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Sailing with the Tides

Embarking on a financial plan is like sailing around the world. The voyage won’t always go to plan, and there’ll be rough seas. But the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-advised. A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.

Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire. Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of “bad weather” can your plan withstand along the way?

The key to a successful voyage is a good navigator. A trusted advisor is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the advisor may suggest you replot your course.

As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced advisor will work with the conditions. Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well-diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.

Circumnavigating the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes is the enemy of many a long-term financial plan.

Distractions can also send investors, like sailors, off course. In the face of “hot” investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets. A lack of flexibility is another impediment to a successful investment journey. If it doesn’t look as though you’ll make your destination in time, you may have to extend your voyage, take a different route to get there, or even moderate your goal.

The important point is that you become comfortable with the idea that uncertainty is inherent to the investment journey, just as it is with any sea voyage. That is why preparation and planning are so critical. While you can’t control every outcome, you can be prepared for the range of possibilities and understand that you have clear choices if things don’t go according to plan.

If you can’t live with the volatility, you can change your plan. If the goal looks unachievable, you can lower your sights. If it doesn’t look as if you’ll arrive on time, you can extend your journey.

Of course, not everyone’s journey is the same. Neither is everyone’s destination. We take different routes to different places, and we meet a range of challenges and opportunities along the way. But for all of us, it’s critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target.


Adapted from “Sailing with the Tides,” Outside the Flags by Jim Parker, March 2018. Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Know Your Retirement Plan Beneficiaries

According to a recent Wall Street Journal article, retirement plans and IRAs account for about 60 percent of the assets of U.S. households investing at least $100,000.¹ Both state and federal laws govern the disposition of these assets, and the results can be complicated, especially when the owner of the account has been divorced and remarried. Therefore, it is important for plan fiduciaries of qualified retirement plans to understand their role regarding beneficiary designations and the regulations that dictate.

Under ERISA and the Internal Revenue Code, in the case of a defined contribution plan that is not subject to the qualified joint and survivor annuity rules², if a participant is married at the time of death, the participant’s spouse is automatically the beneficiary of the participant’s entire account balance under the plan. A participant may designate someone other than his or her spouse as the beneficiary only with the spouse’s notarized consent.

If the owner of a retirement plan account is single when he or she dies, the assets go to the participant’s designated beneficiary, no matter what his or her will states. In addition, the assets will be distributed to the designated beneficiary regardless of any other agreements including even court orders. If the participant fails to designate a beneficiary, the terms of the plan document govern the disposition of the participant’s account. Some plan documents provide that in the absence of a beneficiary designation the participant’s estate is the beneficiary, while others provide for a hierarchy of relatives who are the beneficiaries. Because of the variances in plan documents, it is important that fiduciaries review the terms of their plan document when faced with determining who the beneficiary is in the absence of the participant’s designation.

The beneficiary determination can become complicated when a retirement plan participant divorces. Where retirement benefits are concerned, both the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code contain provisions requiring plans to follow the orders of state courts overseeing domestic disputes that meet certain requirements. These orders are referred to as “qualified domestic relations orders” (QDROs).

Until recently, the federal courts have failed to adopt a reliable and uniform set of rules for adjudicating disputes among beneficiaries with competing claims. Some courts, adopting a strict reading of ERISA, simply pay the benefit based on the express terms of the plan; while others, with a nod to such concepts of “federal common law,” look to documents extraneous to the plan (e.g., the divorce decree, a waiver, or some other document) to make the call. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, the U.S. Supreme Court settled the matter, coming down squarely on the side of the plan document.

The facts in Kennedy are straightforward: A plan participant married and designated his wife as his beneficiary.  The plan participant and his wife subsequently divorced. Under the terms of the divorce decree, the participant’s spouse surrendered her claim to any portion of the benefits under the participant’s retirement plan. As sometimes happens, the participant neglected to change his beneficiary designation under the plan to reflect the terms of the divorce. As a result, his ex-spouse remained designated as his retirement plan beneficiary. Upon the death of the participant, the plan administrator, following the terms of the plan document and the beneficiary designation, paid the participant’s account to the ex-spouse. Predictably, the participant’s heir (his daughter in this instance) sued on behalf of the estate. The Supreme Court ruled that under the terms of the plan document, the designated beneficiary receives the participant’s death benefits, and in this case, the ex-wife was the designated beneficiary entitled to the participant’s account.

Another common example occurs following a divorce, when a plan participant designates his or her children as beneficiaries. If the participant later remarries, and dies while married to the second spouse, the second spouse is automatically the participant’s beneficiary unless he or she consents to the participant’s children being designated as the beneficiaries.

There are steps that plans can take to make the beneficiary process less prone to error. For example, a plan document can provide that divorce automatically revokes beneficiary designations with respect to a divorced spouse. It also behooves plans to review their communications materials to help ensure that participants are made aware of the rules that apply to the designation of beneficiaries.

Many plans that have had to deal with issues like these have decided to take inventory of their current beneficiary designations on file and attempt to remediate any deficiencies directly with the participants. Some have also requested their recordkeeper to insert a note in participants’ quarterly statements reminding them to confirm their beneficiary designation is current and accurate. Both are good ideas.

As a plan sponsor you have the best wishes of your participants in mind and helping ensure their beneficiary designations are in order is another way to protect them and help ensure their intentions are carried out. Consider distributing this month’s accompanying participant memo that reminds participants of the importance of keeping their beneficiary designations up to date.

About the Author, Michael Viljak, Senior Plan Consultant

Michael Viljak joined RPAG in 2002 and has over 30 years of experience in the pension field, on both the wholesale and retail levels, focusing on retirement plans ever since their inception in 1981. Michael has an interest in fiduciary related topics and was part of the team that created RPAG’s proprietary Fiduciary Fitness Program™.  He also authors many of the firm’s newsletter articles, communication pieces and training modules.

The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. (c) 2017. Retirement Plan Advisory Group.

¹Family Feuds: The Battles Over Retirement Accounts

²This commentary addresses only plans that are not subject to the qualified joint survivor annuity (QJSA) rules. Typically, retirement plans are designed not to be subject to the QJSA rules by meeting the following requirements: (1) upon death, 100 percent of the participant’s vested account balance is payable to the surviving spouse; (2) the participant does not elect a life annuity; and (3) the participant’s account balance does not include any assets subject to the QJSA rules, such as a transfer from a money purchase pension plan. Please contact your consultant for questions related to defined benefit pension plans and money purchase pension plans subject to the QJSA rules.

Volatility is Back

It’s back! Volatility has returned to the financial markets.

The year got off to a calm start, but the stock market saw a return to larger daily price moves. Such volatility has many investors moving more funds to bonds or cash. Sounds reasonable! But economic conditions still favor stocks.

The primary way to measure risk, or uncertainty, in stocks and other financial instruments is to look at option contracts. These risk measurements are generally spoken of on Wall Street as Fear Indices.

The most famous is called the VIX.   The CBOE Market Volatility (VIX) is an index of stock option trading for the large, US-based companies in the Standard and Poor’s 500 Index. The VIX index reflects the cost of hedging risk through the sale or purchase of option contracts on the stocks of US companies. Option prices rise when the underlying stock prices move dramatically in one direction or another – reflecting greater uncertainty over what the price will be in the future.

As of the middle of March, The Chicago Board Options Exchange’s VIX index is at 17 percent, compared to an average daily rate of only 11 percent for all of 2017.  Statistically, this is a big difference. A 6 point rise reflects a large rise in expected risk.

The 17 percent value of the VIX index is a statistical measure called standard deviation. The VIX is saying over the foreseeable future we can expect to see stock returns deviate from their long run average by approximately 17 percent on an annualized basis. In terms of probability, a 17 percent deviation means there is about a 1-in-4 chance investors will be down over the course of the next year.

Therefore, stocks look more risky this year than last. But this rise in uncertainty comes at a time when things look very good in the real economy.

The three main indicators of our macro economy – income, prices, and employment – are all showing improvement. The nation’s income, or real gross domestic product (real GDP), is growing at a 2.5 percent annual rate based on the most recent report. This compares to only 1.5 percent growth in 2016.

According to the Congressional Budget Office (CBO), the US economy is now operating at its potential, meaning we are using all our workers and all our capital equipment fully. In theory, this means prices of goods and services should be rising more quickly.

The inflation rate, however, remains below long-run averages. As measured by the Consumer Price Index (CPI) index, inflation today is 2.3 percent, compared to an annual average of 3.3 percent since the 1980s.

Meanwhile, the labor market is strong. The national unemployment rate stands at only 4.1 percent, below the 4.7 percent rate which the CBO estimates to be normal.

If the economy is doing well why should stock prices be any more volatile? What’s the risk?

The financial market uncertainty seems to center on the fiscal and monetary policy of governments around the world.  What policies are changing that will hurt corporate profits and stock prices?

In terms of fiscal policy, most developed nations continue deficit spending, raising government debt levels. For monetary policy, central banks continue to hold bank interest rates below historical averages.

The US public debt situation is unchanged with total federal debt holding at just over 100 percent of GDP.  The debt levels of other major governments are growing even more (e.g., Japan).

Central banks around the world continue to support such government borrowing with relatively easy monetary policies, or liquidity in the banking system. High bank liquidity keeps interest rates below market equilibriums and creates uncertainty over the consequences of how fast central banks may raise rates.

Fortunately, classical economic theory and historical evidence show us that these two situations should not concern us. First, economist David Ricardo (1772 – 1823) showed when people expect taxes to be raised to offset the future payments of principal and interest on current debt, then today’s debt financing is equivalent to a tax.

That means there is no real difference if the government taxes its citizens or borrows to finance its spending. Thus, rising government debt levels shouldn’t affect corporate profits any more than current taxes. Companies have made good money even when governments run deficits.

Second, economist and philosopher David Hume (1711 – 1776) showed monetary policy has no real effect on the economy. Monetary neutrality is the theory that over time changes in the level of bank money and credit affects only nominal variables, such as interest rates and exchange rates. Such changes have no effect, however, on real variables like income and consumption.

Therefore, banks and other financial institutions may be at risk as interest rates rise, but most companies will see no harm. Households will even benefit from better returns on their savings.

With interest rates still below normal and the underlying economy humming along, stocks remain the better value over bonds or cash despite rising uncertainty. The near-term outlook for increasing household incomes and corporate profits remains strong.

The views expressed here are those solely of the author and do not represent Northwest Nazarene University or R|W Investment Management.


Peter R. Crabb, Ph.D.

Professor of Finance and Economics

Department of Business and Economics

School of Business, Northwest Nazarene University

Dr. Crabb holds a Ph.D. in Economics from the University of Oregon and an MBA in Finance from the University of Colorado.  His research in economics and finance is published in the Journal of Business, the Journal of Microfinance, and the International Review of Economics and Finance, among others.  Dr. Crabb lives with his wife, Ann, and their four children in Canyon County, Idaho.

Dr. Crabb’s regular Financial Economics column is published by the Idaho Statesman. Previous work experience includes international trade, banking, and investments.