Monday, October 20, 2014

The Self-Employed Should Open a Solo 401(k)

I ran some calculations on a self-employed retirement calculator, and as the chart below clearly shows, the Solo 401(k) is a superior retirement plan for the self-employed regardless of income level.  The Solo 401(k) allows self-employed individuals to put more money into a tax-advantaged account while reducing taxable income better than any other retirement vehicle.  


The one advantage the SEP IRA has, is that it can be opened AFTER the tax year has ended.  A SEP IRA can be created as late as April 15th (or as late as October 15th if you extend your tax return) for the previous tax year.  Thus, while the Solo 401(k) is the best way to go, you must open the 401(k) account before the end of your tax year (December 31st). 

Being self-employed means you are both the employee and employer when it comes to retirement plans.  You must create the solo 401(k) account before December 31st and make the employee contribution also before December 31st.  However, the employer contribution can be made as late as April 15th the following year (or October 15th if you extend your tax return).

Self-employed individuals can contribute up to 100% of their compensation to a maximum of $17,500 (plus an additional $5,500 if aged 50+) for their employee portion and up to 25% of net income for the employer contribution up to $34,500 for a grand total combined maximum contribution of $52,000 for 2014 ($57,500 if aged 50+). 

Wednesday, August 27, 2014

Wednesday, June 4, 2014

Bravo NC Treasurer Cowell! (Yeah, I said it.)

     I was hopeful when the State Employees Association of North Carolina (SEANC) turned up the heat on North Carolina State Treasurer Janet Cowell to make changes to the North Carolina Retirement System (NCRS) pension investment operations and reporting by hiring professional pension investigator Ted Siedle and his firm Benchmark Alert.  I was hopeful when Treasurer Cowell announced the formation of the Investment Fiduciary Governance Commission to evaluate the State Treasurer's management of the NCRS.  I was hopeful when Treasurer Cowell's Governance Commission issued recommended changes that addressed many of Mr. Siedle's concerns and echoed many of my suggestions.  Hopeful, but skeptical.  

Thursday, May 15, 2014

SEC: 50% of Private Equity Firms Steal from their Clients

Andrew Bowden, the Director of Compliance Inspections and Examinations recently gave a speech entitled, "Spreading Sunshine on Private Equity."  If you click on the link and read the transcript from Bowden's speech, you would have to wonder why anyone would ever give their money to a private equity fund ever again.  Bowden's speech should be required reading for all pension fund managers.  What follows is a quote from Bowden's speech:

"When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.  This is a remarkable statistic."
The SEC has found in their audits of private equity firms that more than 50% of them:

  1.  over charge their clients for fees, and 
  2.  improperly reimburse themselves for their expenses from the companies they acquire.  

Both maneuvers essentially mean they take money that is rightfully their clients money.  In other words, they are thieves.

Another astonishing quote from Bowden's speech:
"The private equity model is very different [from publicly traded stock portfolios].  A private equity adviser typically uses client funds to obtain a controlling interest in a non-publicly traded company.  With this control and the relative paucity of disclosure required of privately held companies, a private equity adviser is faced with temptations and conflicts with which most other advisers do not contend.  For example, the private equity adviser can instruct a portfolio company it controls to hire the adviser, or an affiliate, or a preferred third party, to provide certain services and to set the terms of the engagement, including the price to be paid for the services ... or to instruct the company to pay certain of the adviser’s bills or to reimburse the adviser for certain expenses incurred in managing its investment in the company ... or to instruct the company to add to its payroll all of the adviser’s employees who manage the investment." 
Let me summarize that paragraph.  Bowden is saying that private equity managers use their client's money to buy businesses. Once they control the business, they proceed to rob it.  What an incredible business model!  Use someone else's money to buy businesses so that you can rape and pillage the business for your own benefit.

Lastly, Borden points out that Bruce Karpati of the SEC's Enforcement Division has found that many private equity funds lie to their clients about the valuation of their investments.  This also boosts fees which is another way to steal from their clients.
"Last year at this conference, Bruce Karpati, then of the SEC’s Enforcement Division, addressed this debate, noting the importance of valuations in fund marketing.  Academic studies have supported this thesis, showing that some advisers inflate valuations during periods of fundraising...A common valuation issue we have seen is advisers using a valuation methodology that is different from the one that has been disclosed to investors....."
One would have to wonder how any pension fund manager could possible ponder investing in private equity funds without inherently violating their fiduciary duty to their pensioners?

Tuesday, March 4, 2014

Monday, February 3, 2014

Politics Already at Play Within North Carolina Pension

What follows was my letter to the editor of the Raleigh News & Observer that was published on page 2 of the Work & Money Section of Sunday's paper on 2/2/2014.  My letter was a response to Andrew Silton's column from the prior Sunday's News & Observer. 

Mr. Silton’s Jan. 26th column, “Keep politics out of pensions” was sparse on facts.  I’d like to add some.

The last annual report issued by Treasurer Cowell shows the state pension funding status to have fallen from 112.8% in 2000 to just 94% now.  That is to say, it is 6% UNDER-funded.  That’s roughly a $4 billion shortfall.  But, Treasurer Cowell knows the government pension accounting standards are flawed and about to change.  A Buck Consultants report says the pension will be just 86% funded under the new rules.  That’s 14% under-funded, or roughly $8 billion.  However, the nation’s leading expert on public pension funding, Stanford Professor Joshua Rauh, argues that public pensions should calculate funding status in the manner corporate pensions are required. Professor Rauh estimates North Carolina is $38 billion under-funded.  That is roughly the equivalent of two years of North Carolina tax receipts. Professor Rauh will lecture at NC State University on April 16.  I suggest Mr. Silton and Treasurer Cowell both attend.

As of 6/30/13, the annualized 10-year investment performance of the state pension of 6.6% lagged the median public pension return of 7.4%.  The underperformance of 0.8% per year for 10 years for the $83 billion pension fund translates into lost returns of $6 billion.  And, that is the cost of not being merely average.  Plus, the average pension fund underperformed a simple portfolio of index mutual funds.

The primary cause of the state pension’s poor investment performance