SEC Money Market Reform(2)

SEC Money Market Reform

Since the crisis in 2008, regulators have paid extra attention U.S. financial markets.  Sweeping changes like Dodd-Frank and the Department of Labor fiduciary ruling will change the way Americans save for retirement.  While these two examples have received tremendous media coverage, others haven’t.  SEC money market reform efforts have important implications, but seem to have flown under the radar.  Here’s what you need to know:

 

Background

Money market funds are a type of mutual fund developed in the 70s, which invest in short term fixed income securities. Their objective is two-fold:

  1. Never lose money
  2. Provide a higher yield than interest bearing bank accounts

The money fund market is comprised of three types: government funds, tax exempt funds, and prime funds.  As you can guess, each type describes what securities the fund may invest in.

Government money funds invest in government securities only, and as a result are thought to be the safest of the three types.  Tax-exempt funds invest in municipal securities that are exempt from U.S. federal income tax, while prime funds may invest in both corporate and U.S. government debt. So, while government funds may be safer, prime funds normally offer a higher yield in exchange for slightly more risk.

 

Reserve Primary Fund

Many investors have historically viewed all three types of money market funds as safe alternatives to cash. This view changed during the financial crisis in 2008. At the time, the Reserve Primary Fund was the largest money market fund in America, with assets of over $55 billion.

Being a prime fund, the Reserve Primary invested in an array of corporate debt issues. And in 2008, its portfolio included sizable chunk of securities issued by Lehman Brothers – which wasn’t seen as an overly risky proposition at the time.

As you probably know, the Lehman Brothers investment did not turn out well. Lehman Brothers was in far more trouble than its management let on, and the company eventually went bankrupt and could not repay its debts. This meant the Reserve Primary Fund lost its entire investment in the debt securities, striking a blow to its portfolio value.

 

Breaking the Buck

The hit was large enough to cause the fund to lose money, as its net asset value fell from a stable $1.00 to $0.97 per share. Also known as “breaking the buck,” only three other money funds had lost money in the 37 year history of money market mutual funds.

The reaction from the fund’s investors was fierce, as the consensus opinion at the time viewed the Reserve Primary Fund as a safe alternative to cash. Investors ran for the exits and demanded millions in redemptions. The fund lost over 60% of its assets in a mere two days, compromising its ability to meet other redemption requests and further spreading market contagion.

To diffuse the situation, the U.S. Treasury Department stepped in and offered to insure money market funds much like the FDIC insures bank deposits. Investors in funds participating in the Treasury’s program would be guaranteed at least a $1.00 net asset value if their fund broke the buck. This support helped limit liquidation pressure, and helped stabilize money markets until the crisis subsided.

 

SEC Money Market Reform(2)

SEC Money Market Reform

Unsurprisingly, the government does not want to be in the business of insuring money market funds today. So, the SEC has responded with reforms to help avoid this situation in the future. In July of 2013 the SEC amended Rule 2a-7, which will be enacted in October of 2016 and change the market structure of money funds.

The amendment essentially bifurcates money funds into two broad categories: retail and institutional. The previous classifications of government, tax-exempt, and prime will still exist, meaning that each will be further partitioned into retail and institutional classes.

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The 9 Most Common Small Business 401k Mistakes

The 9 Most Common Small Business 401k Mistakes

It’s no secret that small businesses are often short on resources.  And my guess is that keeping close tabs on your 401k plan is not at the top of your to-do list.

As you likely know, sponsoring a 401k plan comes with certain responsibilities, and neglecting them can get you in hot water with the IRS and Department of Labor.

If you’re wondering whether your bases are covered, here are the 9 most common small business 401k issues I see in my practice:

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6 401k Trends for 2016

6 401k Trends for 2016

Now that we’ve turned over the calendar to 2016, I thought it might be helpful to take a look at current 401(k) and 403(b) trends across the country.  The marketplace is continuously changing, and 401(k) and 403(b) sponsors can maintain competitive and low cost plans by keeping current.

Six 401k Trends for 2016:

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Buying Bonds vs Buying Bond Funds

Buying Bonds vs Buying Bond Funds

Stock markets tend to be pretty good at keeping investors up at night.  Peaks, troughs, business cycles, corrections, and crashes are par for the course when investing in stocks.  And for many investors this is just a little too much excitement.

For anyone uncomfortable with the risk of investing in stocks, bonds are often the first alternative. They won’t nock knock your socks off with huge returns, but bonds can provide steady income with less risk that your portfolio sours.

But when it comes to buying bonds, investors have a big choice to make: do you buy individual bonds or bond funds.

Unlike stocks, the choice between buying individual securities or a fund that includes individual securities has major implications.

Here’s a quick guide that explains what you need to know.

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4 Telltale Signs You're in the Wrong Investments

4 Telltale Signs You’re in the Wrong Investments

Investing is kind of like buying new shoes.

There are a thousands of options out there: running shoes, hiking shoes, dress shoes, and flip flops just to name a few.  The right pair for you will depend on what you need them for, how big your foot is, and how much you want to spend.

There are thousands of options in the investment world too, from individual stocks and bonds, to mutual funds and ETFs, to managed accounts and automated platforms.

One question I hear a fair amount is, “with all the options out there, how do I know if my portfolio is right for me?”

Much like buying a new pair of shoes, the right portfolio for you matches your needs.

If you need new shoes to take your dog for a walk around the block twice a day, you probably won’t go out and buy ski boots.  The same idea applies when investing.

 

4 Telltale Signs You’re in the Wrong Investments:

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5 Ways to Get Lower Rates on Unsecured Business Loans

5 Ways to Get Lower Rates On Unsecured Business Loans

Borrowing money is a way of life for most entrepreneurs and business owners.  I recently read that 80% of businesses rely credit to finance their ongoing operations.

Entrepreneurs often don’t have many options when it comes to procuring credit.  And any time you don’t have collateral to put up against a loan, you’re venturing into the unsecured business loan market.

Many small business experts advise against taking out an unsecured business loan.  The rates are high and the terms can be kryptonite to your bottom line.

But for many of us, unsecured business loans are our only option.  If you ever find yourself in this situation, this post will cover 5 ways to improve your rate on unsecured business loans.

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What No One is Telling You

What No One Is Telling You About Long Term Disability

When someone mentions the word insurance, most of us think of one of three things:

  1. Aaron Rodgers doing a discount double check
  2. The GEICO Gecko using his British accent
  3. The coverage we carry on our cars, our home, our health, or our life

What most of us don’t think of is our long term disability coverage.

Since tangible assets like our cars and homes are easy to visualize, they’re often top of mind when it comes to insurance protection.

But what about the risk that we get sick or injured, and can’t work?

Long term disability insurance is meant to replace our income if this happens.  And coincidentally, our ability to earn a living is probably our biggest and most overlooked asset.

 

Earnings Capacity

Let’s take a moment to think about your ability to earn a living.  Just imagine for a moment what your lifetime earnings will look like.

Your lifetime earnings includes every single paycheck you earn throughout your entire career.  It counts every single raise, every single promotion, and every single bonus.

When you add them all together you’ll get a massive number.  It will be far bigger than the value of your home, your car, and probably your retirement nest egg.

Your ability to go out into the work force and earn this money is your earnings capacity.

 

Now Imagine It’s Gone

Many people consider the possibility that they die, and the impact that would have on their family.  But what if you were hurt or sick and unable to work?

Your family would be left with monthly expenses like a mortgage, utilities, and grocery bills.   They’d also be left without your steady paychecks to afford them.

Plus there’s a chance you might need additional help from a caretaker if you’re permanently disabled.  The end result?  Higher expenses, lower income.

 

It’s More Likely Than You Think

If you’re thinking “that’ll never happen to me,” the statistics would disagree with you.

The social security administration says that 1 in 4 of today’s 20 year-old’s will become disabled for some period of time before they retire.

And if you’re under 45, the chances that you become disabled are far, far greater than the chances that you die.

 

Let’s Think About This

  1. Our earnings capacity is our biggest and most important asset
  2. Becoming disabled is far more likely than we realize
  3. Losing our earnings capacity could cause our family severe hardship

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Small Business and Tax Policy

For small businesses, two topics are consistently near and dear to our hearts in presidential elections: taxes and health care costs. 

There’s been heated debate on the issues during this election (and most for that matter).  And while I’m no political expert, I’m confident our new president will push for changes that affect the small business community – both good and bad.

To help sort through negative ads, debate & media circuses, and smear campaigns, I’ve compiled the remaining candidates’ positions on taxes and health care.

 

The Candidates

I’ve sorted them by where each falls on the political spectrum with regard to their tax policies.  We’ll start with most conservative, and work our way toward the most liberal.

 

Ted Cruz

ted-cruz-poster_1

Personal Taxes

Ted Cruz has notably emerged as a proponent for a flat tax.  Cruz wants to tax all personal income and wages at 10%, and eliminate the estate tax and alternative minimum tax entirely.

Corporate Taxes

On the theme of a flat tax, Cruz wants to replace the payroll and corporate income taxes with a 16% flat business tax.  He also wants to eliminate tax on business profits earned abroad.

Cruz’s position is the most radical of the republican candidates, but the camp still claims that social security and medicare would remain fully funded after implementing his measures.

Interestingly the Tax Foundation, which is a group that supports lower tax rates, claims that Cruz’s plan would increase the federal deficit by up to $3.6 trillion over the next 10 years.  With potential economic growth, that number decreases to $768 billion.

Cruz has also been outspoken against the IRS, and wants to relegate tax collection and enforcement to another arm of the treasury.  He’s been critical of the IRS since their targeting scandal, and believes they should be made irrelevant through his tax plan.

Healthcare

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How to Calculate Solo 401k Contribution Limits

How To Calculate Solo 401k Contribution Limits

Whatever you want to call it: solo 401k, solo-k, uni-k, or one-participant-k,  the retirement plan is one of my very favorite for small business owners.  Solo 401k plans are easy to set up, low cost, and easy to maintain.  But despite the benefits, solo 401k contribution limits and the plan’s other intricacies can be murky.

 

When Can You Contribute To A Solo-401(k)?

 

The solo 401(k) is just what the name implies – a 401(k) plan for business owners without employees.

While most often utilized by sole proprietors and single member LLCs, solo 401(k)s can also be used in partnerships, multi member LLCs, S-corporations, and C-corporations as long as there are no qualifying employees.

Basically, you can make contributions in any year that you report income from self-employment on your tax return.  This can come in several forms:

  • Schedule C income from a sole proprietorship or single member LLC
  • W-2 compensation from an S-Corp or C-Corp
  • K-1 income attributable to self employment earnings, from a partnership or multi member LLC

 

Solo = No Eligible Employees

 

Not only must you have self employment income, but you can’t have any eligible employees.  This is where many business owners get tripped up, because the definition of an eligible employee can seem a bit murky.

Basically, the solo 401(k) is not much different than the traditional 401(k).  Solo 401(k) plans must have a plan document that describes how the plan is to be operated, just like traditional 401(k) plans.  Additionally, all 401(k) plans must be fair & equitable to all participants, and not discriminate in favor of highly compensated employees (or against non-highly compensated employees).

Solo 401(k) plans are no different.  They all have plan documents that must be followed, but since there are no other participants in a solo 401(k), there is no one to discriminate against.

From an administration standpoint this is great for business owners. Making sure that a traditional 401(k) is compliant requires non-discrimination testing each and every year, which can be onerous and expensive.  No employees = no testing required.
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