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Water Cooler Wisdom: Third Quarter 2016

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By Mack Bekeza

The Presidential Election and What to Know

Despite the pleasant performance in the stock market for 2016, investors are becoming more doubtful about the global economy as a whole in regards to how “pleasant” future growth will be. On top of that, The U.S is having one of the most interesting presidential elections in history. With both of the leading candidates making big promises to the public, how will these proposed actions affect the economy as a whole? But perhaps the biggest question and misconception that U.S investors have is “How does the President affect the economy?”

For our response, we want to point out 3 big myths about how the President affects the economy

            1. Capital Markets perform better when Republicans are in the White House:  

Although many consider the Republican party as the “pro-business” party, if you look at the returns of the Dow Jones Industrial Average since 1897, the markets do not give a hoot about who is president.

2. Major pieces of legislation get passed once the new President assumes office:

With the exceptions of the Affordable Care Act and Dodd-Frank, The United States rarely makes major policy changes in one major swoop, rather in small increments.

3. The President has as much of an impact on the economy as consumers and businesses:

     Although the media places major scrutiny on the President over the U.S Economy, government spending only accounts for 17.7% of total GDP, while the remaining 82.4% comes from consumer spending, private investments, and foreign trade.

So… will this presidential election completely change the way we invest? More than likely no. However, it is important to note the U.S GDP is expected grow between 1.5 to 2% over the next decade. This is primarily due the recent and projected dismal growth in the U.S labor force along with over $30 trillion in private wealth being transferred to younger generations. In other words, it is more crucial to observe how Millennials begin to take charge of the U.S Economy rather than who becomes president.

Attached are slides that provide more detail regarding presidential elections and major leading economic indicators.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@CastleRockInvesting.com.

 

Fund Families sued by their own employees over their retirement plans??

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By Mack Bekeza

Over the past two years, a number of investment firms have been sued by their employees over their 401(k) plans. That’s right! Investment firms have been sued over their own in-house retirement plans! Why? In most cases, these firms would only provide proprietary funds to their employees at a full or slightly reduced cost. In fact, here are just a few of the recent cases from the past two years:

1. Transamerica
2. Fidelity Investments
3. Ameriprise
4. New York Life
5. Great West (Empower)
6. MFS Investment Management
7. Waddell and Reed
8. Allianz Global Investors
9. MassMutual
10. Neuberger Berman
11. Putnam Investments
12. BB&T
13. Edward Jones
14. Morgan Stanley
15. American Century

Why do these investment firms offer their own funds to their employees without significantly lower fees? First, they do not want to convey to their employees that there are potentially superior investment opportunities outside of the company. For instance, Fidelity might not want to offer an outside fund that could be cheaper and possibly better performing than a comparable Fidelity fund. Additionally, since these plans tend to be very significant in size, reducing investment fees for their own employees could be problematic, since it could potentially increase fees for their retail investors to absorb the cost.

Is there a solution to this dilemma? Yes, there actually is! For the investment firms that are currently offering their proprietary funds to their employees without reduced expenses, these firms should consider offering outside funds to their employees. This could potentially result in lower expenses for the employees. Furthermore, this could remove the target off their backs from ERISA once the DOL regulation becomes effective in April of 2017. Of course, this is a lot easier said than done because it requires investment firms to expose their weak spots in their investment line ups, which could also potentially leak out to their retail investors. Also, a retirement plan was never meant to make the employer money, it is supposed to be a generous benefit for its employees.

With the new DOL regulation coming in April 2017, 2016 has proven that broker dealers and investment advisors are not the only target, but the fund families have also been dealing with quite the roller coaster themselves. And, as retirement investors, we should be glad that the investment business is starting to clean up its act for good and will in return make the industry more beneficial for everyone.

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