Thursday, June 28, 2012

States Win Interesting Powers in ACA

The highly anticipated Supreme Court decision regarding the Affordable Care Act has come down as a split decision. The individual mandate is upheld not under the Commerce Clause but as a tax. By 2016, the tax will be 2.5% of gross income. So, for a household income of $150,000, you can expect to pay $3,750 if you go without health insurance. This figure is less than the cost of today's health insurance for a family of four. However, what about a single person working in Silicon Valley? If they are young, single, and make $150,000 a year, plus do not feel the need for health insurance, then they will be required to pay a tax of $3,750. The question becomes whether this $3,750 can be levied or not, because the tax cannot be more than the cost of insurance in the zip code where this person resides. For example, if the average health insurance cost in this person's zip code is $2,400, then the tax is limited to this $2,400 amount. I have a question. Who is going to figure this out for every person in America? I presume the IRS.

The second part of the decision that was struck down was that the States risk losing 100% of their Federal funds for Medicaid. The Supreme Court held that this clause was unconstitutional and termed it was like "holding a gun to the head" of the states to comply. This brings up a very interesting predicament. What if a state says that they do not want to expand Medicaid to allow those under 133% of the poverty level to obtain Medicaid coverage? What is the potential effect of this? It would seem that it would keep the status quo as it is now. These people would continue to go to the Emergency Room for their minor illnesses and continue to clog up the system.

Also, how would "everyone" obtain health insurance coverage if these people, those under 133% of the poverty level were in a state that refused to expand Medicaid to cover them? This certainly presents an interesting dilemma.

Other factors of this Affordable Care Act are some taxes that go into effect, because of it. There is a 3.8% tax on capital gains. If the current tax rates are allowed to expire at the end of this year, then the capital gains rate will climb at the highest level to 43.4%. It is 20% today.

An interesting quote from the opinion was this one. "But the Court does not express any opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people."

Perhaps the most telling quote in the decision is this one, however. "It is not our job to protect the people from the consequences of their political choices."

The voters voted for their elected officials and the ACA is the result of those voters decisions. Look on the bright side. Voters can choose a new direction this November.

Tuesday, June 26, 2012

ERISA Fee Disclosure Rule Fails Smell Test

Everyone was waiting with bated breath over the Department of Labor fiduciary ruling that came down recently. I for one actually thought the tide might have been turning against Wall Street firms and insurance companies, but boy was I wrong. I was foolish to believe that the Department of Labor was going to level the playing field in the retirement plan area when it came to fee disclosure. This just didn't happen.

I recall when I was the Branch Manager II for Charles Schwab in Jacksonville, (almost 8 years ago now) we had a retirement plan guy come in to speak to my team about their retirement plan services. The spill was the usual non-speak..."we are the best and to hell with all the rest." However, I wasn't quite convinced. So, I began to question the young fellow as to how much the fees were inside their 401k plan that they wanted us to sell. He replied that "there was no fee to the plan participants." I knew this was not true because of revenue sharing offered by mutual funds. You see, mutual funds have 12(b)-1 fees which they use to pay firms to market their funds. In the retirement plan arena, fees have long been hidden from participants, but make no mistake they exist.

Typically, the sales pitch is made to the employer that "you can save on your administration costs by taking the revenue sharing from the mutual fund 12(b)-1 fees as an offset." So, when that young man was telling me that there was no fee to the plan participants, what he really meant is that he could reduce or eliminate the fees to administer the retirement plan by utilizing the 12(b)-1 revenue. The plan participants would never see any fees and the employer could possibly not have to pay any administration fees. It was a win-win situation for both.

Fast forward to the recent ruling by the Department of Labor on fiduciaries and fee disclosure. Retirement plan advisers who charge fees will have to disclose their fees to plan participants and employers. However, if you can believe this, 12(b)-1 fees can continue to be hidden from view! Wall Street firms and insurance companies win again!

As a result of this ruling, it will be business as usual for Wall Street firms and insurance companies who use 12(b)-1 revenue sharing arrangements to sell their retirement plans to employers. What has changed for them? Absolutely nothing.

However, retirement plan advisers who charge fees will now have to disclose their fees in writing, while the Wall Street firms and insurance companies do not have to disclose their 12(b)-1 fees. Are you getting this picture? Wall Street firms and insurance companies want to squash their fee based competitors and it looks like they have succeeded.

If this is any indication of the power and influence that these groups have over registered investment advisers, then I shudder to think how the SEC will come down with their interpretation of fiduciary rules. In my mind, this is proof that nothing will change for Wall Street firms and insurance companies. It is likely that registered investment advisers will be subject to more onerous rules, costs and requirements. The goal of course is to squash the competition. Sadly, the competition, registered investment advisers, are the best choice for retirement plans, in my opinion, yet they will not appear that way to employers and participants.

Thursday, June 7, 2012

Testing Investor Discipline

The last six weeks has been a nail biter for a lot of people in regards to the overall stock markets. We started May 1st with $140.74 closing price on the S&P 500 SPDR ETF (ticker symbol SPY). Barely a month later, on June 4th, the SPY was down to $128.10. That is almost a 9% drop in about 30 days. If you go back another month to April 1st, then you are looking at a 10% drop in price for the SPY. They say that a 10% drop in price signals a bear market.

I can tell from my technical analysis charts that I follow that there were several investors who threw in the towel the first few days of June. Sadly, those that did would have pretty much picked the low point for the year. This is typical investor behavior. They sell when their fear gauge goes up.

Those investors who stayed the course would have been rewarded, because the last three days the SPY has climbed back from $128.10 to over $133.00 a share. That is a 4% bounce back from the low and that 4% gain happened in just three days. Did you stay the course?

As I describe in my book, Keep Your Assets. Take My Advice, investors tend to look at the high point for the year as a measuring stick. In other words, they would look at their account as of the April 1 or May 1 price of around $141 and surmise that they are down 6% on SPY, since SPY is trading at $133 or so today. However, they would be totally wrong. The first day of the year, the SPY opened at $127.76. So, even though an investor would "feel" as if they had lost money and were down 6%, the truth is that they would actually be up on the year! They would be up over 4% on the year!

Think about all that is going on right now with Greece, Spain, unemployment, political contests and loads of other uncertainty. Yet, through it all, the SPY is up over 4% on the year. Can you imagine what the market may do when there are good times ahead? Suppose the SCOTUS over turns Obama's Health Care legislation. Suppose we not only get a new POTUS, but also a major change in the do-nothing Congress. This is what appears to me to be headed our way. If some or all of this happens, then I suspect the investors will be well rewarded for staying the course.

I will admit that the month of May was pretty much a downhill slide, but you cannot invest in America without being willing to take some ups and downs in the market. I can empathize with the fact that 2008 is still very vivid in a lot of investors minds. However, the solution to investing cannot be to jump in and out of the market every time that your fear gauge goes up.

You have to be brave to be rewarded.