Fiduciary Commentary | Spring 2017

By: Brant Griffin – May 22, 2017

Tax Reform – Here we go Againtax-planning

In April 2017, President Trump revealed his administration’s proposal for comprehensive tax reform. Trump’s plan represents the largest tax change since the Tax Reform Act of 1986 (TRA 1986). If history serves as any guide, the preferential tax treatment that retirement plan incentives have long enjoyed may be at risk to pay for the tax cuts.

This is Yuuuuge! Trump’s tax plan would affect nearly every taxpayer as well as sector of economy. Trump’s proposal would:

  • Reduce the current seven individual tax brackets into three; 10, 20 and 25 percent
  • Reduce the corporate tax rate to 15 percent
  • Double the standard deduction
  • Repeal the federal estate and gift taxes and the alternative minimum tax
  • Eliminate the 3.8 percent net investment income tax on high-income earners

The Committee for a Responsible Federal Budget estimates the cost of tax reform to be $5.5 trillion in the first decade alone. The math is simple…. If the intent is to lower personal and corporate income tax rates with a neutral effect on tax receipts, additional tax revenue must be secured to offset the costs of the tax cuts.

To help cover the cost of tax reform, Trump’s plan calls for the elimination of many personal tax breaks. Americans have historically enjoyed an abundance of personal deductions including mortgage interest, charitable contributions and retirement plan and IRA contributions. Defined contribution plans represent one of the largest tax expenditures of the federal government. The Joint Committee on Taxation estimates that over the next five years defined-contribution plans will cost $584 billion in lost federal tax revenue. These figures may prove too costly for those in Washington when pressured to find a revenue neutral solution to tax reform.

A previous 2014 proposal to ease the cost of tax reform offers a glimpse into how Trump’s legislation may play out and affect retirement plan contributions. The proposal sought to freeze retirement plan contribution limits for a decade and permit only half of elective deferrals to be made on a pre-tax basis (the remainder to be Roth contributions). The changes were estimated to raise over $200 billion in revenue over 10 years, mostly by transitioning saver’s pre-tax savings to after-tax contributions. Furthermore, last generation’s tax act, the Tax Reform Act of 1986, had a significant impact on retirement plans reducing deferral limits by 75%.

This time around, tax preference items will certainly be scrutinized again and a focus of any reform negotiations. The favored status of the of retirement plans will be high on that list of items.  Retirement details that could be reduced or eliminated include:

  • Reducing contribution limits
  • Emphasizing after-tax or Roth deferral contributions over pre-tax deferrals
  • New discrimination testing requirements limiting highly compensated employees benefits
  • Limiting the deduction amount for pretax deferrals despite of marginal income tax rate

What is apparently not factored into Washington’s budget calculations  is that retirement plan tax preferences are temporary. Pre-tax deferrals and employer contributions (and their earnings) will be subject to taxes in the future when the contributions are withdrawn. However, Washington bean-counters view tax revenues and expenditures within a 10-year window.  Taxable retirement plan distributions that will typically occur after that time period is considered lost tax revenue, despite the future tax consequences. This makes them an especially ripe target for cuts.

Trump’s chief economic advisor and director of the National Economic Council, Gary Cohn stated that “retirement savings will be protected.” Given the potential sweeping nature of the proposed reform and the immediate impact of cutting employer-sponsored contributions, it’s easy to see why many are concerned that it will be especially difficult for retirement plans will remain unscathed during the tax-reform negotiations.

There will be considerable pressure for lawmakers to restrict or even eliminate current income exclusions to alleviate the fiscal pressure from Trump’s tax reform initiatives. In the wake of the country’s swelling federal budget deficit, retirement plans, having long benefitted from a favorable position in the Internal Revenue Code, again appear to be a valuable revenue target for law makers. The legislation proposed could serve to limit individual savings opportunities at the expense of future generation’s tax receipts.

GW – The Final Rule- Extension of DOL Fiduciary Rule Applicability Date

On Feb. 3, 2017, President Trump issued a memorandum that would delay the DOL new fiduciary rule by up to 180 days. The memorandum directed the DOL to review the rule and its possible impact on the economy and savers. In doing so, if it were found inconsistent with administrative policy, Trump ordered the DOL to rescind and revise the rule.

Consequently on April 4, the Labor Department pushed the official effective date of the final regulation from April 10th to June 9th 2017 and extended the applicability dates of the amendment’s previously granted fiduciary advice exemptions for 60 days.


Market & Economic Commentary| Spring 2017

By: Jim Scheinberg – May 8, 2017

Drinking Water Out of the White House Fire Hose

The first days of the Trump presidency have proven to be as unconventional as the election cycle. With a flurry of Executive Orders, President Trump has rolled back regulations, challenged immigration from Middle Eastern countries, attempted the replacement of ACA (AKA Obamacare) not once but twice, and had several high profile firings – including his own new appointment to head the NSA. Controversy didn’t stop at his dizzying pace of policy objectives. Several members of the Trump camp have been alleged to confer with high ranking Russian authorities during the transition of power, lending credibility to the Democrats’ claims that the Russians intervened on Trump’s behalf to influence the 2016 election. Regardless of the actual truth behind the partisan clashes on Capitol Hill and in the media, the news cycle has been a blur. Amidst all this drama, U.S. and European stock markets have steamed ahead at a pace rivaled Washington’s. With expectations that lower taxes and pro-business reforms will lead to growth in GDP and corporate earnings, Walls Street is betting on big wins across the board. The question is, will economic realities match these lofty expectations. So far, the early results are mixed.

How the Markets Fared10

The debt markets weathered the second Fed interest rate hike with little fanfare. The intermediate and long-end of the yield curve was virtually unchanged during the first quarter of the year. Yields for the 10 and 30-Year Treasury Bonds fell a few basis points, generally staying where they started in the year, close to the two and a half and three percent levels, respectively. This led to fractional gains in the high quality – intermediate end of the market, as bonds generally earned their modest coupons plus a tad of price appreciation. Credit spreads tighten further with the continued expectation of a stronger domestic (and global) economy. This benefitted the credit sensitive end of the aggregate bond market a tad, but had its most impact on the high yield sector. Junk bonds tagged on gains of nearly three percent after 2016’s impressive seventeen percent run. The U.S. Dollar gave back some of its lofty Q4 gains, which enabled the debt of developed market and emerging market bonds to outperform domestic debt indexes. Lastly, with inflation flaring up a bit in Q1, there was renewed interest in inflation protected securities, resulting in TIPS gaining modestly during the quarter.

11Stocks around the globe surged ahead at the start of 2017. In the U.S., the technology sector led the way, helping the NASDAQ reach all-time highs. Large capitalization stocks gained over six percent with growth names leading the value indices by over five percentage points. This was a reversal to 2016’s ten-percentage point dominance from the value side of the spectrum. Value indices were held back during the quarter by declines in the energy sector, as oil prices faded back below the $50 a barrel mark. In fact, commodities generally declined in the first quarter, which hurt resource names in the small cap sector as well. Though small cap growth indexes advanced over five percent, the Russell 2000 Value Index was virtually unchanged during Q1. That area of the market was due for a pause after 2016’s robust 30%+ gain. Developed market international equities also saw attractive increases, with growth leading value there as well. Unlike the U.S., where large caps outperformed smaller companies, internationally, it was small stocks that saw the greatest gains. Ultimately though, it was the resurgence in the emerging markets that stole the show. Manufacturing and resource based EM equity markets generally saw double digit appreciation in the first quarter. This was despite the slight declines in commodity prices. The pull-back in the U.S. dollar added to local market appreciation to make this the best place to be so far in 2017.

PIERing Ahead

There is little doubt that a global economic resurgence is afoot. Europe is showing more promise than many had expected, as GDPs rise and unemployment falls. With all of last year’s hubbub over BREXIT, the EU economy may be the biggest surprise of 2017. Here at home, regardless of how the plethora of changes spewing out of Washington play out, our economy is on solid footing. With a strong labor market, growing home values, and potential tax cuts on the horizon, consumer and business optimism is likely to continue. It is highly doubtful that economic conditions will falter in the coming months. What lies ahead in the later years of a Trump Presidency may be another story. Recent saber rattling with North Korea may foreshadow a bold and potentially reckless foreign policy style that could come at a cost. If the pre and post-election promises of border taxes take form and lead to trade wars, our young global economic renaissance may be in jeopardy. You simply can’t discount the possibility of conflict. If clashes break out, be they financial or military, we may need that White House fire hose we’ve all been drinking out of to douse the flames.