What we might see in 2019regarding ETFs, tax reform, pensions, 401(k)s, and more. (Photo:Shutterstock)

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As we head into 2019, below are five questions relating tocurrent trends and topics which are expected to impact retirementand savings next year:

1. How will tax reform continue to impact savings andretirement?

Overall, the reduction in U.S. corporate tax rates contributedsignificantly to company earnings growth in 2018. It also spurredrecord company stock buybacks.

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Through September, these events helped anchor significant gainsin U.S. equities, which generally benefited diversified savers.

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However, revenue concerns and warnings for some companies (e.g.Apple), as well as the expected diminished impact of tax reform on2019 earnings, have helped create increased volatility and aselloff in global equities in the fourth quarter.

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Most analysts expect a continuation of stock market volatilityin 2019.

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From a pension standpoint, lower tax rates have encouragedhigher employer contributions to defined benefit plans in 2018. Inaddition, many plans have increased the company match in their401(k)s.

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Both contributions and matches may be diminished in 2019 as thetax advantage of front-ended employer contributions becomes lessbeneficial.

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On the policy side, higher budget deficits resulting from taxreform have, fortunately, not resulted in retirement plans beingdirectly sourced for additional revenue, through lowered 401(k)contribution limits and other restrictions.

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Though retirement plan tax advantages do not appear to be injeopardy for 2019, they remain a ripe target for deficitreduction.

2. What will happen with interest rates?

In 2018, interest rates have been a tale of two maturity ends ofthe U.S. Treasury yield curve. Yields on bonds with shortmaturities (1 year or less) have risen due to three Federal Reserve(Fed) rate hikes during the year, with an additional hike still apossibility for December.

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Rates for bonds with longer maturities (10 years and longer),have also risen, but by less than those with shorter maturities, asinflation has remained relatively tame.

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The rise in shorter rates has benefited a majority ofretirement-age savers. According to bankrates.com, average 1-yearCD rates increased from 0.66% in January 2018 to 1.16% in November2018. Higher rates have also helped increase pension funded ratiosand offset volatility in asset returns.

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As with any future event, it is unclear with what will happenwith interest rates in 2019. The Fed will have to balance arelatively strong U.S. economy and mild inflation, versus externalfactors such as tariffs, slowing global economies, Brexit, oilprices and geopolitical tensions.

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There is also the risk that further Fed increases will create an“inverted” yield curve whereby short-term debt instruments havehigher yields than longer-term debt instruments. Inverted yieldcurves have historically been an eventual precursor to economicrecessions.

3. Where is the fiduciary standard headed?

In 2018, the move toward a uniform fiduciary standard forbrokers and advisors was disrupted when the Department of Labor(DOL) fiduciary standard, also known officially as the “Conflict ofInterest” rule, was repealed by a Federal court.

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Into this vacuum stepped several parties:

  • a.  The Securities and Exchange Commission (SEC),which issued its proposed best-interest standards in April 2018,which would require broker-dealers to disclose conflicts ofinterest and to “exercise reasonable diligence, care, skill andprudence” to ensure they are selling products and carrying outtransactions that are in a client's best interest.
  • b.  The DOL itself, which announced it will releasenew advice rules by September 2019.
  • c.  Various states, which have proposed their ownfiduciary regulations – New Jersey, for example, hasproposed and begun hearings on rules that would create a uniformfiduciary standard for brokers and registered investmentadvisers.

Given that the target dates for the final SEC and DOL fiduciaryproposals are for late 2019, it is hoped that a more global anduniform standard will emerge next year.

4. Will Medicare for All (M4A) heat up as a policy topic?

While M4A and universal health care likely remain years away asalternative solutions to health care delivery in the United States,political and social dynamics have led to amplified discussionregarding the costs and benefits of both.

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In addition to Congressional proposals, a number of states haveproposed government sponsored single-payer systems, includingMichigan, New York and California.

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The biggest impediment to implementation is expected to be cost,whether funded through income, payroll and/or business taxes.

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A compelling statistic is that the United States, Greece, andPoland are the only countries of the 34 members of the Organization for Economic Co-operation andDevelopment (OECD) that do not have universal health care.

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Whether the United States eventually joins the list willcontinue to be a hot button topic in 2019 and going forward.

5. Will exchange-traded funds continue their rapid growth?

Although ETF assets remain a relatively small fractionof the total of passive index funds and actively managed funds,there has continued to be an explosion in ETFs.

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While ETF expense ratios are competitive with mutual fund indexfunds, there are differences between the two, including hidden ETFcosts associated with bid-ask spreads and ETF premiums anddiscounts from net asset values.

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Market trends suggest continued growth and demand for ETFs byinvestors and advisors in 2018 and 2019. The chart below shows U.S.ETF assets at $3.4 trillion at the end of 2017, an annualizedgrowth rate in excess of 20% over a 10-year period.

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Total Net Assets and Number ofETFs. (Source: Investment Company Institute.)

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  NOTE: Information presented herein is for discussionand illustrative purposes only and is not a recommendation or anoffer or solicitation to buy or sell any securities. Pastperformance is not a guarantee of future results.

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Fred Slade has over 25 years of experience inthe investment management and retirement services industries. He isSenior Director, Investments for Pentegra Retirement Services, aleading provider of retirement services to financial institutionsand organizations nationwide, founded by the Federal Home Loan BankSystem in 1943. Mr. Slade manages over $1 billion in internal bondportfolios and provides analytics and strategy for Pentegra'sDefined Benefit and Defined Contribution Plans. Mr. Slade holds aPh.D. in Economics from University of Pennsylvania and a CFA, andhas presented at a number of seminars and conferences.

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