The Answer to the DOL’s Final Rule on Environmental, Social and Governance (ESG) Investments
The Department of Labor (DOL) has issued a final rule, “Financial Factors in Selecting Plan Investments,” concerning environmental, social and governance (ESG) funds in private employer-sponsored retirement plans, such as 401(k)s. While the final rule does not prohibit these investing choices for workplace retirement plans, its goal is to provide clear regulatory guidelines for ERISA plan fiduciaries, with the suggestion that ESG investing conflicts with their fiduciary responsibilities.
ESG investments advance positive social change such as improving the environment or promoting human rights. According to the DOL, decisions about these investments are not primarily pecuniary (in other words, determined and expected to be in the plan participants’ best financial interests, with a material effect on the risk and return), so plan fiduciaries may be cautious about recommending or including them in the workplace plans.
According to DOL Secretary Eugene Scalia, rather than further social goals or policy objectives, “This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.”
Therefore, employees who are saving for retirement through a 401(k) or other workplace plan may now experience some roadblocks when it comes to including ESG funds or individual investments in their retirement plans.
ESG investments can be held in self-directed IRAs as an alternative
Self-directed IRAs allow individual investors to embrace social investing and include alternative assets that align not only with their financial goals but their values as well. For example, the self-directed IRA can invest in funds and initiatives that combat climate change, nefarious labor practices, or human trafficking; or support green energy, fair trade cooperatives, and other investments that address inequities in the economic landscape, promote sustainability, and support positive governance practices.
With a self-directed IRA, investors have access to the same types of account types as they would with a brokerage firm, such as a Traditional IRA, Roth IRA, SEP IRA, or even a Solo 401(k). Individuals with these retirement plans can include a broad array of non-publicly traded alternative assets in addition to ESG-related assets, such as real estate, private equity, hedge funds, precious metals, private lending and more.
It is unclear whether there will be a lot of pushback about this final rule or how it may be amended in the future. However, for investors who want to proactive take control of their financial futures, opening a self-directed retirement plan is a great step forward. At Next Generation, we invite you to schedule a complimentary educational session to learn more about self-direction as a retirement strategy.
Social Security Cost of Living Adjustment (COLA) for 2021
It was announced in mid-October that Social Security beneficiaries will see a 1.3% cost- of-living adjustment (COLA) in their monthly distribution checks, effective January 1, 2021. The Social Security Administration says this is in line with prior years’ increases, although it is slightly smaller than the 1.6% increase in 2020 and a more significant 2.8% bump to monthly checks in 2019. Looking back over a longer timeline, the COLA was zero several times (2010, 2011, 2016) and only 0.3% in 2017. Back in the 1970s and 1980s, the figures are much higher, ranging from around 6% in 1977 to 14% in 1981.
Given the financial effects of the COVID-19 pandemic on many Americans, including those receiving Social Security checks, that 1.3% increase won’t go too far in many areas of the country. According to the Social Security Administration, the average monthly benefit increase will be as follows for various categories of recipients:
- All retired workers, $20
- Aged couples who both receive benefits, $36
- Disabled workers, $16
Some other changes coming in 2021 are:
- The maximum amount of wages taxed for Social Security goes up from $137,700 now to $142,800 in 2021.
- For those of full retirement age, the maximum monthly retirement benefits are going up from $3,011 to $3,148 a month in 2021.
- In addition, the full retirement age is once again inching up based on year of birth.
The cost-of-living adjustment is based on the consumer price index for urban wage earners and clerical workers. However, this formula focuses on younger workers under age 62, who are not claiming benefits nor having Medicare payments deducted from their monthly Social Security income. Let’s not forget the rising costs of living seniors face in general, which outpace that COLA amount—food, housing, and prescription drugs among them.
There is a groundswell to change the COLA calculation to the consumer price index for the elderly instead. This is the Social Security 2100 Act, which is being put forward by Congressman John Larson of Connecticut. It expands benefits for current and future recipients, cuts taxes on the elderly, and aims to keep the Social Security Trust Fund solvent through the rest of this century.
Social Security is not so secure
Any way you slice it, relying heavily (or in many cases nationwide, solely) on Social Security for one’s retirement income does not bode well for today’s retirees —especially right now, when the fund is scheduled to be insolvent by 2033. Being more proactive about retirement saving can provide more stable financial health during one’s working and retirement years.
While Social Security benefits provide a financial safety net as per the program’s original intent, in today’s world, those benefits don’t stack up for individuals seeking to retire comfortably and maintain their accustomed lifestyle. That’s where self-directed IRAs and the nontraditional investment they allow can really shine.
Self-directed IRAs allow account owners to include a broad array of non-publicly traded, alternative assets, such as real estate, private equity, notes/loans, precious metals, and so many more. Self-directed investors can be proactive as well as nimbler about how they invest for their later years. That’s because, as individuals who make all their own investment decisions, self-directed investors can take advantage of market shifts and opportunities, and invest in many alternative assets they already know and understand, and that provide a hedge against stock market volatility.
At Next Generation, we’re all about client education. You can read more about the different types of self-directed retirement plans for individuals and business owners here. You may also schedule a complimentary educational session to get the information you need to decide whether self-direction is the right retirement strategy for you. Our helpful team is here to answer questions as well; you may contact us directly via phone at 888.857.8058 or NewAccounts@NextGenerationTrust.com.
Has the Pandemic Affected Your Retirement Confidence?
The Transamerica Center for Retirement Studies issued its 20th annual survey of retirees last month, titled “Retirees and Retirement Amid COVID-19.” The report focuses on financial stability and readiness in retirement amid the pandemic. Findings are based on a survey done in November/December 2019 and again in June 2020; it polled people 50+ years of age who consider themselves fully or semi-retired, and who worked for a for-profit company for the majority of their careers.
The study reported that among those retirees surveyed:
- The majority (76%) stated their confidence in being able to maintain a comfortable lifestyle has not been altered by the pandemic. Among that group, 29% are “very confident” and 47% are “somewhat confident.”
- A smaller group, 15%, cited a decline in confidence in light of COVID-19 while 4% reported increased confidence in financial stability.
- Social Security will be/is the primary source of income for 69% of respondents, but 40% have other savings and investments (such as checking and savings accounts, retirement plans, credit cards).
- Approximately 35% of retirees said they expect income streams from IRAs and workplace retirement plans with another 30% of retirees saying they have company-funded pension plans.
However, eating into the financial security for nearly half of those surveyed is household debt (student loans, car loans, credit cards, medical bills) and nearly a quarter of respondents are paying off mortgages.
Even though many retirees are not feeling shaken financially by COVID-19’s economic ramifications, Transamerica noted that relatively few were “very confident” before the pandemic. The study concluded that many retirees are in danger of outliving their financial resources or lack income to cover healthcare expenses or pay for long-term care. Another sobering revelation: the lack of a financial strategy for retirement. Of those who said they have a plan (58%), only 18% have it in writing. That leaves 42% without a financial strategy amid the pandemic.
Self-directed retirement plans—an effective financial strategy at any time
Self-directed IRAs are ideal for investors who are confident in making all of their own investment decisions, and those who may already be investing in alternative assets outside of a retirement plan. Whether you are in your early- or mid-career phase, nearing retirement, or already retired, you have the option to use the many different nontraditional investments allowed through self-direction to build retirement wealth.
Self-directed IRAs enable investors to include a wide range of non-publicly traded alternative assets that typical plans do not allow, such as real estate, private equity, social causes, precious metals, secured and unsecured loans, and many more. In short, while the pandemic and politics can create instability in the stock market, self-directed IRAs provide a valuable hedge against that volatility, with a more diverse retirement portfolio and better control on investment returns.
If you’re thinking of diversifying the investments in your retirement plan, are comfortable conducting your own due diligence and research about those investments, Next Generation has the tools you need to get started. Please considering registering for a complimentary educational session. Alternatively, you may also contact our team directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.
Further Expansions to “Accredited Investor” Definition
Last month, the Securities and Exchange Commission amended its “accredited investor” definition that goes beyond income and net worth criteria; the expanded definition allows investors to qualify based on defined measures of professional knowledge, experience, or certifications. There is also an expanded list of entities that may qualify as an accredited investor, including tribal governments, family offices and certain other organizations.
This status allows individuals to participate in private placements—equity investments such as those allowed in self-directed IRAs. This amendment to the final rule aligns with self-directed investing in another way—using an investor’s knowledge or experience as a basis for participating in investment opportunities. Self-directed investors make their own investment decisions about the alternative assets they wish to include in their retirement plan, based on what they have researched, know, and understand—decisions not based solely on wealth.
The SEC’s previous rule used income or net worth as factors of financial sophistication—individuals had to meet the test of a net worth of at least $1 million excluding the value of primary residence, or income of at least $200,000 each year for the last two years (or $300,000 combined income if married). The amended rule goes beyond wealth as the criterion for purposes of the accredited investor definition.
What the amendments include
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act to:
- Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund
- Clarify that limited liability companies with $5 million in assets may be accredited investors
- Add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs)
- Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries
- Add family offices with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act
- Add the term “spousal equivalent” so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors
Self-directed IRAs for investors of all kinds
Several years ago, the SEC implemented the JOBS Act in full, which opened up equity crowdfunding platforms to even more individuals, including nonaccredited investors who did not meet the income/net worth tests but wanted to take advantage of equity funding opportunities. For those who want to be angel investors in an early-stage company and/or wish to participate in equity crowdfunding platforms, a self-directed IRA is a valuable vehicle for making these types of investments. The flexibility of these retirement plans and the many non-publicly traded, alternative assets, they allow offer a great way to build a diverse retirement portfolio—and a hedge against stock market volatility with potential to earn greater returns.
At Next Generation, we’re here to help our clients understand the many options available to them as self-directed investors. If you’re wondering what types of investments you can include in a self-directed retirement plan, or have questions about how private equity/private placements can be part of your self-directed portfolio, you can sign up for a complimentary education session to learn more about this retirement wealth-building strategy. You may also contact our team directly with questions, via phone at 888.857.8058 or via email at NewAccounts@NextGenerationTrust.com.
Get Schooled on Self-Directed Education Savings Accounts
There are several investment/savings options available to individuals who want to give the gift of education to children. An education savings account (ESA) is an excellent supplement to other education savings (such as a 529 plan) with tax advantages. Also called a Coverdell Education Savings Account, this is a trust account created by the U.S. government.
An ESA may be used to cover qualified expenses related to primary, secondary, or higher education, from kindergarten through college or post-secondary trade school. Withdrawals are tax free (free from federal income tax) when used for eligible expenses. These include tuition, books and supplies, computers/equipment, transportation, school fees, and room & board. Children attending public school or private school may use the funds for qualified expenses.
Self-directed ESA investments
As with any other type of self-directed plan, an education savings account can include a range of alternative assets. Depending on need and time horizons for taking qualified withdrawals, there are opportunities to boost the $2,000 annual contribution limit through nontraditional investments such as private equity, secured and unsecured loans, real estate, precious metals, and many more.
Baby Sarah’s grandparents want to contribute to her education and open a self-directed ESA – they can contribute up to $2,000 annually. Sarah’s parents are also putting money away for the baby’s education. They plan to register her into public elementary school but may consider private middle/high school.
Every year, Sarah’s grandparents contribute $2,000 into her ESA, and begin investing the funds in an alternative asset with which they have years of experience.
As the value of Sarah’s ESA grows beyond the $2,000 annual contributions, she will have funds to use for books and supplies or can withdraw funds to cover tuition costs at a private high school or for college, to supplement her parents’ savings. Plus, her grandparents can continue to contribute to the ESA until Sarah turns 18—and continue to diversify the accounts’ holdings through other self-directed investments they already know and understand.
Their $36,000 gift over those 18 years can grow exponentially through the power of nontraditional investments not typically affected by the stock market, provide Sarah with more money to use for her education, and give mom and dad a little help along the way.
- Contributions may be made for beneficiaries until they turn 18; funds must be used within 30 days of the student turning 30 years old. (There are certain exceptions for special needs students.)
- The funds in the account can be transferred into another ESA for a relative under 30 years old.
- The total maximum contribution for any single beneficiary (even with multiple education savings accounts) is $2,000 per year.
- Contributions are considered gifts by the IRS and are not tax deductible.
- There are income guidelines regarding who may contribute. The 2020 limits are as follows:
- For a married couple filing jointly with modified adjusted gross income (MAGI) between $190,000 and $220,00, a partial contribution is permitted; for those with less than $190,000 MAGI, the full $2,000 contribution is permitted.
- Solo tax filers must have MAGI of $95,000-$110,000 to make a partial contribution, and less than $95,000 MAGI to make the full $2,000 contribution.
- Corporations and trusts may contribute to an ESA without the restriction on adjusted gross income.
- There is a 10% IRS penalty on earnings (with certain exceptions) for non-qualified withdrawals.
If you have questions about how to get started or about the alternative assets allowed in self-directed accounts, you can schedule a complimentary educational session with one of our knowledgeable representatives. Alternatively, you may contact us at directly via phone at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.
Has Your Work Situation Changed? You Can Roll Your 401(k) Funds into a Self-Directed IRA
Do you have a retirement plan that is still with an employer where you are no longer working? If you have recently lost a job due to COVID-19, or are in job transition, make sure you don’t leave your old 401(k) plan behind. If yours is still with a previous employer, you can rescue those funds and roll them over into a self-directed IRA.
Right now, it’s unclear for many workers if or when there will be a new employer with a new workplace retirement plan. However, one thing is clear: opening an IRA (Roth or Traditional) is an option that enables individuals to make sure their retirement savings stay with them. Moreover, if that new retirement plan is self-directed, there is a much wider range of potential investment options available that account holders—not their employers—control.
Rollovers into self-directed IRAs
Since most 401(k) plans are limited in terms of allowable investments, rescuing and rolling over those funds into a self-directed IRA opens up the door to greater investment opportunity, without the limits imposed by most plan sponsors on the defined contribution plans they offer. As you may know from your existing 401(k), most of those plans are limited to investing in mutual funds or exchange traded funds, stocks, and bonds. Opening a new self-directed IRA will enable you to include an array of alternative assets that you may already know and understand, such as real estate, private equity, precious metals, hedge funds, secured and unsecured notes/loans, energy investments, and more.
Through self-direction, you’ll build a more diverse retirement portfolio, create a hedge against stock market volatility, and gain better control over your investment returns as part of your retirement strategy. You’ll also have the flexibility of buying and selling your investments when you choose, rather than according to a prescribed schedule that most 401(k) plans follow.
You can choose to do a rollover into a new Roth or Traditional IRA, or a SIMPLE or SEP IRA, depending on your employment status, overall tax situation and how far out you are from retirement. As always, we recommend you discuss your unique scenario with a trusted advisor. You may also have to check with the current plan administrator to see if there are any restrictions concerning the type of IRA allowed for a rollover from the existing 401(k).
How to roll funds over into a self-directed IRA
At Next Generation, our comprehensive starter kits walk you through all the steps needed and required documentation to submit in order to open a new self-directed retirement plan with us, and include a rollover form for Traditional, Roth, SEP, or SIMPLE IRAs (we have starter kits for other types of plans as well). Moreover, our helpful team of professionals are available to answer questions about opening a self-directed IRA or about the many types of non-publicly traded, alternative assets, these plans allow. You may schedule a complimentary education session; or you may contact Next Generation by phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.
Fuel Your Self-Directed IRA with Energy Investments
Energy investments are among the alternative assets that can be held in a self-directed IRA; oil and gas fall under the umbrella of types of energy investments.
Oil and gas investment opportunities can include:
- The land being explored and/or the mineral rights of that land
- Interest in refineries and drilling companies
- Futures and commodities contracts
Oil and gas investments are relatively complicated, but for the right investors, can be a powerful way to fuel one’s retirement portfolio and create asset diversity. As with any nontraditional investment, individuals should carefully research the oil and gas market and understand mineral rights, surface rights, working interests, and royalty streams.
Property issues to consider
In the United States, property owners have rights to the land’s surface, structures and what lies below. Therefore, property owners with oil or gas deposits on their land control those minerals. They may sell or lease the mineral rights to make money and buyers with self-directed IRAs can invest in the mineral rights as a long-term retirement strategy.
Holding mineral rights means you own the mineral content beneath the surface. Other minerals besides oil and gas that qualify for mineral rights differ among states, so make sure your research and due diligence includes state law regarding mineral rights.
The person who holds mineral rights to a piece of property within a self-directed IRA also has access to the property’s surface; this confers the ability to use reasonable means to locate and produce the underground minerals (as in exploration or drilling).
This is the right to control the surface of the land, including existing structures erected on the land. Depending on the transaction, the seller may stipulate that he or she is selling surface rights only and retaining the mineral rights (or vice versa).
A working interest is an investment in drilling operations (also referred to as operating interest). It is an ownership percentage in the operation; therefore, the investor is responsible for a portion of the ongoing costs associated with the exploration, drilling and production of the asset. With all self-directed investments, any expenses related to the asset must be paid from the self-directed IRA account, and profits from the investment must be returned to the account.
The accounts can be tax-deferred or tax free, depending on the type of IRA (Traditional or Roth). Since there are certain tax benefits related to the costs and losses in a working interest, investors are wise to consult a tax specialist as part of their due diligence.
Royalty interests in oil and gas are the ownership portion of the resource or the revenue it produces. The entity that owns a royalty interest (such as the self-directed IRA) is not responsible for any operational costs, but does own a portion of the resource or revenue produced (the royalties). Some reasons to invest in royalty interests are whether the investor/company/IRA has the finances to bring resources to the production phase, and risk tolerance. In the case of oil production, the producing company pays the property owner a royalty in return for access to the oil field.
Other self-directed energy investments
Solar or wind options, geothermal energy, biofuel, or hydroelectric power are other energy-related assets that can be included in a self-directed IRA.
Take control of your retirement, today
You might already be investing in energy assets outside of your existing retirement plan, in which case, you can open a new self-directed IRA with Next Generation and include these as a hedge against stock market volatility. Whether you plan to include oil, gas, or other alternative assets in your portfolio, you may have questions about self-direction as a retirement strategy. If so, you can schedule a complimentary educational session with the Next Generation team. Alternatively, you can email us directly at NewAccounts@NextGenerationTrust.com or call 888.857.8058.
Social Investing Through a Self-Directed IRA
Self-directed investors are avoiding the stock market roller coaster by investing in non-publicly traded, alternative assets, through their self-directed IRAs. These retirement plans offer the same tax advantages as regular IRAs, but allow for a broader array of nontraditional investments that traditional brokerage accounts do not. This also enables individuals to build retirement wealth through investments that reflect their personal interest or, in other cases, their ethics. One such class of nontraditional investments is social investing, also called sustainable investing or impact investing.
Examples of social investing are assets that fit into the broader category of environmental, social, and corporate governance (ESG); they foster positive social change, social justice, and protect the environment. Investors are discovering ways to invest in causes that are meaningful to them; these may be renewable energy options that reduce carbon footprint, shares in cooperative farms that lift people out of poverty, or funds that include corporations with excellent employee relations or human rights records.
As with any self-directed investment, social investing means taking the time to research and conduct one’s due diligence. Investors who want to make a difference through their retirement plan can look for ways to support sustainable or impact investing projects, or funds that are managed in a socially responsible way. Maybe you know of a startup that’s bringing clean energy projects to market or clean water to remote villages; or perhaps you want to invest in a minority-led company as a way to diversify your retirement portfolio—and support economic diversity.
Once you’ve done your research and selected sustainable investments to include in your retirement plan, Next Generation—as the self-directed IRA custodian and administrator—will first conduct an administrative review of the asset documents to ensure it meets internal guidelines for self-directed retirement plans. We will then process your transaction based on your instructions, hold the assets, and manage all the paperwork and mandatory filing associated with the investment (mandatory IRS filings of 5498s, or Fair Market Value and 1099s if required).
If you have questions about self-direction as a retirement strategy, or about the many other nontraditional investments these retirement plans allow, you may schedule a complimentary educational session with one of our knowledgeable representatives. You can read more about various types of alternative assets these plans allow here; or contact us directly via email at NewAccounts@NextGenerationTrust.com or call 888.857.8058.
Will Social Security Benefits Support Your Retirement Age?
Although individuals can claim Social Security benefits as early as age 62, the retirement age associated with full Social Security benefits had been 65 for many years. That marker has been creeping up over time, with the number currently set at age 67 for people born in 1960 or later. The goal has been to encourage Americans to retire later; the Social Security Trust Fund is only solvent through 2037 and delaying benefits will help shore up the fund.
However, according to a paper titled, “How Sticky is Retirement Behavior in the U.S.? Responses to Changes in the Full Retirement Age,” the increase in full retirement age is not stopping many Americans from retiring and claiming Social Security at the age of 65. The study, published by the National Bureaus of Economic Research (and reported in Investment News) posits that Congress needs to develop new policies – in addition to increasing full retirement age – to get Americans to retire later.
Adding to this conundrum is the effect that the COVID-19 pandemic has had on the economy and personal finances, with historic levels of unemployment or reduced work. It’s unclear right now how this will play out, but one writer foresees trouble ahead for people born in 1960—who are turning 60 years old this year—because of how Social Security benefits are calculated.
- Each year’s earnings over one’s lifetime are adjusted to index to the growth or inflation of national average earnings; the indexing occurs for the year someone turns age 60 and ends there.
- 2020 earnings are taking a major hit compared to 2019 due to the pandemic, and there will likely be a decrease in the national average earnings this year.
- This in turn reduces the indexed lifetime earnings of everyone turning 60 this year, which reduces the monthly Social Security retirement benefits.
- The author warns that, although unknown right now, average earnings could decline for another year or so, also reducing the benefits of those born after 1960.
- Those who are already retired may see little or no cost of living adjustment (COLA).
This may cause many Americans to re-evaluate their retirement timeline, as they may need to work longer as a financial necessity. This is especially true for those who have not been contributing to a retirement plan.
Build a more supportive portfolio with a self-directed IRA
Many people already understand that Social Security may not be there for them throughout their retirement years or be sufficient to rely on as a sole source of retirement income. As a result, most have retirement plans to support them in their later years. For those who’ve been planning for retirement with a self-directed IRA as part of their portfolio, they understand the need to take control of their retirement planning and diversify their investment allocations.
Self-direction enables investors to include a broad array of non-publicly traded, alternative assets within their IRAs, which provide a hedge against stock market volatility while building retirement wealth. It’s a proactive approach for individuals who are comfortable making their own investment decisions, and who understand nontraditional investments such as real estate, private equity, precious metals, lending, partnerships and more.
Are you looking to shift your retirement strategy to include alternative assets you already know and understand? Do you want to develop a retirement portfolio that reflects your interests or an area of expertise? If you’re comfortable making your own investment decisions, it’s a great time to plan your retirement from a different perspective. You’ll find a plethora of information about self-directed IRAs on our website. If you have questions about how to get started, you can schedule a complimentary educational session with someone from our team. Alternatively, you can contact us directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.