors. In this post, we will discuss:

1)    What percentage of world trade is denominated in US dollars

2)    What makes the dollar so appealing to international actors

In order to explain how international trade denominated in the dollar behaves, we first need to step back to see how banks that use various currencies and/or are in different countries settle transactions between one another. The Bank for International Settlements (BIS) provides the best public data on this subject area.

The Bank for International Settlements (BIS) provides services for central banks, monetary authorities, and international financial institutions. Though the BIS is not the only source for foreign exchange, it is a reliable source for research of the international financial system, including foreign exchanges. The BIS assists in the settlement of foreign exchange trades (FX) across countries, so that central banks can settle exchanges from cross-border financial flows. In this way, countries maintain a more stable international financial system.[1]

BIS
Produced by Castle Rock Investment Company

The simple process to transfer dollars to any foreign value is described below, with the BIS as an observational authority. The BIS is responsible for Basel rulings, collecting and publishing research with the cooperation of central banks, and identifying instances of international banking fraud.

What percentage of world trade is denominated in dollars today?

The BIS uses data provided by Central Banks in their Triennial Central Bank Survey (most recently updated in April 2013) to monitor and analyze the foreign exchange market. The US dollar is the dominant currency vehicle in international trade, comprising one side of 87% of foreign exchanges as of April 2013 (according to the Bank for International Settlements’ “Triennial Central Bank Survey”). This means that 87% of settlements between banks on an international level are either to or from US dollars.

Not only is the dollar a popular trading vehicle, it is also very popular to save; dollar holdings abroad are actually larger than the amount used to trade. These values are called “foreign reserves” and are researched globally by the International Monetary Fund (IMF). The US dollar comprises 60.9% of allocated reserves globally, meaning that the dollar denominates the majority of global reserves in government and institutional accounts.

Source: International Monetary Fund, http://www.imf.org/external/np/sta/cofer/eng/
Source: International Monetary Fund, http://www.imf.org/external/np/sta/cofer/eng/

So what makes the dollar universally attractive?

The dollar is popular because it is a hard currency, and more consistent than any other. Due to the framework and history of the international trading system, the dollar has been the dominant currency since the end of WWII and the creation of the Bretton Woods institutions.[2] Currently the dollar does not face strong competition from other currencies, which are either more strictly controlled by their governments through capital controls or do not have the established history of a banking sector capable of providing credit to international institutions and/or governments.[3]

There is no magic number, to the extent of my education and research, to determine when a reserve currency is no longer a reserve currency. Though the current fragmented international monetary system lacks the stability of an idealized model, the exchange system in place is accepted and adopted by all international trading countries. While the reminbi is growing in popularity as a reserve currency for developing countries, it does not significantly compete with the US dollar at this time. The high international demand for dollars, especially in times of crisis, and the current construction of the international trade and banking systems ensure that the US dollar is fundamental to global economic stability.

Do you have questions on or expertise to add to this conversation? What do you hope to hear about? Add to the conversation on LinkedIn or email me directly at Katherine@CastleRockInvesting.com. 

Katherine Brown is a Research Associate at Castle Rock Investment Company.

[1] For a more expansive account of the ways that the BIS contributes to financial stability, see their website www.bis.org.

[2] The most popular recent book about the establishment of the Bretton Woods system is called The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New World Order by Benn Steil (2013). I highly recommend it for a historic perspective on our institutions.

[3] Many monetary economists hold this theory, but the most popular is Barry Eichengreen of Berkley, California. For further reading on the dollar, the IMF produces regular research papers that take about 30 pages to say a more complicated version of what I just said in two sentences.