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Vol. 73, No. 4, July 2019
FOCUS ON Tax, Investment Planning & Financial Planning
Is a 401(k) Loan in the Client’s Best Interest?
Kenn Beam Tacchino, JD, LLM
There are at least 18 factors that need to be considered when deciding whether a client should take a 401(k) loan. Financial planners must carefully consider each of these issues in light of the client’s unique circumstances. This article introduces a method for planners to use when approaching the plan-loan question. Any examination of the inquiry of which loan best suits the client’s needs is aided by first understanding the rules governing plan loans. The considerations that compel a choice to use the 401(k) plan to provide the loan are investigated. Reasons a commercial loan may be advantageous are then considered. Finally, a deeper dive is taken to analyze the opportunity cost of having retirement funds “out of the market” when high returns occur; how the planner can avoid the repayment of a loan by reducing plan contributions and retirement readiness; and whether there is a double tax on loan repayments. The provided checklists can be used to guide planners through the decision process.
What Matters in Exchange-Traded Fund Selection?
David Nanigian, PhD, CFP
This study examines the impact of both expense ratio and tracking difference on exchange-traded fund (ETF) performance. The relationship between expenses and performance is much stronger than the relationship between tracking difference and performance. This study shows that the slightly positive relationship between tracking difference and performance is attributable to the fact that funds with stronger tracking difference tend to have lower expenses. The practical implication of this study is that low costs should be the main characteristic that financial service professionals look for when selecting ETFs for clients.
Black-White Differences in Financial Risk Tolerance
Patti Fisher, PhD
Given the increasingly diverse world, financial service providers must be aware of a variety of consumers' needs. This study investigated differences in financial risk tolerance between households with white and black respondents. Financial literacy was positively associated with high and some (versus no) financial risk tolerance for white households, but this relationship was not found for black households. The relationship between net worth and high financial risk tolerance differed significantly for black and white households. The current findings show that the frameworks used to explain the financial behaviors of white households may not be appropriate for all groups.
No Debt and Underwater: The Need for Flood Insurance Especially as Home Equity Rises
Robert Klein, PhD
Harold Weston, JD, CPCU
Flood risk can be a serious and underappreciated risk even in areas not designated a 100-year flood plain. Recent extreme weather and the likelihood of more extreme weather in the future make flood risks even more significant. Yet many homeowners fail to insure against this risk. Homeowners with high equity (low debt) have a greater reason to insure against flood because the loss will be significant and fall on the homeowner. Private flood insurance is ever more available and can be an important supplement to National Flood Insurance Program coverage, or fully adequate by itself because of the higher limits and broader coverage available.
401(k) Hardship Withdrawals
Kenn Beam Tacchino, JD, LLM
Distributions via plan hardship withdrawals have been around for a while. However, recent laws and proposed regulations have altered the landscape. Perhaps the best way to delve into this recently revised topic is to focus on the hardship withdrawal rules that have been in effect for many years and continue to be in effect. Then we will look at recent alterations. In addition, we will examine the rules from two perspectives. Our primary focus will be on some examples that illustrate the current state of the rules as they apply to individual clients. However, we will also identify considerations that plan sponsors should be contemplating.
Accounting & Taxation
U.S. Supreme Court to Review the Issue of Taxation of Trust Beneficiaries Based on Their Residency
Thomas F. Commito, JD, LLM, CLU, ChFC, AEP
In recent years, a popular and quickly growing technique involves a grantor in a high-income-tax state setting up an irrevocable trust in a state without a state income tax. These trusts are sometimes referred to as incomplete grantor trusts (ING) trusts. The idea is that by placing assets in an irrevocable, nongrantor trust, in a state without an income tax, the income on the assets is not taxed, thus avoiding the state income tax. If the assets were not placed in trust, the resident state where the grantor lives would tax the income return on those assets. It is important to note that a nongrantor trust means that the trust itself is a taxable entity. Under older law theories, only the state where the trust is located, its situs, can impose an income tax on the assets. A number of states have enacted tax laws to collect income taxes on these out-of-state trusts. The issue is going before the U.S. Supreme Court.
Advice for the New Planner
Understanding Business Protection Needs
April Caudill, JD, CLU, ChFC, AEP
For nearly any business that is financially viable enough to continue following the death of one or more key employees, key person life insurance is an essential need. New advisors can start this conversation with the business owner by simply asking about the nature of the business, and who is essential to its success. The answer to that question could lead to becoming a trusted advisor—followed by many years of assisting with business and personal needs—from early key person needs, to retention of key employees, disability protection, retirement planning, and the eventual sale of the business.
The Tax Law Unchains the “Lox” on Deduction of Family Office Expenses
Mark R. Parthemer, Esq., AEP
The tax treatment of single family offices (SFOs) is examined. Both the new tax act and a U.S. Tax Court case shed light on how to trigger deductibility.
Diving into Longevity Economics: A Financial Services Backgrounder
John N. Migliaccio, PhD, RFG, FGSA, MEd
For almost a decade, serious attention has been growing on the outcome of a highly predictable demographic phenomenon—the aging of the U.S. and global population. The competition between outdated mythology about older adults and the beacon of life-changing and economic opportunity is reaching a tipping point as it attracts more attention and commitment from broad sectors of business enterprise. This includes financial services companies as they identify opportunities to develop a more effective message, products, and services to meet the demand of an increasingly vital and engaged 50+ population.
Insurance & Risk Management
The Risk of Financial Information Overload
Steve Parrish, JD, RICP, CLU, ChFC, RHU, AEP
While financial literacy is a daunting challenge in an increasingly complex society, it is not necessarily the root communication problem for the advisor and client. The concern may instead be that there is simply too much information to deal with. The threat is financial information overload. It is the financial advisor who can help clients sort through the clutter of financial information and figure out what’s important.
Qualified Plans & Retirement Counseling
Benefit Transitions, 403(b) Plans, and Cultural Issues within Higher Education
Lauren Lo Re, CFP, MBA Julie Freestone, MPA, SHRM-CP, SPHR Chelsea Dye, JD, MAcc
The primary purpose of this column is to share an insider’s perspective on how the regulatory changes in the 403(b) area continue to impact higher education institutions, and to provide insight into the unique challenges resulting from the governance structure within higher education. Following the change made in 2007, 403(b) plans operate within a similar structure to 401(k) plans; however, the cultural environments are very different. This column offers perspectives on higher education institutions that may be helpful to financial professionals working within this area.
Social Security Planning
We May Be Seeing the Beginning of Social Security Reform
Bruce D. Schobel, FSA, MAAA, CLU, CEBS
We may be seeing the emerging outlines of future Social Security reform. Proposed changes include a minor across-the-board benefit increase, a revised cost-of-living adjustment (COLA) calculation that uses the consumer price index for the elderly (CPI-E), special minimum benefit increases, increased thresholds for Social Security benefit taxation, imposition of a Social Security payroll tax on high earnings, inclusion of newly taxed earnings in the benefit formula, and gradual increases in the payroll tax rate.
“Hey, Siri! Is Artificial Intelligence the Ultimate Oxymoron?”
Richard M. Weber, MBA, CLU, AEP (Distinguished)
What do the following have in common: drones, robotics, augmented and/or virtual reality, self-driving cars, Internet of Things, quantum computing, bio chips, CRISPR, and nanorobotics? They are among the current considerations in pursuit of technology’s “next big thing.” We’ve come a long way since the 2001 introduction of the Segway (then predicted to be “bigger than the Internet,” [M. McFarland, CNN Business, October 30, 2018]. The common thread in developing and deploying most of tomorrow’s next big things is artificial intelligence (AI). But is AI just another Segway—all hype and no reality? Is AI the ultimate oxymoron?