As corporate employers shift from defined benefit to defined contribution plans, the burden of ensuring retirement income sufficiency has shifted from employer to employee—and most employees are ill-equipped to handle the responsibility.

About 50% of private-sector employees have access to a retirement plan; but access to defined benefit plans has dropped off significantly. In 1980, 83% of those employees were covered by a defined contribution plan. But by 2008, that number had dropped to 31%, leaving about 85% of employees fending for their own retirement security.

In response to employees’ increasing retirement worries, insurance companies and financial services firms have developed new financial products and plan features providing income sufficiency for participants in defined contribution plans.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of retirement studies in Advisor’s Journal, see How Much to Allocate to Annuities: A Critical Analysis (CC 11-109) & How Are IRA Owners Investing Their Money? (CC 11-112).

For in-depth analysis of qualified plans, see Advisor’s Main Library: A—General Introduction to Qualified Plans.

Trusts offer your clients asset protection and tax benefits, giving them the power to say how and when their cash and property are distributed. They also offer a mechanism for putting the decision-making process in the hands of someone other than the grantor—the power of appointment (POA).

But for all their flexibility, powers of appointment also have the tendency to throw estate plans off track, resulting in unplanned-for tax liability and unforeseen results.

Although a person who has a general power of appointment over property isn’t said to own the property, if they die holding the POA, their gross estate can include the value of that property. And that’s where the dispute in Estate of Chancellor v. Comm’r, T.C. Memo 2011-172 (2011) begins.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the estate tax in Advisor’s Journal, see More States Moving to Estate Tax Repeal (CC 11-121) & Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122).

For in-depth analysis of the estate tax, see Advisor’s Main Library: A—Federal Estate Tax General.

Why is This Topic Important to Wealth Managers? This blogticle discusses the debt limit debate. We present discussion directly from the Administration including the Department of the Treasury. Wealth managers who are following the debt debate discussion will likely be interested in our presentation of insider comments.

As almost the entire world knows at this point, the U.S. reached the debt limit on May 16, 2011. To plug the gap, the Treasury Department has employed three measures to temporarily extend our ability to meet the nation’s obligations.  Those measures, in order taken, are (1) suspending issuance of State and Local Government Series (SLGS) Treasury securities; (2) declaring a “debt issuance suspension period” of the Civil Service Retirement and Disability Fund (CSRDF); and (3) suspending reinvestment of the Government Securities Investment Fund (G Fund).

It is said that these four extraordinary measures allow the Treasury to extend borrowing authority until August 2, 2011. Here’s what Treasury has said about the debt limit over the past few weeks:

7/12 Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.

“The Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

7/13 Treasury Secretary Tim Geithner made a brief statement to the press:

There is unanimity in that room that we are a country that meets its obligation, we are a country that pays our bills and that we’ll act and do what’s necessary to make sure that we can maintain that commitment. As the Majority Leader said, we have looked at all available options and we have no way to give Congress more time to solve this problem and we are running out of time.

And the eyes of the country are on us, and the eyes of the world are on us and we need to make sure we stand together and send a definitive signal that we are going to take the steps necessary to avoid default and also take advantage of this opportunity to make some progress in dealing with our long-term fiscal problems. We don’t have much time; it’s time we move.

7/14 The U.S. Department of the Treasury released the following statement from Under Secretary for Domestic Finance Jeffrey Goldstein on the Standard and Poor’s (S&P) downgrade:

“[This} action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support.”​

7/15 U.S. Department of the Treasury releases the following statement from Jeffrey Goldstein, Under Secretary for Domestic Finance, regarding the use of the last of the previously mentioned measures available to keep our nation under the statutory debt limit, suspension of reinvestment of the Exchange Stabilization Fund.

“Today, as previously announced, the Treasury Department will suspend reinvestment of the Exchange Stabilization Fund, the last of the measures available to keep the nation under the statutory debt limit.  In order to prevent a default on the nation’s obligations, Congress must enact a timely increase of the debt ceiling.”

Finally, to quote President Obama from his address earlier this week:

“[American workers] are fed up with a town where compromise has become a dirty word.  They work all day long, many of them scraping by, just to put food on the table.  And when these Americans come home at night, bone-tired, and turn on the news, all they see is the same partisan three-ring circus here in Washington.  They see leaders who can’t seem to come together and do what it takes to make life just a little bit better for ordinary Americans.  They’re offended by that.  And they should be.”

Tomorrow’s blogticle would ideally present the terms of the debt agreement, but if not, we’ll discuss life insurance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Last month, we talked about how cash value is influenced by the different cash value investment options, the historical performance of such cash value investment options, and cost-effectiveness of the various cash value allocation options.

This month we talk about using the most advantageous and consistent rate of return. There are different ways that companies publish rates of return depending on the type of life insurance.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of cash valuation in Advisor’s Journal, see Historical Performance of Underlying Cash Value of Life Insurance (CC 11-82).

The Financial stability Oversight Council, (FSOC or Council), formed as part of the Dodd-Frank, is charged with three main responsibilities:

1. To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.
2. To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.
3. To respond to emerging threats to the stability of the U.S. financial system.

The FSOC recently issued a report discussing the financial crisis. The report found that among other conditions, the U.S. economy continues to heal from the 2007–09 recession (the longest since the Great Depression). Consumer spending and business investment have increased, but housing markets remain depressed and the unemployment rate is elevated. The global economy is also recovering, albeit at varying rates across advanced and emerging economies.

Moreover, the report found the financial crisis produced great upheaval in the U.S. financial sector, but the impact on the economy was even more devastating. At the height of the crisis, credit conditions tightened for households and businesses, as well as for financial firms of all sizes, reflecting severe disruptions to a range of financial markets that proved far more damaging than the disruptions from the initial credit losses themselves.

The FSOC notes, government budgets, both federal and nonfederal, have been strained by the cyclical response of revenues and expenditures to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery. The federal government deficit grew from 1.2 percent of GDP in 2007 to 8.9 percent in 2010, and net publicly held federal debt outstanding rose from $5 trillion to $9 trillion. This public borrowing largely replaced private borrowing in the credit markets, and global financial markets readily accommodated the increase in federal debt. Even after economic conditions return to normal, the federal government faces a long-run imbalance between revenues and expenditures. This need for long-run fiscal sustainability has been a focus of recent attention from credit rating agencies. Achieving longrun sustainability of the national budget is crucial to maintaining global market confidence in U.S. Treasury securities and the financial stability of the United States.

State and local government revenues were also severely affected by the economic downturn. While state finances started to improve in the second half of 2010, several quarters into the economic recovery, local governments remain challenged. The municipal debt market exhibited evidence of considerable stress last year.

In the period after the financial crisis, the legal, regulatory, and accounting framework of our financial system has changed significantly.

The Dodd-Frank Act, which created the Council, was intended to close gaps in the financial regulatory framework and strengthened supervisory, risk management, and disclosure standards in important ways. The new Basel III international standards for banks, negotiated with major input from U.S. regulators, will require banks globally to hold more capital, particularly when they take market risk, and will subject banks to a liquidity standard for the first time, and new accounting rules will serve to limit financial institutions’ off-balance-sheet activities.

For the first time, information on trading in swaps will be available through trade repositories. In addition, standardized derivatives will have to be traded on regulated trading platforms and centrally cleared, improving price transparency and reducing counterparty credit risk for market participants. Once regulators complete the implementation of the Dodd-Frank Act, the mix of complex structured credit products, derivatives, and short-term wholesale funding that helped produce the financial crisis is unlikely to reappear in its previous form.

Still, U.S. regulators continue to work out the details of several important initiatives, including those mandated by the Dodd-Frank Act and those agreed to with their international counterparts. For example, the Council has defined the characteristics under which it will designate systemically important financial market utilities for enhanced supervision.

The Council is also in the process of defining the characteristics under which it will designate nonbank financial institutions for Federal Reserve supervision, and the Federal Reserve, in consultation with other Council member agencies, is establishing tougher supervisory guidelines for large financial institutions. Regulators are also developing new reporting and disclosure requirements for designated nonbank financial companies.

Tomorrow’s bloticle will discuss issues related to federal regulation.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

The idea of appointing a self-regulatory organization (SRO) to oversee registered investment advisors (RIAs) has been knocking around in Washington for almost a decade. But the push to delegate some of the SEC’s authority over RIAs to an SRO has new urgency as the SEC struggles under budget cuts and its increased responsibilities under the Dodd-Frank Wall Street Reform Act.

The situation at the SEC is so dire that some of the most strident opponents of an SRO for advisors are backpedalling, recognizing that the Securities and Exchange Commission (SEC) may be unable to fulfill its mandate without outside assistance. Even the Consumer Federation of America (CFA), a consumer organization that has long advocated against establishment of an advisor SRO, is coming around.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the proposal to appoint an SRO for advisors in Advisor’s Journal, see FINRA Plans New Power Grab as SEC Falters (CC 11-67) & Republicans Balk at RIA User Fees (CC 11-60).

Why is This Topic Important to Wealth Managers? This blogticle discusses the Value Added Tax or VAT. As our debt limit debate continues, we examine one avenue the government may consider to close the deficit.

General dissatisfaction with the federal tax system by the taxpayers  has contributed to a debate about U.S. tax reform, including proposals for a national consumption tax. One type of proposed consumption tax is a value added tax (VAT), widely used around the world.

A VAT is levied on the difference between a business’s sales and its purchases of goods and services. Typically, a business calculates the tax due on its sales, subtracts a credit for taxes paid on its purchases, and remits the difference to the government.  VAT liability is typically calculated in industrialized countries using what is known as the credit invoice method. Under this method, businesses apply the VAT rate to their sales but claim a credit for VAT paid on purchases of inputs from other businesses (shown on purchase invoices). The difference between the VAT collected on sales and the credit for VAT paid on input purchases is remitted to the government.

Example: VAT with a 10 percent rate. A lumber company cuts and mills trees and has sales of $50 to a furniture maker. Assuming no input purchases from other businesses, to keep the illustration simple, the company adds the tax to the price of the goods sold and remits $5 in tax to the government. The purchase invoice received by the furniture maker would list $50 in purchases plus $5 in VAT paid.

If the furniture maker has sales of $120 to a retail store, $12 of VAT would be added to the sales price but the furniture maker could subtract a credit for the $5 VAT paid on purchases and remit $7 to the government. The retailer would receive an invoice showing purchases of $120 and $12 of VAT. Similarly, if the retailer then has sales of $150, $15 of VAT would be added but the retailer could subtract a credit for the $12 paid on purchases and remit $3 to the government.

Yes, there is revenue for the government in the VAT tax, but what will the costs of administration be?  A VAT, like any tax system, will require government resources to administer. The drivers of administrative costs in many tax systems  include the number of taxpayers (businesses, individuals, or both) subject to the tax, how often they file returns, and the percentage of taxpayers audited. In the case of a VAT, administration requires the government to process tax returns and provide certain services to businesses.

Even a simple VAT warrants education and assistance services, in part to address compliance risks. Tax administrators also need to spend significant resources on audit and enforcement activities.

Some available data from the Government Accountability Office indicate a VAT may be less expensive and easier to administer than an income tax. In 2006, the tax administration agency in the United Kingdom measured administrative costs for the VAT to be approximately half a percent of revenue collected compared to over one and a quarter percent for the income tax.

Tomorrow’s blogticle will discuss issues related to regulation.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

How fast time flies. The one year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) came and went on July 21^st, and we’re left wondering: Where are we now?

Surprisingly little has changed since the Act was passed on July 21, 2010. The Securities and Exchange Commission (SEC) and other federal agencies charged with implementing Dodd-Frank have struggled to comply with their mandate. The SEC, in particular, has had difficulty meeting its timeline due to funding problems and short staffing.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Dodd-Frank in Advisor’s Journal, see Dodd-Frank: Dying on the Vine? (CC 11-116), Is Barney Frank’s Resolve to Implement Dodd-Frank Weakening? (CC 11-95), & Republicans Look to Erode Dodd-Frank (CC 11-75).

Why is This Topic Important to Wealth Managers? This blogticle discusses the municipal bond market. The discussion focuses on regulation regarding wealth managers who recommend the use of muni bonds to clients.

This past week served as the one year anniversary of when President Obama signed into law the Dodd-Frank Act. [1]

The Dodd-Frank Act was enacted, among other things, to promote the financial stability of the United States by improving accountability and transparency in the financial system.[2]

With Section 975 of Title IX of the Dodd-Frank Act, Congress amended Section 15B of the Exchange Act [3] to, among other things, make it unlawful for municipal advisors to provide certain advice to, or solicit, municipal entities or certain other persons without registering with the Commission.[4]

Since then the SEC has taken several actions regarding municipal securities. In December, it voted to propose a rule creating a new process by which municipal advisors must register with the SEC. [5] In May 2010, the Commission voted to approve rule changes improving the quality and timeliness of municipal securities disclosure. [6]

Both measures were intended to strengthen existing requirements for the scope of securities covered, the nature of the events that issuers must disclose, and the time period in which disclosure must be made.

Until the passage of the Dodd-Frank Act, the activities of municipal advisors were largely unregulated and municipal advisors were generally not required to register with the Commission or any other federal, state or self-regulatory entity with respect to their municipal advisory activities.

Some entities that are now subject to registration as municipal advisors pursuant to Section 15B of the Exchange Act, and rules or regulations promulgated thereunder, currently are subject to regulation by various federal and state regulators in other capacities.  These entities include brokers, dealers, municipal securities dealers, investment advisers, and banks.  Such regulations, however, generally do not apply to their activities as municipal advisors.

Municipal advisors engage in municipal advisory activities in a variety of contexts.  For example, municipal advisors participate in the majority of issuances of municipal securities.

According to the Municipal Securities Rulemaking Board (“MSRB” or “Board”), approximately $315 billion (70%) [7] of the municipal debt issued in 2008 was issued with the participation of municipal advisors commonly referred to as “financial advisors.”

A study that looked at historical involvement by “financial advisors” identified participation rates of approximately 50% in a nearly twenty-year period ending in 2002. [8]

The municipal securities market consists of over 51,000 issuers,[9] a diverse group that includes states, their political subdivisions such as cities, towns and counties, and their instrumentalities such as school districts or port authorities.  These public bodies are governed by state and local laws, including state constitutions, statutes, city charters, and municipal codes.

Municipal securities are issued by government entities to pay for a variety of public projects, for cash flow and other governmental needs, and to fund non-governmental private projects by acting as a conduit on behalf of private organizations that wish to obtain tax-exempt interest rates.

As of March 31, 2010, municipal issuers had an outstanding principal amount of securities in excess of $2.8 trillion. [10]

Tomorrow’s blogticle will continue discussion on regulation.

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[1] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[2] See Pub. L. No. 111-203 Preamble.

[3] 15 U.S.C. 78o-4.  All references in this Release to the Exchange Act refer to the Exchange Act as amended by the Dodd-Frank Act.

[4] See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C. 78o-4(a)(1)(B)

[5] See 17 CFR Parts 240 and 249.

[6] See 17 CFR Parts 240 and 241.

[7] See Municipal Securities Rulemaking Board, “Unregulated Municipal Market Participants:

A Case for Reform” (Apr. 2009), available at http://www.msrb.org/News-and-Events/PressReleases/Press-Releases/~/media/Files/SpecialPublications/MSRBReportonUnregulatedMarketParticipants_April09.ashx (“MSRB

Study”).

[8] See Arthur Allen and Donna Dudney, May 2010, Does the Quality of Financial Advice

Affect Prices?  The Financial Review 45: 389 (“Allen and Dudney”) (analyzing data from

1984 to 2002).

[9] See Report on Transactions in Municipal Securities, Office of Economic Analysis and

Office of Municipal Securities, the Division of Trading and Markets, U.S. Securities and

Exchange Commission, (July 1, 2004).

[10] See Federal Reserve Board, Flow of Funds Accounts, Flows and Outstandings, First Quarter

Why is This Topic Important to Wealth Managers? Today We Continue with our Casual Friday Series with a Blogticle on Noteworthy Convictions and Arrests Regarding Recent Insurance Fraud and Scams in New York. Don’t let your name appear next.

Kelly Woods, an upstate New York woman who had relocated to Utah, was sentenced in June to 1-to-3 years in prison and ordered to pay $42,000 in restitution to the New York State Insurance Fund. She was extradited and arrested in March or faking a work injury in order to collect workers’ compensation benefits. She pleaded guilty to insurance fraud in April. On numerous occasions between July 2008 and November 2010, she reported that she suffered from permanent fixed torticollis, a condition that kept her head at a 90-degree angle at all times. However, she was observed on video moving her head and neck freely. As a result of the fraud, she collected $42,000 in benefits to which she was not entitled. She also signed a Workers’ Compensation Agreement waiving future claims to benefits, thereby freeing up nearly $600,000 in reserves that the State Insurance Fund had put aside for her fraudulent claim.

A Syracuse carpenter, Paul J. Keyes, who was originally charged with insurance fraud, violation of the Workers’ Compensation Law and offering a false instrument for filing at his arrest on 12/21/10, pleaded guilty to a lesser charge of disorderly conduct in June of this year in satisfaction of all charges. An investigation revealed that from 2006 to 2010 he underreported the number of employees on his payroll as well as his income in order to reduce his workers’ comp premiums. As a result, he underpaid the State Insurance Fund by $31,744. He was sentenced to one year conditional discharge and was ordered to pay the State Fund the full $31,744 in restitution.

Sixteen individuals were arrested in connection with a systematic scheme to steal hundreds of thousands of dollars from five insurance companies: Allstate, GEICO, GMAC, Liberty Mutual and Progressive. Additional arrests are expected in this continuing investigation. Evidence was uncovered indicating that the defendants submitted more than 100 fraudulent claims for vehicles allegedly involved in phantom accidents, costing the insurance companies almost $300,000 in payments for property damage claims in the Bronx. The ringleader of the scheme allegedly recruited most of the other defendants to file fraudulent claims, cash the checks issued by the insurers and turn over most of the proceeds to the ringleader, who pocketed more than $100,000. He allegedly allowed them to keep between $50 and $400 for each claim. It is alleged that in each case, an individual would pose as an actual customer of one of the insurance companies and ask to have an additional vehicle added to an existing policy. Once coverage was extended to the additional vehicle, a defendant would call the insurance carrier and report that the vehicle had been involved in an accident causing damage to another car. A defendant, purporting to be the owner of the allegedly damaged car, would then place a call to the insurance carrier and arrange to have the damage inspected, appraised and photographed by an insurance adjuster. Once the adjuster completed the inspection and appraisal, the insurance company would issue a check payable to the individual filing the claim. All of the defendants have been charged with grand larceny. Some also face charges of money laundering and scheme to defraud.

An investigation by the Frauds Bureau resulted in the arrest of a former New York State-licensed insurance agent. He formed three allegedly bogus business groups and then submitted 35 applications for supplemental hospital insurance policies for 19 applicants through Aflac Insurance Company. However, the investigation found evidence that the policies were written for persons who were either fictitious or were unaware that the policies existed. His actions allowed him to fraudulently collect $4,768 in advanced commissions from Aflac.

Next week’s Blogticles will start to discuss issues regarding year end planning.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.