After all, no one knows how long they’re going to live. So how do they know they won’t run out of money? 

“We recommend people do their financial planning with the assumption that they’re going to live a long time because of better preventive medicine and better treatments,” says Gray, who’s based in Raleigh, North Carolina. 

Many retirees today need sufficient liquid investments to last 20 to 40 years. Otherwise, they face a longevity risk, which means they might survive longer than expected and outlive their resources. 

“You may not live to 100,” says Gray. “But what if you live to 97, and you only planned for your money to last until you were 90? Then you’ll spend the last seven years broke. You don’t want to be down to your last nickel.”  

That’s a scary thought, but it can happen, says Gray. “I’m currently working with a client whose mother is 93 and has had dementia for seven years. She has survived COVID-19 three times. Now she’s living in an expensive long-term-care facility, and he’s watching her burn through her assets.”   

His client doesn’t want to be in the same situation.  

Recent surveys reinforce the wisdom of long-term financial planning. In America, the average retirement age is 62 to 65 years old. A 65-year-old man can expect to live to age 82.5 (about 17.5 years in retirement), and a 65-year-old woman can expect to live to age 85 (about 20 years in retirement), according to the Centers for Disease Control and Prevention. 

Although a small percentage of people currently make it to 100, a 2024 report from the Pew Research Center says there will be many more centenarians in the coming decades. 

Calculating Expenses   

Several factors go into fiscal planning for a century-long life, from expenses and asset allocation to inflation and market volatility. As a financial planner, Nick DeCenso, CAPTRUST senior director of wealth solutions, says estimating how much retirees will spend is the hardest part of developing a plan. 

“We know our clients’ assets,” says DeCenso. “We know what their income looks like. We know their Social Security benefits. We know their liabilities. But anticipating spending is tough.” 

“For the first three to five years of retirement, we often see a spike in spending,” he says. “A lot of folks are taking trips they’ve put off, leaning into their lifelong hobbies, or buying big-ticket items they’ve always wanted. They tend to spend less later in retirement.” 

Figuring out expenses is important, says Briana Smith, a CAPTRUST financial advisor in Raleigh, North Carolina. Smith helps clients develop plans for a life expectancy of 95.  

“We want to get as accurate a number as possible,” she says. “For instance, we need to know if you’re spending $15,000 a year on groceries and $30,000 a year on travel.”  

What might seem like a small difference on paper can have a significant impact when you grow these expenses with inflation over long periods. Smith says some people like to create a detailed budget. Others just want a general understanding of how much they spend. 

Adding Costly Items 

Beyond regular living expenses, each person’s long-term financial plan needs to incorporate occasional large expenditures, such as buying a second home or helping adult children purchase property, paying for weddings or grandchildren’s educations, or some combination of those things.   

These expenses are important because they have big potential to move the needle, jeopardizing the chance you’ll achieve your financial goals. “You may end up paying for a wedding that’s so expensive it impacts your retirement lifestyle,” Gray says. 

Today, more clients are making big gifts to their children, grandchildren, and charities during their lifetimes, says DeCenso. “If I live to 100, for example, that means my two daughters are going to be 70 before they get an inheritance. If I’m able to give them financial gifts while I’m still alive, then I get to see some of the fruits of those gifts.”   

Some parents opt to give each child or grandchild the maximum annual amount that you can give without reporting it to the Internal Revenue Service. In 2024, that amount is $18,000 from one parent or $36,000 from both. “That’s fine as long as it doesn’t put the parents’ retirement plan in jeopardy,” Smith says.    

Gray suggests taking care of yourself first. “Make sure you’re comfortable with your resources and planning so you can have the lifestyle you want and eliminate—or at least mitigate—your risk of creating a financial shortfall.”  

Models and Scenarios 

Advisors use financial planning software to give clients a reasonably reliable look into the future.  

The software considers factors such as age, assets, living expenses, charitable donations, automobile expenses, education costs, and gifting to family. Once all your expenses and sources of income are in the system, it can calculate different long-term financial scenarios, adjusting for inflation, market volatility, increased healthcare costs, and other factors.  

The goal is to model multiple versions of the future so you can prepare accordingly. “From there, we can determine how growth-focused each client needs to be, how much money they’ll need available at key moments in their life, and how much of their total portfolio should be allocated to different types of investments,” Gray says.  

For a lot of people, modeling creates peace of mind. 

“We’ve worked with people who were absolutely petrified about the future, and after using these software tools, they were comfortable living a lifestyle that was considerably nicer than they thought they could ever afford,” says Gray. 

Customizing Investments 

Despite what many online calculators might say, when it comes to investments during retirement, there is no one-size-fits-all strategy. “The best mix depends on each person’s unique assets and liabilities,” says DeCenso. “Now more than ever, people are retiring with multiple assets beyond their homes and employer-sponsored retirement accounts.”  

Besides Social Security and, in some cases, pensions, retirees might have other income streams, such as rental properties, business partnerships, or severance from a company. They might also be consulting or working full or part time.  

“All of this factors into how we decide on the right mix of equities and fixed income in investments,” says DeCenso.  

Sometimes, retirees go too far in one direction. “I see folks who are at each of the extremes,” he says. “They think, I’m retired, so I’m going to be as conservative as possible with my investments.” 

“Other folks are too aggressive,” he says. “They keep too high of a percentage of their assets in equities after retirement, which can create substantial risk.” 

There’s a lot to consider when making investment decisions. Someone who’s getting Social Security and has a pension and other sources of income might need to withdraw less from their portfolio. This person can afford to take more risks. But a retiree who receives smaller Social Security benefits and has no pension can’t afford to take as much risk. 

Dividing Investments into Buckets 

Smith suggests thinking about investments as buckets:  

The Cash-Flow Bucket: Keep one to three years of your retirement withdrawal needs in cash or cash-equivalent accounts, such as a money market fund or—in today’s interest rate environment—an exchange-traded fund (ETF) that tracks a three-month Treasury bill. “This can help retirees avoid selling stocks if there’s a dip in the market,” Smith says. 

The Income Bucket: This is money for the intermediate term. “We recommend having roughly seven years’ worth of withdrawal needs in a more income-focused bucket, something that includes a balanced asset allocation with a mix of stocks and bonds,” she says. “It could even include some private credit alternatives to boost yield.” This asset allocation is dependent on the retiree’s risk tolerance. “You have a nice waterfall effect with dividends and interest flowing from the income bucket to the cash-flow bucket,” Smith says.  

The Growth Bucket: The first two buckets should fund the first 10 years of retirement. “This creates peace of mind and allows clients to be more growth oriented with their longer-term assets in the third bucket,”  
she says. 

Avoiding a Financial Shortfall 

The 4 percent rule is a guideline that says if retirees withdraw 4 percent annually from their portfolios, they won’t exhaust their savings. “In general, this is a good budgeting strategy,” Gray says. “However, it’s prudent to check your withdrawal percentage regularly. If your rate starts to creep up, then 4 percent might not be sustainable.” 

In some cases, clients aren’t worried about running out of money. They’re more concerned with preserving investments to pass on to their heirs or favorite charities.  

Smith suggests clients might want to live off dividends and interest to preserve the current buying power of their portfolio. She says financial advisors often coordinate with a client’s estate planning attorney. 

“Sometimes, we need to help strategize the most tax-efficient estate plan,” Smith says. “This could include setting up and funding certain types of trusts or simply considering which assets should be directed toward heirs versus charities.”  

In some cases, people choose to leave homes to their children. Other retirees downsize during their golden years and use some home equity to cover expenses.  

“My mother-in-law is retired and conscious about her spending,” says DeCenso. “She lives in a 3,000-square-foot house that is worth $1 million and is almost paid off. If she needs more money, she has a lot of equity to work with.”  

Regular Check-ins 

Retirement planning is not a one-time exercise. “That would be nice, but it’s not realistic,” says DeCenso. “Nothing will go precisely as planned. The markets won’t move in a straight line and may do better or worse than everyone thought. Also, your spending will fluctuate and evolve. There will be times when you spend more or less than expected.”  

Smith says she tells clients to revisit their plans annually or any time they have a major life change, such as moving to another state, having more grandkids, getting divorced, or having a death in the family.  

DeCenso says some have a clear mental picture of the portfolio amount they’re determined to stay at or stay above. “They think: If I dip below my peak savings amount, it feels like I’m trending toward zero,” he says. Sometimes, this type of thinking can cause more harm than good, causing people to underspend and worry unnecessarily.  

“You saved for your retirement, so enjoy it,” he says. “This is what those long years of saving were meant for.”   

Article by Nanci Hellmich

A: Investing in gold may provide some benefits as a portfolio diversifier and potentially as a hedge against inflation, but there are several issues to consider when contemplating an investment in this or other precious metals. Here are a few: 

• Store of value. Gold has traditionally been viewed as a store of value and a safe-haven asset during times of economic uncertainty and high inflation. As currencies tend to lose purchasing power due to inflation, gold may be viewed as a way to preserve wealth during these periods. 
• Limited supply. The supply of gold is relatively limited and cannot be easily increased. This scarcity can make gold more attractive at times when the supply of money is increasing. 
• Portfolio diversification. Adding gold to an investment portfolio can help hedge against the potential negative effects of inflation on other asset classes, such as stocks and bonds. In addition, gold has historically shown a low correlation to stocks and bonds, providing a diversification benefit. 
• Timing. While gold is often considered an inflation hedge, its price can be volatile and does not always move in tandem with inflation in the short term. Also, timing the purchase and sale of gold can be challenging, so it’s essential to have a long-term investment horizon. 
• Trade-off. While gold may help preserve wealth during inflationary periods, it does not generate income or dividends like other assets, such as bonds or stocks. 

Investors should also be mindful of the additional costs of investing in physical gold, including storage, insurance, and transaction fees, which can erode potential gains. Exchange-traded funds (ETFs) that include gold may be a cost-effective alternative but do not offer the same features as investing in physical gold. 

If you do choose to invest in gold, it should be as part of a well-diversified investment strategy and should not be considered a stand-alone solution to combat inflation. As always, consult with your financial advisor to determine what makes sense for you based on your investment goals, risk tolerance, and overall financial situation. interest that are common in other parts of the financial services industry. 

A: While it’s true that elections can drive market volatility and shifts in investor sentiment in the short term, history shows that, over the long run, fundamentals like economic growth and corporate earnings tend to be far more important drivers of stock returns. 

That said, there are some interesting historical trends around stock market performance during election years, especially years when an incumbent president is running for reelection.  

According to our analysis, for the last 10 election years in which an incumbent was running, the S&P 500 Index has ended the year in positive territory, with an average return of 17.4 percent. That’s well above the average annual return of around 10 percent for all years.  

Why might markets tend to perform better in incumbent reelection years? A big part of the answer likely comes down to the incentives for incumbents to take pro-growth policy actions to boost their reelection prospects. Fiscal and monetary policy may become more stimulative in these years, as incumbent administrations work to keep an economic expansion going.   

We’ve already seen some of this dynamic play out, with large fiscal packages like the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, the Inflation Reduction Act, and the resumption of tax credits like the Employee Retention Credit injecting billions of dollars into the U.S. economy. Despite being an election year, the Federal Reserve has signaled that it will base its rate decisions solely on economic data rather than political calculations. 

However, it’s important not to overstate the impact of elections on markets based on these data points alone. Underlying economic fundamentals like consumer spending, the labor market, earnings growth, and productivity gains tend to be more powerful drivers of stock returns over time. The rollout of artificial intelligence tools and their potential productivity benefits could be a strong tailwind for markets this year, regardless of the presidential election’s outcome. 

Moreover, markets can certainly climb or sell off sharply in election years for reasons wholly separate from elections. For instance, the 2008 financial crisis triggered a major sell-off late in that election year, while the extraordinary stimulus response to the COVID-19 pandemic sent stocks soaring into year-end 2020 after the November election.   

While elections tend to garner outsize attention, they are just one of many inputs for markets. Investors would be wise to look past the political noise and partisan narratives and remain focused on the fundamentals that drive long-term returns. Diversification, discipline, and sticking to your plan should be top priorities, regardless of who occupies the White House.

Q: Some economists are predicting a recession, and I’m in my early 60s. How could this impact my retirement?

The decision to retire is complex and personal, and even more so when the stock market is volatile and the economic climate is so uncertain. But all the planning you’ve done over the years, such as analyzing various scenarios with your financial advisor, will come to good use in these final years of your career.

Even if gloomy forecasts are making you feel anxious, one of the cardinal rules of investing is to stay invested. Remember: Market timing is a fool’s errand. You’d need to have access to a magic crystal ball—not just once, but twice—to be able to know just when to get out of the stock market and when to get back in.

Instead of doing anything drastic, consider taking these financial steps to best position your retirement plan in case of a recession.

Take stock of your financial plan. Revisiting and updating your projected household expenses is paramount. That way, you’ll have a thorough understanding of the income needs from your portfolio.

You should also work with your financial planner to test the resilience of your nest egg against market fluctuations by rerunning projections and layering on several different what-if scenarios.

Calculate your cash cushion. The amount you need is based on personal preference. Building your portfolio buckets may help you become comfortable with the amount of cash you should hold. We recommend keeping about a year’s worth of expenses in cash as an emergency reserve. As you approach retirement, it can make sense to increase this amount, depending on your other sources of retirement income.

Recessions normally don’t last longer than a year. Having a cushion will insulate you from being forced to sell equities in a falling market.

Use tax-loss harvesting. With taxable accounts, it’s always prudent tax planning to be proactive about realizing any capital losses. They can be used to reduce your tax bill by offsetting previously realized gains. Anything you can do to give yourself an edge will help in the long run.

As always, you should speak with your financial and tax advisors about your personal financial situation before you make any decisions. If you don’t have a thorough financial plan that addresses your retirement under various market and economic conditions, now is a good time to consider one.

Indirect Recordkeeper Compensation Coming into Focus

We previously reported on a case from the U.S. Court of Appeals for the 9th Circuit requiring plan fiduciaries to consider all compensation received by plan recordkeepers, including indirect compensation, when evaluating the reasonableness of fees. In that case, the judge said plan fiduciaries were required to consider the revenue the recordkeeper received from managed account services provided to plan participants. Bugielski v. AT&T Services, Inc. (9th Cir. 2023)

This principle has also been endorsed by a federal court in New York. In that case, the plaintiffs claim that TIAA-CREF, a recordkeeper with significant exposure in the higher-education market, undertook an aggressive campaign to increase revenue by selling ancillary services to plan participants. The district court refused to dismiss the case, noting that fiduciaries are required to monitor administrative fees and all compensation that the service provider receives relative to the services delivered. The case will proceed to determine whether plan fiduciaries appropriately considered all compensation received by the recordkeeper. Carfora v. Teachers Insurance Annuity Association of America (S.D. N.Y. 2024)

Use Forfeitures to Offset Employer Contributions? Maybe Not.

We recently reported on several cases challenging the use of plan forfeitures. Forfeitures result from participants leaving employment before being fully vested in their employer contributions. Historically, forfeitures routinely have been used either to offset the employer’s matching contributions or to pay plan expenses. Plan documents often say that forfeitures may be used for either purpose. The argument in these cases is that plan fiduciaries are obligated to do what is in the best interest of plan participants, and, when given a choice in the use of forfeitures, they should first pay plan expenses, which would otherwise be charged against participant accounts. Using forfeitures to first reduce the employer’s matching contributions is allegedly a fiduciary breach.

Ten lawsuits have been filed making these allegations. Initial decisions in these cases conflict. In a case against Qualcomm, the court accepted the basic argument that, given the choice, plan fiduciaries have a duty to use forfeitures in the best interest of plan participants. The defendant’s motion to dismiss was denied. Perez-Cruet v. Qualcomm Incorporated (S.D. Cal. 2024)

In a similar case against HP, the court acknowledged that plan fiduciaries exercise discretion when deciding how to use plan forfeitures. However, the court found it implausible to require that plan forfeitures always be used first to pay plan expenses and then to reduce the employer’s contribution. The case was dismissed with leave to file an amended complaint. Hutchins v. HP Inc. (N.D. Cal. 2024)

Using forfeitures to offset employer contributions is a longstanding and widely accepted practice, permitted under Internal Revenue Service (IRS) regulations and consistent with guidance from the Department of Labor (DOL). In view of the conflicting initial decisions in these cases, plan fiduciaries should review their approaches to plan forfeitures and confirm that they are following their plan documents.

Cybersecurity Nuggets

• In public remarks, a DOL representative reiterated the importance of cybersecurity in protecting participants’ retirement assets and noted the DOL’s focus on this issue. In the context of these remarks, the representative noted that artificial intelligence is making it harder to protect against cyberlosses. For instance, estimates say that it would take artificial intelligence only six seconds to duplicate a person’s voice to circumvent voice-recognition technology.
• In a recent interview with a DOL agent as part of a random DOL plan audit, the agent asked the plan sponsor detailed questions about cybersecurity protocols and about information transfer protocols between the plan sponsor and its vendors. The DOL agent also wanted to know what steps plan fiduciaries had taken to confirm that their vendors’ cybersecurity programs met the DOL’s best practice guidelines.
• Merrill Lynch has alerted state authorities in Maine that, in an isolated incident, the personal data of more than 1,800 Walmart retirement plan participants was inadvertently sent to an external party. The Walmart plan reportedly has more than $35 billion in assets and more than 1.6 million active participants. Affected plan participants will be provided a two-year membership in an identity theft protection program.

Recordkeeping and Investment Fees Cases: Process Wins and Courts of Appeals Resurrect Dismissed Cases

The flow of fees cases continues. Several were settled, were dismissed, or lost motions to dismiss and will proceed. In three instances, courts of appeals have reinstated fees cases that had been dismissed by district courts. The district courts found that the cases filed did not include sufficient allegations to state a plausible claim. The courts of appeals found otherwise, so the cases will go back to their district courts for further proceedings. Kruchten v. Ricoh USA Inc. (3rd Cir. 2024), Mator v. Wesco Distribution Inc. (3rd Cir. 2024), Perkins v. United Surgical (5th Cir. 2024)

In one case, after the facts of the case had been developed through depositions and document requests, the plan fiduciaries filed a motion for summary judgment. Based on the fiduciaries’ thorough process and reasonable decision-making, summary judgment was entered in their favor. Silva v. Evonik Corp. (D. N.J. 2024) The judge particularly noted the following:

• Meetings were held quarterly, and, prior to meetings, investment reviews were prepared and distributed to committee members, including asset allocations, fees, and performance versus industry benchmarks.
• Regular review of expenses included evaluation of recordkeeping fees, investment fees, and the use of revenue sharing to offset plan expenses.

Pension Nuggets

• When pension plan liabilities are settled by transferring them from a plan to an insurance company, plan fiduciaries must select the “safest” available annuity provider, unless circumstances indicate that doing otherwise would be in the best interest of participants and beneficiaries. Several lawsuits have been filed challenging the selection of Athene as an annuity provider as not meeting the Pension Benefit Guaranty Corporation’s safest available provider requirement. Athene is characterized by the plaintiffs as a “highly risky private-equity-controlled insurance company with a complex and opaque structure.” Bueno v. General Electric Company (N.D. N.Y., filed 2024) Allegations of this nature are novel.
• Cases challenging the use of outdated actuarial tables to calculate joint, survivor, and early retirement benefits are proceeding and reaching different conclusions.
  • The case against Kellogg was dismissed because the judge found that the Employee Retirement Income Security Act (ERISA) does not contain a requirement that mortality tables be reasonable, and there is no requirement in ERISA that defendants regularly update their tables. Reichert v. Bakery, Confectionary, Tobacco Workers, and Grain Millers Pension Committee (E.D. Mi. 2024) This is an unusual outcome as most of these cases have been permitted to proceed to trial.
  • In a case against Citgo, the judge refused to enter summary judgment for the company, concluding—at least initially—that the actuarial assumptions used in calculating actuarial equivalents must be reasonable. He also observed that plan fiduciaries may not follow the terms of their plans if doing so would violate ERISA, suggesting that plan fiduciaries should ignore unreasonable actuarial assumptions. Urlaub v. Citgo Petroleum Corporation (N.D. Ill. 2024)

DOL’s Expanded Fiduciary Rule on Hold

The DOL’s latest rule expanding fiduciary coverage has been put on hold. The DOL sees significant risks to retirement plan participants from brokers and insurance agents as money is withdrawn from retirement plans. To address this issue, the DOL issued a regulation in 2024 expanding ERISA’s fiduciary definition to include those advising on rollovers out of retirement plans, regardless of the frequency of the interaction. The DOL’s prior, similar regulation was struck down in 2018 as exceeding the DOL’s authority. The new regulation has also been challenged, and a federal judge in Texas has put the new rule on hold until the court orders otherwise. In issuing the order, the judge expressed his expectation that the new regulation will ultimately be struck down. American Council of Life Insurers v. U.S. Department of Labor (5th Cir. 2024)

Managed Accounts Challenged as Default Investments

A participant in the Bechtel 401(k) plan has filed a class action lawsuit alleging that it was a breach for plan fiduciaries to use managed accounts as a 401(k) plan’s qualified default investment alternative (QDIA). The complaint alleges that few participants provided personalized information about their financial situations but were still charged managed account fees. The lawsuit claims that, without personal input from plan participants, the managed accounts were essentially very expensive target-date funds and that target-date funds could have been used instead. Hanigan v. Bechtel Global Corporation (E.D. Va., filed May 2024) The DOL’s 2006 regulation establishing QDIAs included the potential use of managed accounts, so it will be interesting to see how this case develops.

Ex-Girlfriend from Decades Ago Awarded $750,000 401(k) Balance

Jeffrey Rolison went to work for Procter & Gamble in 1987. At the time, when enrolling in the Proctor & Gamble 401(k) plan, he listed his girlfriend, Margaret Sjostedt, as his 401(k)-plan beneficiary. Twenty-eight years later, in 2015, Jeffrey died with a 401(k) account balance of just over $750,000. By that time, Jeffrey had not married and did not have children. The original beneficiary designation form naming Margaret was still on file.

Margaret and Jeffrey split up after a couple of years, in 1989, and Margaret went on to get married and have two children. After learning that Margaret was the designated beneficiary on file, Jeffrey’s surviving brothers fought the issue, contending that Margaret was not who Jeffrey wanted as his beneficiary and the money should go to his estate—and eventually to the brothers.

Deciding that the beneficiary designation would be followed, the court noted that, over the intervening years, Jeffrey had from time to time accessed his account and had the opportunity to change his beneficiary. He had also received participant communications referencing beneficiary designations. The only evidence the brothers had was their own, potentially self-serving statements of their prior conversations and their beliefs about what Jeffrey would have wanted. The judge was unpersuaded. Procter & Gambel U.S. Business Services Company v. Estate of Jeffrey Rolison (M.D. Penn. 2024)

ESG Caution: American Airlines ESG Suit Survives Motion for Summary Judgment, Proceeds to Trial

As previously reported here, plan participants sued American Airlines for including funds in their 401(k) plan that advance environmental, social, and governance (ESG) causes, alleging that they are not in the best interests of the plan participants. The judge denied American Airlines’ motion to dismiss, accepting the general propositions that ESG investments underperform their non-ESG peers and that ESG investments are not exclusively focused on financial gain to plan participants. The claim is that these characteristics potentially violate ERISA’s exclusive benefit rule.

Following the same logic, the judge has also denied American Airlines’ motion for summary judgment. Unlike a motion to dismiss, which is filed early in a case, a summary judgment motion is filed after the facts of the case have been developed. Spence v. American Airlines, Inc. (N.D. Tex. 2024)

The bottom line is that ESG investing may continue to be a topic in litigation. Plan fiduciaries should be familiar with the DOL’s rule on this topic, “The Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (also known as the ESG rule), which gives direction regarding how to approach selection and monitoring of ESG investments.

Supreme Court’s Elimination of Chevron Deference Already Impacting Retirement Plans

A lawsuit against Chevron in 1984 included a challenge to how individual states were enforcing the Clean Air Act. The Supreme Court held that federal court judges must defer to reasonable agency interpretations of laws, creating the Chevron Deference rule. This ceded interpretation of federal law to the various agencies responsible for issuing regulations and enforcing the law when there was ambiguity. The Chevron Deference rule has been foundational to the decisions in countless cases—including many in the retirement and employee benefits area.

In its previous term, the Supreme Court reconsidered the Chevron Deference rule and abandoned it, finding that federal judges—not agencies—are responsible for interpreting laws. Loper Bright Enterprises v. Department of Commerce (S. Ct. 2024) This is already having a direct impact on cases involving retirement plans.

We also previously reported on an unsuccessful lawsuit by 26 states and other parties to throw out the DOL’s new ESG rule. State of Utah v. Walsh (N.D. Tex. 2023). The district court’s decision was appealed.

During the appeal, the Supreme Court issued its opinion in Loper Bright, throwing out Chevron Deference. Because the district court decision in Utah v. Walsh used Chevron Deference as a basis for its decision, the case was sent back to the Texas district court for it to once again consider the appropriateness of the ESG Rule under ERISA. Utah v. Su (5th Cir. 2024)

Even with elimination of Chevron Deference, in cases where there is statutory ambiguity, judges may still take due consideration of agency views, but they are not obligated to defer to agencies’ interpretations. Eliminating Chevron Deference creates some uncertainty about whether previously settled issues will be reopened, and whether potentially more conflicting court decisions could work their way through the system, ultimately landing at the Supreme Court to be resolved.

A family limited partnership (FLP) is a partnership created and governed by state law and generally comprises two or more family members. As a limited partnership, there are two classes of ownership: the general partner(s) and the limited partner(s). The general partner(s) has control over the day-to-day operations of the business and is personally responsible for the debts that the partnership incurs. The limited partner(s) is not involved in the operation of the business. Also, the liability of the limited partner(s) for partnership debts is limited to the amount of capital contributed.

An FLP can be a powerful estate planning tool that may:

• help reduce income and transfer taxes,
• allow you to transfer an ownership interest to other family members while letting you keep control of the business,
• help ensure continued family ownership of the business, and
• provide liability protection for the limited partner(s).

An FLP is often formed by a member(s) of the senior generation who transfers existing business and income-producing assets to the partnership in exchange for both general and limited partnership interests. Some or all of the limited partnership interests are then gifted to the junior generation. The general partner(s) need not own a majority of the partnership interests. In fact, the general partner(s) can own only 1 or 2 percent of the partnership, with the remaining interests owned by the limited partner(s).

There are several potential advantages to organizing your business as an FLP:

• Limited partnership interests that are gifted to other family members are generally valued at less than the full fair market value of the underlying assets. That is, reasonable discounts to the value of the limited partnership interests are permitted for lack of marketability and lack of control. This means that by gifting the assets via a limited partnership interest instead of an outright transfer of the business assets themselves, you may be saving gift and estate taxes.
• At death, only the value of your ownership interest in the partnership will be included in your gross estate.
• The use of the partnership entity allows you to shift some of the business income and future appreciation of the business assets to other members of your family.
• You maintain management control of the business while transferring limited ownership of the business to family members.
• Restrictions within the partnership agreement limiting the transfer of the partnership interests may help ensure continuous family ownership of the business.

Source: Broadridge Investor Communication Solutions, Inc.

Rivers offer another example. Narrow and broad rivers can convey the same amount of water, depending on their depth and flow. One river, which delivers nearly 20 percent of the world’s freshwater to the ocean, varies in width from less than one mile to more than 30 miles across. Its name, relevant to today’s market discussion, is the Amazon.

So far this year, leadership in the U.S. stock market has been extraordinarily narrow, with five mega-cap technology powerhouses—Alphabet, Amazon, Meta, Microsoft, and NVIDIA—delivering a full 60 percent of S&P 500 Index returns. Without this quintet, the index would have shown negative returns for the second quarter.

Most market watchers view such a narrow market as less healthy and resilient than more broad-based participation. Yet this small group of stocks has driven markets relentlessly higher.

Since February of last year, the S&P 500 has increased by nearly 40 percent without a single daily decline of 2 percent or greater. As shown in Figure One, this represents the fourth longest period without a 2 percent decline since 1990, and the current period has a higher annualized return than the other three.

Figure One: Trading Days Without a 2 Percent or Greater Decline (1990–June 2024)

Sources: Morningstar Direct, CAPTRUST Research. Percentage returns are annualized.

Market Rewind: Second Quarter 2024

April began on rocky footing as inflation data came in hotter than expected, quelling hopes for a second-quarter Federal Reserve interest rate cut. That same month, markets also digested escalating Middle East tensions after a volley of attacks between Iran and Israel, causing volatility in stock and energy prices.

However, the markets quickly recovered, as these tensions calmed and a string of data releases suggested the U.S. labor market, consumer spending, and overall economic activity were cooling in an orderly fashion, while corporate earnings remained solid.

U.S. large-cap stocks continued their early-year momentum, with the S&P 500 delivering returns of 4.3 percent and finishing the quarter just shy of a new all-time high. Overall results masked more disparate activity beneath the surface, with more than half of the 11 S&P 500 sectors posting negative returns for the period.

In contrast, small-cap stocks struggled to a 3.3 percent loss as larger companies continued to capture the lion’s share of market gains. Despite continued economic strength, smaller companies have lagged under higher interest rates, due to their tendency to carry higher levels of debt.

Figure Two: Second Quarter 2024 Market Recap

Asset class returns are represented by the following indexes: Bloomberg U.S. Aggregate Bond Index (U.S. bonds), S&P 500 Index (U.S. large-cap stocks), Russell 2000® (U.S. small-cap stocks), MSCI EAFE Index (international developed market stocks), MSCI Emerging Market Index (international emerging market stocks), Dow Jones U.S. Real Estate Index (real estate), and Bloomberg Commodity Index (commodities).

Outside the U.S., performance varied by region. Currency weakness weighed on Japan, and political uncertainty hampered Europe. Emerging market stocks added to their first-quarter gains with a 5.1 percent return in the second quarter. Performance was buoyed by market-friendly actions from Chinese authorities to support the nation’s struggling real estate sector, plus continued strong results from the Taiwanese semiconductor sector.

Interest rate–sensitive segments of the market underperformed, as the yield on the 10-year U.S. Treasury bond climbed from 4.2 to 4.4 percent. Core U.S. bonds sold off in the final week under pressure from rising interest rates, to finish the quarter essentially flat. Credit spreads remained stable for the period. Real estate showed a modest loss of 1.6 percent.

Commodities were volatile as energy prices, particularly oil prices, experienced swings due to geopolitical tensions and production adjustments by major exporters. Precious and industrial metal prices advanced, especially gold, silver, and copper, while agricultural commodities lagged.

Broad Perspectives on Narrow Market Leadership

The narrowness or breadth of various economic and market conditions can provide important clues to their strength or fragility. Today, we see narrow conditions not just within the stock market but also in key areas such as consumer behavior, inflation drivers, and election outcomes. These factors carry important implications for the future direction of the economy and markets.

When a smaller group of companies drives overall index performance, that index can become increasingly top heavy. As shown in Figure Three, the 10 largest companies in the S&P 500 now represent 36 percent of the index—the highest degree of concentration since the 1970s.

Figure Three: Total Weight of the Top 10 Stocks in the S&P 500 Index

Sources: Morningstar Direct, CAPTRUST Research

To put this in perspective, Microsoft—the highest-weighted stock in the S&P 500—currently has a market capitalization of more than $3.4 trillion, which is nearly 100 times larger than that of the median stock. The level of concentration in these top stocks has now reached a multi-decade record, far higher than what the markets witnessed during the height of the dot-com bubble.

Optimists argue that this degree of concentration should not be concerning, because it demonstrates the exceptional growth, durability, and sheer earnings power of these few companies. It also reflects their ability to navigate the high interest rates, inflationary pressures, and geopolitical uncertainty of the past few years better than their peers.

However, others view this degree of concentration as a sign of market vulnerability. The combination of a narrow market and high valuations increases concerns about the potential for a correction (a decline of 10 percent or more from recent highs) if these companies fail to deliver on lofty earnings growth expectations.

Although analysts now expect earnings growth will stretch across a much larger swath of the equity markets in the second half of 2024 and in 2025, any such expansion of market strength is likely to depend on lower interest rates.

Narrowing Consumer Strength

Consumer spending is the single largest component of U.S. economic activity. The consumer’s ability and willingness to spend during and after the COVID-19 pandemic has, in large measure, prevented a significant economic slowdown, despite high inflation and restrictive monetary policy. Now, it seems consumers could be losing steam.

Recent retail sales data suggests cooling spending activity. Inflation-adjusted retail sales for the April to May period fell by 1.2 percent compared to the first quarter of 2024, with spending on goods showing particular weakness. Other discretionary categories such as food services and drinking places have fallen for three of the past five months. Despite positive movement in some areas, such as automotive-related sales, the overall picture points toward more cautious consumer behavior. [1]

Another place where consumer stresses are becoming evident is in credit utilization. Total credit card balances have now eclipsed $1.1 trillion, while the average interest rates for accounts carrying a balance have risen above 22 percent. Nearly one in five credit card users have maxed out their available credit. Delinquency rates for both auto loans and credit cards have surpassed their 2019 levels by 15 percent and 28 percent, respectively. [2]

A likely contributor to credit card stress is the depletion of savings accumulated during the pandemic. One frequently cited pillar of consumer strength over the past four years is the surplus of savings built up throughout the pandemic, partly due to substantial government stimulus payments.

Now, this savings cushion is narrowing. As usual, the greatest stress is being felt by those with the lowest incomes, as household budgets are squeezed by rising prices, high interest rates, and climbing rent payments. Levels of consumer sentiment for the lowest third of earners is far below that of middle and high earners. And, as shown in Figure Four, while higher-income households continue to maintain a cushion of excess savings, the level of inflation-adjusted liquid assets for the bottom 20 percent of earners has deteriorated since 2019. [3]

Figure Four: Changes in Real Household Liquid Assets

Sources: Board of Governors of the Federal Reserve System, U.S. Bureau of Economic Analysis, CAPTRUST Research

Despite these warning signs, the strong labor market remains a powerful tailwind for consumer activity. The ability to find and keep a job that pays wages that grow faster than inflation plays a pivotal role in supporting consumer confidence and activity.

While the unemployment rate rose slightly in June, its level of 4.1 percent is still far below the 40-year average of 5.8 percent. The labor force participation rate among prime-age workers (those between ages 25 and 54) has also risen to a two-decade high, helping offset the surge of early retirements witnessed during the pandemic. And the number of job vacancies per unemployed worker remains at 1.2, matching its pre-pandemic level. [4]

Narrowing Inflation Drivers

Following 2022’s inflation spike, which saw the consumer price index (CPI) rise to a four-decade high of 9 percent, there has been a substantial cooling in price pressures. In May, inflation was lower than expected at 3.3 percent on a year-over-year basis. This was the smallest monthly gain for more than two years. Although there is still some distance to cover before reaching the Fed’s 2 percent inflation target, continuing signs of declining inflation sustain hopes that the Fed could deliver its first rate cut later this year.

Another positive sign is that the number of categories showing more than 2 percent inflation within the basket of goods and services used to calculate CPI continues to narrow. At its peak in 2022, virtually all major categories of goods and services exceeded the Fed’s 2 percent target. As Figure Five shows, the number of categories exceeding this threshold has steadily declined since. Several essential categories, including shelter and medical care, which tend to carry higher weights within the CPI, continue to hold inflation above target. Others, including new and used vehicles and airfares, have fallen considerably. This indicates that inflation in those categories is likely due to specific factors, rather than broad-based price pressures—a positive sign that inflation is not firmly entrenched.

Figure Five: Number of Core CPI Categories with Inflation Greater than 2 Percent (Year Over Year)

Sources: U.S. Bureau of Labor Statistics, CAPTRUST Research

Another positive sign is that the magnitude of price increases has subsided. At the peak, prices of essential items such as dairy were up more than 20 percent from the prior year. Today, the rate of change in this category has fallen to just 1 percent.

A Narrow Election

Historically, presidential election years have seen solid investment returns. This is especially true in years when an incumbent is running for reelection, as administrations are motivated to use government tools to maintain economic strength. Over the past 50 years, election years with a running incumbent have seen S&P 500 returns of more than 17 percent on average.

History also tells us that markets can thrive under any division of government. Markets performed well under both of the current presidential candidates’ previous terms.

However, rarely have the policy differences between candidates been so great—from international relations, tariffs, and deglobalization, to tax, energy, and regulatory policy. It was already shaping up to be a close and unpredictable election, even before the attempted assassination of former President Trump on July 13. This horrific event will change the dynamic of the race in unpredictable ways, and there will likely be many more twists and turns between now and November.

Control of Congress is also paramount for either party to fulfill its agenda. This is important given the significant fiscal policy imperatives on the legislative docket in 2025. The debt ceiling extension passed in June of this year is set to expire on January 1, 2025, which will require Congress to return to the negotiation table. More than $4 trillion of tax provisions are also set to expire next year, without an extension.

Regardless of who wins the presidential election, they will inherit a fraught federal budget when they take office. Due to ballooning government debt in the post-pandemic era, plus the high interest rate environment, the interest expense on federal debt has nearly doubled over the past three years.

Interest expense on government debt now exceeds defense spending as a share of the federal budget. This represents a potential risk to investors if neither candidate or party is able to enact fiscal reform. Continued deterioration of the fiscal situation could translate to higher bond market volatility due to changing supply and demand dynamics for Treasury bonds.

So far, markets have remained calm amid the dramatic events of this early election season. Although presidential election years generate abundant headlines, they typically have a more muted effect on markets. Nevertheless, given the substantive differences between the candidates’ policy priorities, it is likely that election uncertainty will eventually make its way into markets. When or if the odds of the election become clearer, industries that are connected to the policy preferences of the candidates and parties are likely to react, particularly around the energy and financial sectors.

Broad Possibilities

At this halfway point of the year, the financial markets have delivered a broad range of results—from exceptional returns for U.S. large-cap and international equities to disappointing outcomes for more interest rate–sensitive categories such as small-cap stocks, bonds, and real estate. Corporate earnings have been robust among the largest companies, but this growth must broaden to return the market to a more balanced position.

Although investing always involves uncertainty, investors prefer unknowns that they can analyze and discount. The remainder of the year will present challenges that are less fundamental in nature, and therefore perhaps more troubling to markets: the outcome of a narrow election season, the actions of Fed policymakers, the unknown impacts of emerging technology, and significant geopolitical risks.

While investors should be alert to these risks and the potential for changing conditions, they should also recognize that change often creates new opportunities.

[1] “Retail Sales Confirm Continued Consumer Spending Pullback,” The Conference Board

[2] New York Fed Consumer Credit Panel/Equifax, Board of Governors of the Federal Reserve System, CAPTRUST Research

[3] Surveys of Consumers, University of Michigan

[4] Bureau of Labor Statistics, CAPTRUST Research

Life insurance can help financially protect your loved ones when you die. This type of policy ensures a payout will go to the person you name (your beneficiary) when you’re gone. The payout is generally tax-free.

Your beneficiary can then use your life insurance payout to cover any debts that you have left behind, like mortgages, car loans, or credit card debt. Life insurance payouts can also pay for final expenses and estate taxes or can serve as an inheritance for the beneficiary.

What Else Can Life Insurance Do?

Life insurance can provide benefits while you’re living, as well. First, it offers the peace of mind that comes from knowing your loved ones will be cared for. Also, some life insurance policies come with a cash value that you can withdraw or borrow. You can also use the cash value of the policy as collateral to apply for loans or supplement your retirement income.

There are also policies that pay out before your death if you become incapacitated or terminally ill.

Who Should You Name as a Beneficiary?

Your primary beneficiary is the person (or a corporation or legal entity) who receives the proceeds of your insurance policy. You can also name a contingent beneficiary to receive the proceeds if your primary beneficiary dies with or before you. For instance, if your primary beneficiary is your spouse, and you die together, you will need a contingent beneficiary listed on the policy. The contingent beneficiary then becomes the primary beneficiary. Another option is to name multiple beneficiaries and specify what percentage of the net death benefit each is to receive.

You should carefully consider the ramifications of your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time by signing a new designation form and sending it to your insurance company. However, if you have named someone as an irrevocable (permanent) beneficiary, you will need that person’s permission to adjust any of the policy’s provisions.

How Much Life Insurance Do You Need?

Your life insurance needs will depend on factors such as your age, marital status, the size of your family, the nature of your financial obligations, your career stage, and your goals. Your best resource for figuring this out may be a financial professional, who can assist with determining what you need—and what you can afford.

These questions can help guide you, as well:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
• How much of your salary is devoted to current expenses and future needs?
• How long would your dependents need support if you died tomorrow?
• How much money do you want to leave for the things that matter to you, like funding your children’s education, leaving an inheritance, or gifts to charities?

Your needs will change over time, so be sure to reevaluate your coverage regularly.

Types of Life Insurance Policies

There are two basic types of life insurance: term and permanent.

Term life insurance policies provide life insurance protection for a specific period. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period.

Permanent life insurance policies provide protection for your entire life, so long as you pay the premium to keep the policy in force. Premium payments are larger in the early years of the policy in order to accumulate a reserve. In later years, this accumulated reserve, known as the cash value, is used to cover the shortfall between premium payments and insurance payouts. Should the policy owner discontinue the policy, the cash value is returned to the policy owner.

Where Can You Buy Life Insurance?

Your employer may offer it through a group life insurance plan. You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it. Ratings services, such as AM Best, Moody’s, and Standard & Poor’s, evaluate an insurer’s financial strength. The company offering coverage should provide you with this information.

A financial advisor can help you understand which type of life insurance might be best for you, and how much coverage you should purchase. They may also be able to provide a list of life insurance agents or brokers in your area. For help getting started, call CAPTRUST.

What is a Trust?

A trust is a legal entity that holds assets for the benefit of another. Think of a trust as a safe that can be loaded with anything you choose. You get to decide who can open that safe, and when.

There are generally three parties in a trust arrangement:

• The grantor (also called a settlor): This is the person who creates and funds the trust.
• The beneficiary: This is the person or people who receive benefits from the trust, such as income or the right to use a home. These individuals have what is called an equitable title to trust property.
• The trustee: This is the person or people who hold legal title to trust property, administer the trust, and have a duty to act in the best interest of the beneficiary.

You create a trust by executing a legal document called a trust agreement. The trust agreement names the beneficiary and the trustee. It also contains instructions about what benefits the beneficiary will receive, what the trustee’s duties are, and when the trust will end, among other things.

Potential Advantages

A trust can:

• Help reduce estate taxes;
• Shield assets from potential creditors;
• Avoid the expense and delay of probate*;
• Preserve assets for your children until they are grown, in case you die while they are still minors;
• Create a pool of investments that can be managed by professional money managers;
• Set up a fund for your own support in the event of incapacity;
• Shift part of your income tax burden to beneficiaries in lower tax brackets; and
• Provide benefits for charity.

*Note: Probate is the court-supervised process of settling a deceased person’s estate. Probate can be a complicated process and often takes six to 18 months to complete.

Potential Considerations

Trusts also have potential disadvantages. First, there are costs associated with setting up and maintaining one. These may include trustee fees, professional fees, and filing fees. It’s also important to know that, depending on the type of trust you choose, you may give up some control over the assets in the trust. Also, maintaining the trust and complying with recording and notice requirements can take considerable time. Lastly, income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate.

Types of Trusts

There are many types of trusts, the most basic being revocable and irrevocable. The type of trust you should use will depend on what you’re trying to accomplish.

Revocable Trusts

A revocable trust, also called a living trust, is a trust that you create while you’re alive. This type of trust:

• Avoids probate. Unlike property that passes to heirs by your will, property that passes by a living trust is not subject to probate, avoiding the delay of property transfers to your heirs and keeping matters private.
• Maintains control. You can change the beneficiary, the trustee, and any of the trust terms as you wish. You can also move property in or out of the trust, or even end the trust and get your property back at any time.
• Protects against incapacity. If, because of an illness or injury, you can no longer handle your financial affairs, a successor trustee can step in and manage the trust property for you while you recover. In the absence of a living trust or other arrangement, your family may have to ask the court to appoint a guardian to manage your property.

A revocable trust can also continue after your death. You can direct the trustee to hold trust property until the beneficiary reaches a certain age or gets married, for instance.

Despite these benefits, revocable trusts have some drawbacks. A revocable trust does not:

• Remove assets from your estate for tax purposes. Although these assets would avoid probate, they are still owned by the grantor and would be included in the gross estate.
• Provide creditor protection.
• Provide tax advantages.

Irrevocable Trusts

An irrevocable trust is a type of trust where, once established, the grantor generally can’t change, revoke, alter, or modify the trust. These trusts are considered separate entities, can remove assets from an individual’s estate, and may be subject to their own tax filing. There are many types of irrevocable trusts depending on what you want to fund it with, your intended beneficiary, and the access required. Irrevocable trusts can be established and funded during life or at death, depending on your goals for the trust.

An irrevocable trust:

• Avoids probate. Assets owned by an irrevocable trust are distributed subject to the terms of the trust outside of the probate process.
• Exists outside of your gross estate. For those with a taxable estate, funding an irrevocable trust during life can remove those assets and their growth from your taxable estate.
• Provides creditor protection. Assets are generally considered no longer in the control of the grantor and would generally not be subject to creditors. Provisions can be added to protect assets from the beneficiaries’ creditors as well.
• Provides control over distributions. Trust provisions determine when and how trust beneficiaries receive assets from the trust.

As the name implies, an irrevocable trust cannot be revoked. Although some changes can be made depending on trust rules, the funding of these trusts is generally permanent and irreversible.

Funding a Trust

You can put almost any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust will depend largely on your goals. For example, if you want the trust to generate income, you could put income-producing assets, such as bonds, in your trust. If you want your trust to create a fund that can be used to pay estate taxes after your death or to provide for your family when you die, you might fund the trust with a life insurance policy.

Since an irrevocable trust is a separate entity, gifting rules would apply, and the transfer may be subject to gift tax at the time it is funded.

For help deciding which type of trust might fit your needs and goals, call CAPTRUST.

This is a true story, and more common than you might expect.

“Even seasoned nonprofits can easily become preoccupied with the sort of day-to-day challenges that impact the organization’s operations and not give enough focus to planning and bigger picture needs,” says Heather Shanahan, CAPTRUST senior director of endowments and foundations.

 In the hustle and bustle of putting out small fires, it’s not unusual for leaders to get stuck in short-term survival mode and neglect some longer-term strategic issues, like succession planning. “In these situations, where hasty decisions are made during leadership transitions, sometimes even a good hire won’t stay.”

Certainly, nonprofit executives must address immediate issues, including fundraising, allocating grants, managing volunteers, recruiting and retaining staff, engaging board members, and adapting programs to changing needs, to name a few. But they should also carve out some capacity to address strategic issues like succession planning. Failure to do so may leave them vulnerable to leadership gaps and potential disruptions in their mission-driven work.

On some level, this is true for all organizations, but nonprofits are especially at risk because they often rely more heavily than for-profit organizations on the character, network, and reputation of their leaders to attract funding, partnerships, and volunteers. Abrupt changes in leadership can destabilize operations. They may also create uncertainty about the organization’s direction and impact, potentially eroding trust and support.

“Succession planning is about identifying risks and developing leaders to ensure continuity of both internal operations and the external perception of the organization,” says Heidi Spencer, a CAPTRUST senior financial advisor who specializes in helping religious organizations. “In the context of endowment or foundation boards and committees, succession planning means being prepared for both planned and unexpected transitions in key leadership roles.”

But succession planning goes beyond simply filling vacant positions. It means identifying critical roles and competencies needed for the organization’s future success, then developing a pipeline of individuals who could step into those roles. By identifying potential leaders and nurturing their growth over time, the organization can also ensure a smoother transfer of knowledge and responsibilities.

Effective governance requires nonprofit executives and board members to look beyond their current composition and consider the future needs of the organization. “For instance, if current leadership demographics don’t match the demographics of the community, succession planning can help,” says Spencer. “If leaders and board members are looking around and thinking ‘we need more young people,’ or ‘we need more people of color,’ the succession-planning process can be an opportunity to find those future leaders, grow their skills, and start handing over the knowledge they need to be successful.”

Getting Started

A comprehensive succession planning process begins by identifying the critical roles that may need to be transitioned in coming years. “I tell leaders to start by taking an inventory of their organization’s leadership positions, including board officers, committee chairs, senior leadership, and key staff roles,” says Shanahan. “From there, assess each role’s impact on the organization’s operations, and prioritize your focus based on their criticality and the likelihood of near-term vacancies.”

“Start with your most urgent issues,” says Shanahan. “Are there pending retirements, expected departures, or at-risk colleagues in critical roles? Do you want to limit your focus to the executive team, or go deeper into the organization?”

Once you’ve answered these questions, you can better understand the organization’s specific succession risks and start developing talent to mitigate them. Try to provide multiple leadership development opportunities, such as committee assignments, special projects, mentorship programs, or training sessions.

Along the way, you’ll want to develop and document job descriptions and competency requirements for each key position and establish a regular review process to make sure the thinking embedded in the plan remains current.

A comprehensive succession plan should address both orderly, long-term succession—like planned retirements—and unexpected emergencies, and provide scenarios for what-if exercises. The more you engage with all possible scenarios, the better you can manage them if they arise.

Ideas into Action

“Creating a succession plan is a comprehensive process that, by necessity, involves multiple steps and stakeholders,” says Spencer. “Leaders want to get it right, because they understand the impact it will have on the people, the organization, and the mission, and that takes time and work. But it is absolutely worthwhile.”

While input should be gathered from various stakeholders, the most important primary decision-makers will be board members and current executives. Throughout the succession planning process, boards should stay focused on mission alignment and long-term organizational needs. They will also hold final responsibility for approving the succession plan, especially for the chief executive officer or executive director position. Current executives should also give input on mission alignment but will be especially helpful in identifying internal candidates and evaluating operational skills.

The decision-making process can vary based on the organization’s governance structure, but it’s crucial to have roles and responsibilities defined from the outset. “The board should be involved throughout the process—not just at the approval stage—to ensure the plan aligns with the organization’s long-term vision and goals,” says Shanahan.

The time needed to create a succession plan will vary based on the organization’s size, complexity, and current state of preparedness. It might take from three to six months for a small organization with a simple structure. For larger, more complex organizations, one to two years is a more reasonable time frame.

Strategic Governance

Remember, while creating a formal plan is important, the most effective succession plan is an ongoing, dynamic process integrated into the organization’s overall strategic plan and governance and aligned with its culture, goals, and mission.

“Your succession-planning process and resulting plan should support and advance the organization’s strategic objectives,” says Shanahan. For example, does it promote cultural goals like developing internal candidates? Does it demonstrate the organization’s commitment to transparency and openness?

Another aspect of integrating succession planning into nonprofit governance is in how and when you engage stakeholders. As a best practice, succession planning should be a regular board agenda item, with board members identifying and mentoring potential leaders on a predictable schedule.

While the plan is a work in progress, it’s also a good idea to seek input from major donors and community partners. “Keeping them informed about succession-planning efforts will build their confidence in the organization’s future, stability, and long-term impact,” says Shanahan. “While they may not be decision-makers, their experiences may provide helpful insights, and they sometimes have resources that you can leverage in planning.”

“Your legal, tax, and financial advisors may also be able to help,” says Spencer. In her role as a financial advisor, Spencer says she has helped many clients with succession planning. “Sometimes this means helping with knowledge transfer on investment strategies. Other times, it means helping them find candidates for senior roles, or simply sharing best practices and peer insights from our annual Endowment and Foundation Survey.”

Once the plan is formulated, documented, and socialized, don’t let it just sit on the shelf. Keep the momentum going. One idea is to create a succession-focused committee at the board level to continue to refine the plan, update it as needed, and gather feedback from stakeholders. “Succession is also an excellent topic for a deep dive at least once a year or a board retreat with a focus on long-term leadership needs and development,” says Shanahan.

Another good idea to benchmark your succession-planning practices against peer organizations and industry best practices. “This is something we help with often,” says Spencer. “The breadth of our client base means that we have access to leaders in all nonprofit sectors, including community foundations, religious organizations, zoos, the arts, medical research, private foundations, you name it.”

Succession planning is a critical component of good governance for endowments and foundations. While it may not seem as urgent as day-to-day operational issues, it is critically important. Implementing a sound plan requires commitment, time, and resources. However, this investment pays dividends in terms of organizational stability, leadership quality, and sustained impact.

As stewards of their organizations’ missions, board members and nonprofit leaders have a responsibility to look beyond their tenures and prepare for the future. By integrating succession planning into governance frameworks, endowments and foundations can build resilience, enhance donor confidence, and ensure that their important work continues uninterrupted.