The Markets April 16, 2020

Hard Lessons About Liquidity Buckets and Cash

The middle of a severe bout of market volatility is not the right time to build a bucket strategy or an annuity income stream, but times like these clearly demonstrate why such strategies are important for late-career workers and new retirees.
Reported by

Art by Dion MBD


While the steep drop in the markets caused by the coronavirus pandemic has given near-retirees and retirees great concern with respect to their futures, investment experts say there are strategies they can employ to shore up their portfolios.

“As we saw in the recovery from the Great Recession in 2008, it can be devastating for retirees to not participate in the recovery,” says Jeff Chang, managing director and co-founder of Cboe Vest, a financial advisory platform that delivers option-based investment protection and other products to help advisers better serve their customers. “For retirees worried about losing wealth, going to cash at the wrong time can be very damaging for long-term outcomes.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

That said, in order to be able to ride out the market’s volatility, it is important for those entering retirement or newly retired to have emergency cash already on hand, says Jim Rivers, senior vice president at Ayco, a Goldman Sachs company. This is sometimes referred to as a liquidity bucket strategy.

“To protect their investment portfolios, it is important for individuals to have enough cash on hand to get through, say, six months to a year without taking a withdrawal,” Rivers explains. “Having cash on the sidelines to weather the storm provides peace of mind and helps individuals take a longer-term view of their investments.”

Patrick Poling, managing director and senior portfolio manager at Southern Oak Wealth, agrees.

“We tell our clients who are starting to take income or about to take income that they should already have six months to a year in cash,” Poling explains. “In this downturn and circumstance, we actually think it would be best to have up to two years of liquid cash, if possible.”

While having that much cash on hand will be difficult for many people to generate, it should buy them plenty of time for everything else in the portfolio to recover in the case of a market crash. And even if one is not able to generate the full six months’ worth of expenses in cash, it could be beneficial to even have one or two months of liquid cash on hand to ride out the most severe parts of a given downturn.

“For those who are fully invested and don’t have cash, now may actually be a good time to raise a little bit of cash, because of the recent pops we’ve had in the markets that have given back some of the big losses suffered earlier this year,” Poling muses.

Ayco Senior Vice President Scott Solomon suggests the current market environment makes annuities look all the more attractive as a wealth protection strategy—though it’s probably not a great time to be an annuity shopper.

“They give a client the luxury of not having to worry as much about market fluctuations,” Solomon suggests. And when one has guarantees as part of their retirement portfolio, risk can be dialed up in other parts.

Sid Vaidya, senior vice president and U.S. wealth investment strategist at TD Wealth Management, says high-quality and diversified bond portfolios are also important to consider. They may not pay as much in returns during the good times as strategies that “stretch for yield,” but they are much more likely to hold up during periods of market stress.

“The fixed-income strategies we use are conservative and focus on high-quality instruments,” Vaidya says. “It is important to have an eye towards downside protection and liquidity. It is also important to be nimble and flexible. In this environment, we emphasize active management in particular.”

Active management can shine in this environment because companies are facing liquidity and solvency concerns.

“It is important for investors to focus on high-quality companies,” Vaidya says. “They are the ones likely to benefit and survive in the longer term. TD Wealth’s current asset allocation positioning is that we are neutral to equities, with a preference for U.S. over international equities. In fixed income, we are moderately underweight Treasuries, while moderately overweight investment grade, and neutral on high yield. We also have a recommended cash allocation of 5% that can be used opportunistically.”

Compliance April 14, 2020

A Time of Crisis. A Time to Solve Our Big Problems?

With passage of the CARES Act, Congress has demonstrated an ability to speedily enact ambitious bipartisan legislation that addresses the nation’s major challenges head on. Sources wonder whether the feat can be repeated.
Reported by

Art by Pete Ryan


In addition to the physical and emotional suffering caused by the COVID-19 disease, the coronavirus pandemic has already taken a significant toll on many American workers and retirees—particularly those working in the hospitality, retail, manufacturing and food service industries and those doing gig work or employed by smaller independent businesses.

Federal and state government statistics show millions of people—across industries and geographies—have already lost their jobs outright or been furloughed as a result of the COVID-19 outbreak. Some relief will be provided to these people through the recently enacted Coronavirus Aid, Relief and Economic Security (CARES) Act, but it is clear that further government action is needed, sources agree.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Ross Bremen, a partner in NEPC’s defined contribution (DC) practice, says the political leadership in Washington has proven that significant bipartisan cooperation remains possible in America today. Like other sources, he is encouraged by that and wonders whether the feat can be repeated in 2020. In addition to the pandemic, there are certainly other major challenges to solve, for example the Social Security Trust Fund shortfall or the union pension funding crisis.

Social Security ‘Now Seems Solvable’

“The passage of the CARES Act is a really big deal, both because of what is contained in the legislation and because of what it represents—in absolute dollar terms it is the largest stimulus package we have ever seen,” Bremen observes. “The law addresses a huge range of issues. For our industry in particular, we have seen some similar regional natural disaster relief provided by the federal government in past circumstances, but the relief levels in the CARES Act are unprecedented in scope and are provided nationally.”

Katherine Roy, chief retirement strategist at J.P. Morgan, says the size of the CARES Act—approximately $2 trillion—makes her hopeful that Congress could find a path to shore up Social Security. As Roy observes, it would have been hard to imagine even a few months ago that Congress could pass a law that includes two-thirds as much in spending as is currently held in the entire asset reserves of Social Security’s main Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds, which stand at approximately $2.9 trillion.

“The Social Security question has become even more interesting with the passage of the CARES Act,” Roy says. “If you look at the funding gap and the payroll levers we can pull to shore that up, and then compare these with the scope and scale of the CARES Act, that makes us hopeful.”

As a financial planner, Roy says she is a huge fan of Social Security, and she wants to see the program made fully healthy for the 21st century.

“It is still the foundation of retirement income in the United States. It is an incredibly valuable resource that keeps things going, especially at a time like this,” Roy notes. “Social Security beneficiaries are among those still getting a ‘paycheck’ and keeping the economy moving.”

Bremen and Roy note that Congress, whether intentionally or unwittingly, gave Social Security an important favor by not including a payroll tax holiday in the CARES Act. Such a tax holiday was included in the stimulus response passed in the wake of the Great Recession of 2008, Roy notes, damaging the effective funded status of the retirement income program.

“The closer and closer we get to the trust fund depletion date, the more pressing the need to act will become,” Roy adds. “Unfortunately, based on the economic downturn caused by the coronavirus pandemic, I expect we will see the depletion date move closer based on all of this.”

Ric Edelman, the chairman and co-founder of Edelman Financial Services as well as a vocal Social Security reform advocate, says now is the time to address the program’s financial stability—“before it is too late.” He advocates for a new framework to build upon Social Security’s foundation, called the Trust Fund for America (TFA). The TFA would essentially be funded by a one-time, $7,000 contribution made on behalf of all babies born in the U.S. for the next 35 years.

Edelman stresses that any “real solution” will likely have to come from a blue-ribbon panel appointed by the president and backed by bipartisan congressional action, but he believes a simple approach such as the TFA could garner enough support to actually start building momentum toward a more comprehensive solution.

Building on the CARES Act

Paul Richman, chief government and political affairs officer at the Insured Retirement Institute (IRI), also says the passage of the CARES Act is a major milestone in terms of congressional cooperation. He says he believes the law’s passage can offer a framework for lawmakers to approach other major issues.

“Our lobbying efforts have by no means ceased now that the CARES Act has become law,” Richman says. “In the near term, we are continuing to push for bipartisan and common sense measures that have already been introduced but have fallen short of passage, such as some core elements of the so-called Portman-Cardin Bill or in Congressman Richard Neal’s bill.”

Richman says the IRI is particularly focused on five provisions taken from these bills, which include: 

  • Increasing the required minimum distribution (RMD) age to 75;
  • Eliminating barriers to allow greater use of lifetime income products, especially qualified longevity annuity contracts that are not subject to RMDs; 
  • Allowing early catch-up retirement plan contributions for those affected by COVID-19;
  • Expanding retirement saving opportunities for nonprofit organization employees by making them eligible to join open multiple employer plans (MEPS) or pooled employer plans (PEPs); and
  • Clarifying and expanding the startup tax credit to incentivize small businesses to join MEPs/PEPs.

“Our plan seeks to address the market disruptions and its effect on workers who are living longer and are close to retirement,” Richman says. “It is also meant to help improve the long-term finances of U.S. workers as they eventually come out of this remarkably challenging period.”

While Richman doubts that Congress will act on Social Security this year as part of its COVID-19 response, he is also hopeful the momentum created by the CARES Act and its successor legislation could make solving the Social Security problem appear much easier—both in the eyes of lawmakers and in the eyes of the voting public.

“Social Security is arguably more important right now than it ever has been,” Richman says. “Pensions are quickly disappearing, especially for younger workers and those changing jobs. So we are looking at a future retirement system that is more or less entirely defined by Social Security and defined contribution [DC] plans. We also know that each source individually is not going to be enough to survive on. For that reason, we at the IRI are looking at the proposals on Social Security and weighing what might be the best approach.”

Without endorsing it outright, Richman points to the proposal recently put forward by Representative John Larson, D-Connecticut, in the Social Security 2100 Act. In a nutshell, the bill increases various Old Age, Survivors, and Disability Insurance benefits and related taxes. The bill increases the primary insurance amount (e.g., the amount a Social Security beneficiary receives if the beneficiary begins receiving benefits at normal retirement age) by increasing the percentage of the beneficiary’s average indexed monthly earnings used to calculate the amount.

“We haven’t taken a formal position on that bill but it is interesting and it shows the kind of thinking that is going to be needed to solve Social Security’s shortfall,” Richman says. “I should say, we are hoping to engage on this issue sooner rather than later. It’s going to be an incredibly important part of solving retirement security for the Americans over the long term.”

«