By Edward Leone Jr. DMD MBA RFC
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What a crazy time it is around the globe. There is more conflict, strife and human suffering occurring at this time than in recent years based on the news reports we are hearing and viewing. It is difficult to know what exactly is going on and what exact action needs to be engaged on each of the issues facing us. I fault the news media for speculating and not reporting accurately the conditions in the Middle East, Japan, Africa and our own US with its social and budget problems. There is much for us to know, but access to information that is useful in understanding the challenges is difficult to obtain or just not available. It is my sincere hope that as the future months unfold most of what we are experiencing is resolved in a positive fashion.
One of the more entertaining reports I viewed in Bloomberg Businessweek recently has to do with the new alphabet soup which has been generated by new legislation promulgated by the Congress:
DFA Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
CFPB Consumer Financial Protection Bureau
FSOC Financial Stability Oversight Council
OFR Office of Financial Reasearch
SEF Swap Execution Facility
MSP Major Swap Participant
FIO Federal Insurance Office
CFI Complex Financial Institutions Office
OCR Office of Credit Ratings.
I hope this dictionary of acronyms is helpful to you in your reading in the future. A focus on DFA is appropriate in that it contains provisions for what are known as “Clawback Policies”. These policies permit companies to recover erroneously awarded compensation from executive officers. It seems to me that establishing erroneous status would be difficult unless there is solid proof after an audit or financial restatement. It appears that there is also a code of ethics to be applied here. That is a good thing if the code is clearly defined and not again a matter of arbitrary interpretation. I can see many CEOs challenged in their good work and many lawyers making a bundle on questionable accusations against corporate officers if claw back is ill defined and obused.
One other acronym which is known to all of us deserves some attention due to changes in the IRC (Internal Revenue Code). I am talking about the IRS. Some of you may find benefit in the following list of code changes:
Roth IRA rollovers no longer restricted
Income from Roth rollover can be spread out
Limits on personal exemptions and itemized deductions ended
Personal casualty and theft loss limit reduced
Corrosive drywall damage repairs deductible
Homebuyers credit
Adoption credit
Gifts to charities deductions.
Please work with a qualified accountant to determine your tax obligations or benefits as a result of this partial list of code changes. It may very well be that some of you will receive a letter from the IRS in the near future regarding the inability for IRS computer systems to complete document matching on your tax return. It is important that we avoid a situation where all income is not reported. The purpose of the document matching policy is to identify returns which have misstated information. If you are subject to one of these inquiries, respond promptly and involve you professional tax preparer immediately.
Another area of concern for all who operate a business revolves around the issue of benefits and the employee understanding of those benefits and how to use them. There is no positive effect on employee recruitment, retention and productivity unless these benefits are understood and used. I had such a situation recently in my own business in dealing with a patient. The positive effect upon the attitude of this individual once the benefit package was explained by my staff, understood and applied to her situation was remarkable. Whether you are on the providing side or the receiving side of work place benefits, be sure communication and education is a part of the work place atmosphere.
In considering our own efforts at developing retirement benefits, we must realize that the decade immediately past was one of almost no economic growth. According to Kiplinger, stock values ended the decade about where they started and median income adjusted for inflation was at $49,777 (5% lower than 10 years ago). Real GDP did gain 20% which is only an average of 2%/year (in the face of an inflation factor of 2.7%/year) and employment was essentially unchanged when comparing 2000 to 2010. I have no crystal ball as I have stated in past blogs, but I do observe that many sectors of our economy have exhibited much innovation and productivity increases. It is my expectation that innovation will continue and that technology will be a leading edge toward prosperity in the US. It is my hope that the job requirements and skills available mismatch that we are currently experiencing will resolve over time allowing for improved unemployment statistics. Mean while, it is likely that those of us who are contemplating a move toward retirement will work a little longer. I point to our own efforts to establish a retirement benefit because it is the employee’s deferral of compensation which provides the greatest potential for retirement savings in the current defined contribution atmosphere under which most are saving for retirement. Many employers do provide some help in this effort through matches an other incentive programs, but to a great extent, defined benefit pension plans are disappearing. According to studies done by the National Institute on Retirement Security, it is the promulgation of regulations since the 1970’s which have caused employers to shift to the defined contribution universe. Cost is not so much the issue according to NIRS studies, but rather the volatile environment created by these regulations which leads to unpredictable funding requirements and the inability to budget long-term for this employee benefit. Employers are trending toward systems with predictable costs which are in some instances higher over the long term. Studies by the Center for a Secure Retirement spell out the effect of this dynamic on the near retirement and retired age group (those ages 55 to 75). It turns out that nearly 2/3rds of near retirees and early retirees lack confidence in their retirement security. Those who are engaging the advise of qualified professional planners are more confident on the subject of retirement prospects. The Federal Reserve states that the median income household headed by someone with a 401k in the age group from 60 to 62 has saved only 25% of what will be required to provide a secure retirement even when social security benefits are considered also. This information should be a message to individuals with an extended time horizon before retirement that retirement savings needs to be a priority over consumption, even in these times of restricted cash flows and uncertain income sources for many. Government also needs to once again examine the unintended consequences resulting from regulations on tax deferred retirement savings strategies which have created this current dynamic. I will dedicate my next blog to issues surrounding social security benefits, retirement savings and proposed solutions to retirement income streams offer by banking institutions and the insurance industry.
For the Record:
DOW 12,220.58
NASDQ 2,743.06
S&P 500 1,313.80
Suggested Reading: “Security Analysis” by BenjaminGraham 1934
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