For example, consider the gymnastics events. Long before sprinting toward the springboard in the vault competition, each gymnast has calculated the necessary number of twists and turns required to earn a medal. But success is not decided solely by the complexity of their routine. It also depends on whether they can stick the landing. The same is true in an economic context.

Over the past few years, we have witnessed a dizzying array of economic twists and turns, from pandemic-driven volatility to an inflation surge and aggressive interest rate hikes by the Federal Reserve. Now, investors are watching to see whether the Fed can stick the landing and control inflation while avoiding a recession.

Will policymakers be able to achieve an economic soft landing, or will they create conditions for a rough landing that pushes the economy into recession? Or could we experience something in between: a bumpy landing with an extra step that costs us a few points but doesn’t do much damage?

As the Fed carefully watches the economic data, there are some signs that suggest the rate-hiking cycle could soon end. But others could signal there is more work to be done. The stock and bond markets seem similarly confused; equities have shown continued resilience this year, while bonds have undergone a painful recalibration.

Third-Quarter Recap: Losses for Stocks and Bonds

After a strong first half of the year, U.S. stocks fell in the third quarter, particularly in September when the S&P 500 Index dropped nearly 5 percent. Although this ended a three-quarter streak of consecutive gains for large-cap U.S. stocks, as shown in Figure One, U.S. large- and small-cap equities remain positive for the year.

Growth and value stocks moved in tandem, although growth still leads the year by a generous spread. Interest-rate-sensitive sectors such as real estate and utilities lagged for the quarter, each with losses near 10 percent. Energy was the best-performing sector by a wide margin as the price of oil climbed by more than 20 percent during the quarter. This pushed commodities into positive territory as the only major asset class to end the quarter with a gain.

Figure One: Third Quarter and Year-to-Date Returns

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Outside the U.S., both developed and emerging market stocks slumped, due in part to a U.S. dollar that strengthened for 11 consecutive weeks. European shares were weighed down by concerns about the impacts of rising interest rates as the European Central Bank raised policy rates twice during the quarter.

The third quarter was particularly difficult for bond investors. The total return from U.S. core bonds was -3.2 percent, as the 10-year Treasury yield advanced by more than three quarters of a percent to the highest levels in more than 15 years. These losses pulled year-to-date returns for core bonds into negative territory, at -1.2 percent. The Fed’s higher-for-longer interest rate message finally seems to be sinking in with investors.

The Economy Surpasses Expectations

2023 began with widespread anticipation of a recession, yet the U.S. economy has held up far better than expected and continues to grow. Now, easing inflation pressures and signs of a loosening labor market are fueling optimism that the economy could attain the elusive soft landing.

Several factors have helped the U.S. avoid the economic slowdowns witnessed across Europe and China. This includes inflation that has fallen to more manageable levels and a jobs market that, although tight and challenging for employers, offers consumers the ability and confidence to spend. Also, the housing market, an important driver of household wealth, appears to have stabilized despite limited supply and high mortgage rates.

Can Consumers Go the Distance?

The key question heading into this year was how long American consumers could continue as the driving force behind the economy. Even with dwindling savings and rising interest rates, consumers have almost single-handedly kept the economy out of recession.

Personal consumption increased by more than 5 percent this quarter compared to a year ago, while retail sales continued to surpass expectations. And, as shown in Figure Two, although the excess savings people accumulated during the pandemic has been largely depleted, household net worth has bounded upward, increasing by a staggering $42 trillion since the first quarter of 2020, to a record-high level of $146 trillion.

Figure Two: Household Net Worthby Wealth Percentile Groups ($T)

Sources: Board of Governors of the Federal Reserve System, Distributional Financial Accounts

But even as U.S. consumers carry the economy on their shoulders, they face several significant headwinds moving into 2024. One important headwind is dramatically higher interest rates. As shown in Figure Three, consumer borrowing costs have risen across several important categories, including credit cards, auto loans, and mortgages. Rising debt balances and interest costs harm consumer spending because consumers must divert money away from current spending to pay interest and repay debt.

Figure Three: Soaring Consumer Borrowing Costs

Sources: St. Louis Federal Reserve, Board of Governors of the Federal Reserve System, Freddie Mac, Bankrate, LendingTree, CAPTRUST Research

Other headwinds include the resumption of student loan payments, with the net effect of an $8 billion per month drain on consumers’ spending capacity. Likewise, gas prices have risen by $0.63 per gallon since year-end 2022—the equivalent of an $86 billion tax on the U.S. economy.[1]

Finally, both consumers and businesses are facing tighter lending standards as banks respond to tough business conditions. However, although loan delinquencies have risen, they remain in line with the pre-pandemic trend, largely because of the amount of outstanding debt that is set at a fixed rate.

Given these challenges, it’s no surprise that measures of consumer confidence declined further in September. A slowdown in consumer activity seems likely from here.

Mixed Signals from the Labor Market

Another source of economic resiliency this year is the continued strength of the U.S. labor market. The September payroll report exceeded estimates as employers added 336,000 jobs in September—the highest reading since January. This report also revised July and August numbers upward by nearly 120,000 jobs.

Wages increased at a rate of 4.2 percent on a year-over-year basis, as the unusually tight labor market has increased the bargaining power of workers. This is also evidenced by ongoing labor strikes across various sectors, including the entertainment industry, health care, and manufacturing.

Many signs point to a still-red-hot labor market. As shown in Figure Four, after briefly topping a level of 250,000 in mid-summer, initial jobless claims data has trended steadily downward, indicating employers’ reluctance to let go of workers. However, there are also signs that the labor market is beginning to normalize. The quits rate, one measure of worker confidence in the labor market, has cooled considerably since the post-pandemic resignation boom. These mixed signals are difficult for economists to interpret.

Figure Four: Labor Market Mixed Signals: Quits Rate vs. Initial Claims

Sources: U.S. Bureau of Labor Statistics, U.S. Employment and Training Administration

Fed Policy Apparatus

The Fed left its policy rate unchanged in June and again in September, signaling optimism that it may be approaching the end of its rate-hiking campaign. However, following the last Fed meeting, Fed Chair Jerome Powell hinted that another rate hike could be in the cards for 2023, along with a somewhat cryptic statement that one can know when monetary policy is sufficiently restrictive, in his words, “only when you see it. It’s not something you can arrive at with confidence in a model or in various estimates.”

In other words, there remains significant uncertainty about the future path of Fed policy.

There is also uncertainty about the path that potential future rate cuts could take. If inflation remains elevated above the target while the economy stays strong, then interest rates could stay high for some time. But if inflation recedes to more comfortable levels, the Fed could begin mild rate cuts as soon as next year. Or, if the economy stumbles into recession, the Fed may be forced to cut rates more rapidly.

The Bond Market Dismount

Although the economy has not been knocked off course by the Fed’s actions, the bond market has been. The Fed’s higher-for-longer mantra has caught the attention of bond investors, sending yields up and prices down.

Core bonds are now flirting with their third consecutive year of negative total returns, even though fixed-income markets are offering their highest yields in more than 15 years. In this environment, only bonds at the short end of the maturity spectrum showed gains.

The tumbling bond market was somewhat surprising, given the widespread view that both the global and U.S. economies were moving toward recession. Slowing growth should be supportive of bond prices as investors seek safe haven investments, alongside an expectation for lower inflation and central bank rate cuts. One theory is that bonds were slow to react to rising rates because of recession expectations. Another possible explanation is the growing U.S. deficit and the growing burden of government debt servicing costs.

Earnings Face Hurdles

As the third-quarter earnings season kicks off in earnest, many investors are optimistic that S&P 500 earnings will land in positive territory after three consecutive quarters of decline. Early estimates are largely unchanged given the uncertain macroeconomic backdrop.

One area of focus this earnings season will be interest costs. Rising rates will have a growing impact as more companies must refinance maturing debt at significantly higher rates. However, if companies can deliver positive earnings growth, it could put stocks on a firmer footing for the fourth quarter following a year when stock price gains have far outpaced profit growth.

The Global Stage

Conditions outside the U.S. reflect a global economy that is losing steam. Thus far, Europe has narrowly avoided recession amid energy shortages and central bank tightening. In China, dimmed consumer confidence and a debt and property crisis have cast shadows over its economy, as well as other emerging market nations.

Finally, continuing conflict in Europe and the outbreak of war in the Middle East add new uncertainty to a fracturing global economy that poses risks to commodity prices, as well as to the decades-long globalization trend. Deglobalization would have significant implications for global growth and inflation conditions.

Trials Remain

As we enter the final quarter of 2023, major questions remain on the minds of investors. Can a stronger-for-longer economy coexist with higher-for-longer interest rates, or does continued strength today mean more pain later? Will corners of the stock market that have not seen gains in 2023 rally by year-end, or will recession pressures drag all sectors down?

As always, investors should assess both the risks and opportunities presented by the current market and economic conditions. A wide range of potential outcomes makes a strong case for portfolio diversification.

When we tune in to the Olympics for a welcome distraction next year, there will be a few new additions alongside our longtime favorite events. This includes breaking, also known as break dancing. The sport was, apparently, an outstanding success in the Buenos Aires Youth Games and features dancers who must improvise to changing music. Like these acrobatic athletes, investors must adapt to changing conditions as we hope that the economy can bend, but not break, under the pressures of higher rates and slowing growth.

[1] Fitch Ratings, Energy Information Administration, CAPTRUST Research

Today, perhaps more than ever, employers have the opportunity to enhance talent recruitment and increase employee retention by rethinking their retirement benefits to better align with their employees’ needs and expectations.

As Joanne Sammer writes for the Society for Human Resource Management, “At the most basic level, employee benefits are designed to provide workers with a sense that their employer supports them both in- and outside of the workplace.” Although it may be impossible to give every employee every benefit they want, employers can adjust existing benefit menus to show employees that they are listening.

“As an industry, we talk a lot about the shifting social contract between employers and employees,” says Jennifer Doss, defined contribution practice leader at CAPTRUST. Over time, the line between people’s personal and professional lives has thinned. Employees today want to be recognized as complex and complete individuals, not just workers.

To support them, employers should start with the basics, such as offering retirement plans. Research from Voya Financial shows that, among working Americans, 60 percent are more likely to stay with their current employer if they are offered an employer-sponsored retirement plan. Yet in 2021, only 52 percent of American employers offered a 401(k) or similar employee-funded retirement plan. And 41 percent did not offer any retirement benefits at all, according to data from Benefits Pro.

“Offering a retirement plan is the first step, but for companies that already sponsor a retirement plan, personalization and financial wellness are the next frontiers,” says Doss. “As the workplace contract continues to shift, employees are asking for financial wellness benefits beyond retirement savings.” And maybe just by coincidence or serendipity, they’re asking at a time when employers are starting to see improved capabilities for information-based solutions that can help them personalize their financial benefit packages.

Understanding Employee Needs

The path to a customized financial benefits program starts by understanding what employees want. Increasingly, employers are polling employees to learn which benefits are most attractive and which can be removed as population demographics and needs shift.

To balance employee and organizational desires, it can be helpful for employers to write an employee mission statement, describing the specific outcomes they want for people while they’re working at the organization. Most companies have an overarching mission but not one focused on the employee experience. “Knowing the goal will help you decide what to offer and explain why the organization provides each specific benefit or plan design feature,” says Chris Whitlow, CAPTRUST senior director of advice and wellness.

Although it’s a good idea to start by understanding which financial benefits employees want, the company may also choose to offer less-sought-after benefits that align with its employee mission statement.

As an example, consider health savings accounts (HSAs). These are tax-advantaged, member-owned accounts that allow participants enrolled in high-deductible health plans (HDHPs) to save pre-tax dollars for qualified healthcare expenses. HSAs are less popular with younger groups because younger individuals often have fewer medical needs and may not see the value in proactive saving for healthcare. Organizations with an HDHP option—and especially those with younger employee populations—might not see polling data that asks for an HSA but may still choose to offer one as part of their employee mission.

Personalized Investment Allocation

Another major area where employers are leveraging personalization to improve employee outcomes is investment allocation within retirement plans. Recordkeepers have more data now, shared by both the employee and the employer, and they can use that data to customize allocations for individual employees.

“In the past, we had just one data point—the person’s birthday. That’s what made target-date funds so impactful. That one data point felt like a very big deal,” says Doss. With a person’s birthday in hand, plan sponsors could figure out a participant’s estimated retirement date—assuming retirement at age 65—and could adjust allocations to optimize investment returns as the person aged.

“But now, with better data, we can customize further,” says Doss. Employers today can leverage information about each employee’s current retirement savings, salary, deferral rate, assets outside the retirement plan, financial goals, budget constraints, and more. “Atop this information, sponsors now have access to managed accounts, targeted education campaigns, and algorithm-driven recommendations for investment allocation, so they’re moving the needle that much more,” she says.

But personalized investment advice can only take an employee so far. The next piece is to personalize financial education campaigns to be sure the company is meeting every person where they are.

Targeted Education

Like investment allocation, until recently, financial education campaigns were generic by necessity. Mass personalization was simply not possible. Now, plan sponsors are leveraging technology to create customized campaigns at scale. “Technology can help you reach everybody by going beyond one-size-fits-all messaging, because you have the ability to gather more data on each person and draw smarter, less generic conclusions,” says Whitlow.

For instance, recordkeepers can scan employee data to identify all the people who are not saving at least enough to qualify for their company match. Those employees then receive a personalized email that tells them exactly how much money they’re leaving on the table and how much their company would give them if they saved more.

“In these targeted campaigns, the call-to-action is usually very specific, and it has the person’s name on it, so they’re already much more likely to open it and respond,” says Doss. Although targeted education services may not be available through all providers today, they are expected to trickle throughout the industry as converging technologies accelerate data collection and messaging capabilities.

Financial Wellness and Advice

Sponsors are also seeing increased capabilities for personalization of financial wellness programs. These are courses or educational materials that teach people how to manage money, invest, save, grow their assets, pay down debt, and more. Whitlow says technological advancements have improved financial wellness, “but at the end of the day, what I’ve learned throughout my career is that individuals want real, humanistic, empathetic advice and coaching.”

Doss agrees. “I don’t think anyone would argue that the best way to reach people—the best way to help people—is to meet with them one-on-one to understand their financial picture, their financial education level, and their financial goals, then give them the tools and knowledge to help them reach those goals,” says Doss. “But most people can’t afford a personal financial advisor. That’s why financial wellness is such an important and desirable employee benefit.”

By offering financial wellness services as part of benefit packages, companies ensure all employees have access to personalized, expert advice, not just those who can afford it on their own. And with so many data points at their fingertips, financial advisors can give better guidance faster.

Fortunately, financial wellness services are now more cost effective than ever before. Also, research shows that they are worth the investment. According to data from HR Professional and Ernst & Young, companies with financial wellness programs in place saw increases in employee retention (56 percent), employee well-being (50 percent), and employee productivity (46 percent).

“Financial wellness programs benefit participants, but they also benefit plan sponsors by improving participation, increasing contribution rates, and more generally, increasing engagement, satisfaction, and productivity at work,” says Whitlow. “Sponsors are already making thoughtful, future-focused plan design choices, but those mean little if employees don’t know how to put them to the best use.”

Now, plan sponsors don’t have to assume a general level of financial education for all employees. They can use recordkeeper data and internal surveys to deliver personalized education campaigns to all employee groups, from new workers to sandwich-generation caregivers to sophisticated investors in executive positions.

Driving Outcomes

Ultimately, Doss says, personalization benefits the individual participant, but it should also be driving better overall plan health and plan outcomes. “The big four measures of plan success are getting people in the plan, getting them to save enough, getting them invested, and then getting them to decumulate well,” she says. “If you’re leveraging personalization to do those four things, then you should be on the right track.”

Company culture also plays a part in this equation, says Whitlow, “by helping plan sponsors drive better outcomes for both employees and the organization, or detracting from their shared success.”

Many companies aim for a workplace culture that nurtures their most engaged employees: those who are both highly productive and an inspiration to their peers. Financial wellness programs, including benefits such as retirement plans, play a pivotal role in fostering this culture, he says. “Some employers grapple with the challenge of increasing employee participation in financial wellness programs. Yet it’s clear that success lies with employers who invest in understanding their workforce.”

By crafting personalized programs and clearly communicating the importance and value of these benefits—from the executive level down—employers often see significant improvements in engagement, productivity, and employee retention. These are cyclical forces. Company culture can drive participation, and participation can improve company culture.

What’s clear is that the personalization of benefit options and messaging makes a difference. Regardless of whether sponsors give participants a limited lineup of curated options or a robust, cafeteria-style menu, the most successful organizations will likely be those that have a clear picture of what employees want, and what the company wants for employees. By polling employees, writing an employee mission statement, and making use of recordkeeper data to personalize financial benefits, employers can put personalization to work for mutual benefit.

It’s OK to start small, but it’s important to get started. To keep employees engaged and on track financially, start by offering a retirement plan. Then work with a financial advisor to understand which plan features, financial wellness programs, and education campaigns will help them make the best use of it.

“From the day Jake was born, people said, ‘Don’t save anything in his name,’” Gehringer says. They told her if someone with a disability had more than $2,000 in cash or other resources, the person might not be able to qualify for certain government benefit programs, such as payments from the federal Supplemental Security Income (SSI) program and home and community-based services from the joint federal-state Medicaid program.

So, whenever Jake received cash, checks, or other such gifts—on his birthday, for example—the money typically was spent, not saved. Today, the picture is different.

Jake, now 27, is the owner of an Achieving a Better Life Experience (ABLE) account. It’s a special type of savings account intended to help individuals with disabilities pay for disability-related expenses—and it does impact the person’s ability to qualify for government benefit programs.

In 2014, Congress approved legislation creating ABLE accounts “to encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life,” according to the bill.

The bill was also intended to “secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance” as well as through Medicaid, SSI, the beneficiary’s employment, and other sources.

The federal law also allowed states to establish their own ABLE programs. The first, in Ohio, launched in 2016. As of September 2023, 46 states and the District of Columbia have ABLE account programs, says Miranda Kennedy, director of the ABLE National Resource Center, which was founded and is managed by the National Disability Institute in Washington, D.C., and serves as an independent clearinghouse for information on ABLE accounts. The exceptions are Idaho, North Dakota, South Dakota, and Wisconsin.

“Having a disability is expensive,” Kennedy says. An ABLE account “gives people with disabilities who need public benefits the chance to get out of a life of poverty, to be able to save and grow their money” without jeopardizing those benefits, she says.

Account Basics

An ABLE account can be opened online, usually for a minimum initial investment of $25 or less. Anyone can contribute, including family members, friends, and the account owner. 

The person with the disability is the account owner and designated beneficiary, although a parent or other authorized person can have signature authority over an account established on someone’s behalf, such as a minor. 

Investment options, which vary by state, are typically fairly conservative and often include not only mutual funds but also savings and checking accounts backed by the Federal Deposit Insurance Corporation (FDIC), says Stephen Dale, an attorney at The Dale Law Firm, PC, in Pacheco, California. Dale is a disability rights advocate. He works with families that have members with disabilities, focusing mainly on special needs trusts.

ABLE account contributions are not federally tax-deductible, but money invested in an ABLE account grows on a tax-deferred basis, Dale says. This means interest, dividends, and capital gains that are earned inside the account are shielded from federal income tax.

Withdrawals may also avoid tax consequences if they are used for the disabled person’s needs. The list of what counts for tax-free treatment includes expenses for education, housing, transportation, employment training and support, assistive technology, personal support services, health, prevention and wellness, financial management, administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses, according to Internal Revenue Service Publication 907, “Tax Highlights for Persons with Disabilities.”

Although some programs require the account owner to be a state resident, programs in a majority of states are open to residents and nonresidents alike, Kennedy says. 

The ABLE National Resource Center website, www.ablenrc.org, includes a tool to compare all the available programs, summarizing features such as tax breaks for in-state residents, investment options, and debit cards or checking accounts for withdrawals.

Congress has made some changes to the law since its enactment. Under one of these changes, some funds now may be rolled into an ABLE account penalty-free from the designated beneficiary’s own 529 college-savings plan.

Limitations

ABLE accounts have limits. For example, you’re eligible to open one only if you have a significant disability (generally based on Social Security Administration rules) and if the disabling condition arose before you turned 26 (even if you’re now older than that). 

If you clear those two hurdles and you’re already receiving benefits under SSI or Supplemental Security Disability Insurance (SSDI), you’re automatically eligible to open an account. If you’re not receiving either SSI or SSDI benefits but otherwise meet the guidelines, you can still open an account, but you’ll need to obtain a letter of certification from a licensed physician, Kennedy says.

A designated beneficiary can have only one ABLE account, and contributions from all sources are generally limited to $15,000 a year in the aggregate. This limit can increase annually with inflation. Also, an ABLE account owner who has a job typically can contribute an additional sum, within limits, from their work earnings.

There’s also an overall cap on the amount that an ABLE account can hold. For California’s program, for example, the cumulative balance limit is $529,000; for North Carolina’s, it’s $450,000, according to the ABLE National Resource Center’s state-by-state summary.

Although amounts in an ABLE account—and withdrawals that are used for qualified expenses—are typically disregarded for purposes of Medicaid or certain other government benefit programs, if the account balance exceeds $100,000, the person’s SSI benefit will be suspended until the account balance falls beneath that threshold. 

 As of the last quarter of 2021, there were more than 112,000 ABLE accounts with about $1 billion in assets under management—even though an estimated eight million people are potentially eligible for these types of accounts. The average ABLE account contains about $6,000. “People are certainly learning about [ABLE accounts], but there’s a lot of fear” that the rules could change regarding eligibility for benefits programs, Gehringer says.

Special Needs Trust

Another option is a special needs trust, which may be a better fit for some individuals, in part because these trusts can accept and hold significantly larger sums. There’s also no annual contribution limit and no limit on the accumulated balance, Dale says. But special needs trusts come with their own requirements, as well as legal costs and other matters, including the appointment of a trustee.

A number of families with whom Dale works have individuals with cognitive challenges, such as autism spectrum disorder, schizophrenia, or a traumatic brain injury. Often, in such situations, “families are looking for some sort of oversight,” and a special needs trust may be more appropriate because they offer more control, he says. 

Compared with a special needs trust, ABLE accounts are especially useful for making housing payments for the beneficiary. They feature less scrutiny overall when it comes to distributions, provide more autonomy to the beneficiary, and offer the opportunity for the beneficiary to learn financial literacy, Dale says. 

But ABLE accounts and special needs trusts aren’t mutually exclusive. “You can have one or the other—or both,” Kennedy says. For a number of families, “the ABLE account is not so much a savings account as a distribution vehicle,” Dale says. For example, the trust can supply a limited amount of funds to the ABLE account, giving the beneficiary the chance to spend a portion of the money with some autonomy. And “If there’s a problem, we can cut it off,” he says.

Jake Gehringer currently lives with his mother, 52, who is executive director of an organization that builds apartment communities for individuals who have intellectual disabilities, and with his father, Jeff, 53, a computer specialist, in Papillion, Nebraska. Jake contributes to his own ABLE account, mainly out of his earnings from a part-time job as an office assistant at a local learning center. 

His long-term goal is to live independently in his own apartment.

The money that the family saves in his ABLE account will eventually be used to help pay for furniture, housewares, and other items he’ll need when he moves, his mother says. “The ABLE account is a great tool for him so he can save up for things that are more expensive,” she says. The account also means “having savings for him when we’re no longer here to help him.”

In a welcome surprise, last Friday, August 25, the IRS announced a two-year delay in the implementation of SECURE 2.0’s mandatory Roth catch-up rule. This rule mandates that catch-up contributions to 401(k), 403(b), or governmental 457(b) plans must be designated as after-tax Roth contributions for those with prior-year Social Security wages exceeding $145,000.

The rule was scheduled to take effect on January 1, 2024. However, with new IRS guidance in the form of Notice 2023-62, it will not take effect until January 1, 2026.

In addition, the notice also addressed a drafting error in SECURE 2.0 that would have eliminated all age-50 catch-up contributions beginning in 2024, by clarifying that such catch-up contributions would indeed be permitted after 2023.

Although plan sponsors have expressed concern that this new rule will require significant preparation, until last week, it seemed any delay in the effective date of the provision was unlikely. Now, sponsors can breathe a sigh of relief as they continue preparing to make this transition.

Plan sponsors who have questions about this and other SECURE 2.0 provisions should reach out to their financial advisor for advice or visit CAPTRUST’s dedicated SECURE Act 2.0 web page. The complete IRS notice is available here.

Should you have immediate questions, or for more information, please contact your CAPTRUST financial advisor at 1.800.216.0645.

Delegated Investment Managers: Challenges Yield Mixed Results

Delegated 401(k) investments have been an infrequent target of litigation. This quarter, we saw three cases in that area. In delegated situations, plan fiduciaries retain an investment advisor as an investment manager to implement a plan’s investment policy statement and make individual investment decisions as a fiduciary to the plan. Plan sponsor fiduciaries are responsible for monitoring the delegated investment manager.

ESG Cases Begin

Plan participants sued American Airlines for including funds that advance environmental, social, and governance (ESG) causes in their 401(k) plans. The complaint broadly alleges that ESG funds violate ERISA because they support objectives other than plan participants’ financial security in retirement. However, it does not provide specifics. It also alleges that many of the socially responsible funds offered are more expensive than—and underperform—non-ESG funds.

The complaint identifies 25 ESG funds as being in the American Airlines plans. This seems unlikely unless the plaintiffs have included ESG funds available in the plan’s self-directed brokerage account. From a recent Form 5500 for the American Airlines 401(k) plans, it is not apparent that any of the ESG funds identified are in the plans. It is generally accepted that plan fiduciaries are not responsible for the investments offered in properly structured self-directed brokerage programs. Spence v. American Airlines (N.D. Tex. filed June 2023). It will be interesting to see if the court addresses the availability of ESG investments in self-directed brokerage programs.

This suit is filed against the regulatory backdrop of frequently changing standards announced by the DOL for the use of ESG investments in retirement plans. Although the DOL’s position has varied, the underlying ERISA requirement that plan fiduciaries act exclusively in the best interests of participants and beneficiaries in their plans has not changed since its adoption in 1974.

401(k) and 403(b) Fee Cases Continue

The flow of cases alleging fiduciary breaches through the overpayment of fees and the retention of underperforming investments in 401(k) and 403(b) plans continues, with one new twist. Here are a few updates.

In the last quarter, at least 15 court decisions were issued on motions to resolve fees lawsuits. Some cases were decided in fiduciaries’ favor, and others will proceed.

Here are three notable recent cases:

Plan Sponsors Have Wide Discretion in Severance Plan Design

After layoffs at Northrop Grumman, some employees received severance benefits, and others did not. Disappointed, laid-off employees sued. The Northrop Grumman severance plan provides that those who work at least 20 hours per week are eligible for benefits if they receive a personally addressed memo from a vice president of Human Resources. The employees who did not receive severance benefits had not received a required memo. They contended that the memo requirement was only a ministerial act confirming the eligibility of those regularly scheduled to work at least 20 hours a week.

The district court found in favor of the company, noting that the plan document gives the human resources department discretion to decide who, if anyone, receives severance benefits, as ERISA permits. The disappointed former employees appealed. The appellate court affirmed the decision in favor of Northrop Grumman. The court pointed out that the design of a plan, which may include discretion, is not a fiduciary function. But administering a plan according to its terms is a fiduciary function. As the judge said, “A plan sponsor always may, indeed always must, apply a pension or welfare plan as written.” Carlson v. Northrop Grumman Severance Plan (7th Cir. 2023).

Health Plan Fiduciary Claims Ramping Up

We have been reporting on the veritable avalanche of 401(k) and 403(b) plan fee-related cases for years. So far, there have been few cases alleging fiduciary breaches in connection with health plans. That appears to be changing.

The Schlichter law firm, which filed the first group of 401(k) fees lawsuits in 2007 and 2008, has been using social media to identify “current employees who have participated in healthcare plans” at Target, State Farm, Nordstrom, and PetSmart. The Consolidated Appropriations Act of 2021 and newly issued regulations with transparency requirements for health plans appear to be the foundation for potential claims.

There is also an increasing number of claims by plan sponsors against third-party administrators (TPAs). For instance, Kraft Heinz has sued its TPA under ERISA for improperly overpaying claims and failing to turn over plan data in connection with processing claims, among other things. Kraft Heinz Company Employee Benefits Board v. Aetna Life Insurance Company (E.D Tex. filed June 2023).

These pages will not include detailed reporting on fiduciary issues in the health space. Plan sponsors and fiduciaries are encouraged to consult with their healthcare advisors.

A nonprofit mission statement is a short and precise declaration of the organization’s purpose in society. And its values are the principles that guide how the organization thinks and acts. While a mission statement explains the organization’s reason for existing, values describe its culture and beliefs.

Although some foundations are established to mobilize funds around a single, specific, and unchanging mission, many others must retroactively develop or reorganize their mission and values as the organization evolves. Private and family foundations—which often have asset pools before they develop mission statements—are particularly vulnerable to misalignment without a clear and sustainable direction for their philanthropic endeavors.

“Especially as leadership shifts from one generation to another, it’s important for foundations to have a steady vision of what they want to achieve and to define that vision through their mission and values,” says CAPTRUST Director of Endowments and Foundations Heather Shanahan. “Otherwise, different leaders may have very different opinions on how to spend, which can create gridlock or dilute impact over time.” Without clarity of purpose, foundations may also experience a multitude of causes vying for their attention, leading to confusion and uncertainty.

A well-designed mission and values can do the opposite. Namely, they help foundation leaders and staff move together in a shared direction.

Mission Driven

“While mission and values are intertwined, they each serve a distinct purpose,” says CAPTRUST Financial Advisor Luis Zervigon. Zervigon advises endowments and foundations, works on multiple community boards, and serves as a trustee of both the Keller Family Foundation and the RosaMary Foundation in New Orleans, Louisiana. He says one of the biggest benefits of having a mission statement is that
“it helps the foundation think proactively.”

A mission-driven approach emphasizes long-term vision and desired impact. It defines the causes and issues the foundation aims to address by identifying its goals and target beneficiaries. “The mission lays the groundwork for subsequent decision-making,” says Shanahan.

Creating a mission statement allows founders to engage in strategic planning and align their short- and long-term philanthropic goals. It also helps outline the foundation’s focus, creating the potential for deeper impact.

Nonprofits that are drafting—or revising—mission statements can begin with two key steps. First, reflect on the foundation’s purpose. For foundation leaders, this means evaluating long-term aspirations, understanding the legacy of the group, and assessing the external needs and opportunities that align with their resources and expertise.

Next, board members may choose to perform a SWOT analysis with key stakeholders, assessing the organization’s internal strengths and weaknesses, plus external opportunities and threats. A SWOT-based stakeholder analysis can help identify areas of focus and potential alignment between the foundation’s resources and its community’s needs.

Throughout this process, it can be helpful to remember that developing a mission is iterative. Leaders should draft initial statements, seek feedback from stakeholders, then refine accordingly. “The ideal mission statement allows flexibility over time while creating healthy limits,” says Shanahan. “It demonstrates what the foundation does and does not do, and it gives leaders a reference point when evaluating opportunities.”

Zervigon says he’s seen many foundations move from generalist giving to special-interest-based missions. For instance, the Bill and Melinda Gates Foundation—now known for its fight to end malaria—was founded in 2000 with four initial priorities: global health, education, libraries, and the Pacific Northwest. In 2006, it reorganized, creating three separate divisions. One addresses global development; another addresses global health; and the third addresses social inequities in the U.S. The U.S. program also identifies emerging societal needs that currently fall outside the program’s scope but could become areas of focus in the future.

Another example is the Surdna Foundation, founded as a family foundation in 1917 to address a broad range of philanthropic purposes. But by the 1990s, Surdna’s focus had narrowed considerably, addressing mainly environmental and community revitalization needs. In 2008, the foundation adopted an all-new mission statement focused solely on social justice. According to its website, this decision was intended to “create a sense of common purpose and help build consensus around difficult choices.”

Value Development

Zervigon says core values can provide a similar sense of purpose and consensus. And sometimes, they can offer additional specificity. “While the mission is a useful tool for creating guardrails, values can provide a framework within the mission to help leaders put priorities in order,” he says. Naming core values can help leaders discern which projects and efforts to support, in which order.

For instance, the mission of the RosaMary Foundation is to support grant seekers in Greater New Orleans who share the foundation’s vision to build a successful and vibrant city. Under that mission, it gives highest priority to grants in five categories, ranging from education and human service organizations to governmental oversight activities. These classifications help foundation leaders prioritize grant applications.

A value-driven approach can also be helpful for foundations that have outdated mission statements or trust documents. “Often, these groups simply follow an organic process of letting the trustees decide what is the greatest need in their community,” says Zervigon. And that’s OK too. But for foundations that want a list of values, looking at past decisions can reveal patterns of giving. For instance, if the organization finds itself consistently giving to community development and to the arts, then those may be its values.

Nonprofits typically have three to seven core values. What’s important is not the specific number but making sure that all leaders agree on what should be included. Also, value statements should not be aspirational. They should be grounded in the real experience of the foundation or the culture of its board. Once the foundation knows its own values, it’s easier to identify like-minded grant seekers.

Natural Evolution

Once mission and values have been established, implementation and evolution become critical, ensuring that the foundation’s efforts remain aligned with its purpose and adaptable to change. Foundation leaders must actively steer the organization toward the foundation’s intended impact while embracing the evolving philanthropic landscape.

“Ideally, mission and values will work together, guiding the foundation’s grantmaking strategies and decisions,” says Shanahan. “Aligning funding opportunities with these two elements can help ensure the efficient allocation of resources and maximize the foundation’s impact.”

Zervigon agrees. “Mission and values provide a framework, but it is through strategic grantmaking that foundations truly manifest their impact,” he says. “By allocating resources in alignment with their mission and values, foundations can more effectively address societal needs and drive positive change.” Strategic grantmaking allows foundations to leverage their unique perspectives and expertise to target pressing issues. It empowers them to be change agents in their communities and beyond.

However, as time progresses, both the external landscape and a foundation’s priorities are likely to evolve. This is one of the reasons why foundation leaders should periodically assess the effectiveness and relevance of their mission and values. “The evaluation process allows for adjustments and refinements to ensure continued alignment between the outside world and the foundation’s goals,” says Shanahan.

Each foundation’s journey is an ongoing process of growth. “Regular evaluation helps us stay true to our core principles while embracing new possibilities,” says Zervigon. “It enables foundations to be proactive and nimble in their approaches to philanthropy.”

Especially for family foundations, the generational transfer of leadership can be a natural time for evaluation. Some families choose to involve younger family members very early in the process, educating them about the mission and values so they’re ready to take the reins when the time comes. Engaging next-generation leaders before they become board members can help ensure a smooth transition.

It also creates continuity of purpose and helps the organization stay relevant in a changing world. This can help strengthen the group’s long-term impact. Whether those next-generation leaders are family members or professional staff, each successive generation will contribute to the foundation’s growth and continued relevance, but only if they understand and feel connected to its mission and values.

For leaders of private and family foundations grappling with the question of which comes first—mission or values—the answer lies in recognizing their interdependence. By engaging stakeholders, reflecting on purpose, conducting analyses, and embracing an iterative process, leaders can create mission and value statements that are fit to guide a multigenerational philanthropic journey. Implementing and regularly evaluating these statements will ensure ongoing alignment and adaptability, helping the foundation to achieve its intended impact and fulfill its purpose.

Q:  I bought whole life insurance when my kids were little. Do I still need it? 

 In brief, maybe you don’t. If your kids have finished college, your mortgage is paid off (or you plan on downsizing), and your retirement savings are on track, you may no longer need your life insurance policy. Still, there are reasons you might want to keep it. 

For instance, consider that—simply due to aging—you are now at a higher risk of health complications. Even with health insurance in place, it’s easy to amass tens of thousands of dollars of uncovered healthcare expenses, especially if you need long-term care. Life insurance is one way your spouse and heirs can replenish any depleted savings accounts after these expenses are paid. 

You can also use life insurance to pay for estate taxes. Typically, this is done by establishing an irrevocable life insurance trust (ILIT), which is shielded from creditors and the Internal Revenue Service. Or you can leverage life insurance to leave an inheritance for your loved ones by naming them as the beneficiaries of your policy. Another option is to sell the policy through a viatical settlement, but there are some very specific requirements you’ll have to meet before this can happen. Also, a viatical settlement is only recommended if the lump-sum payout you’ll receive is more than the cash value of the policy. 

No matter what you decide to do, talk to your financial advisor to be sure your actions are aligned with your financial goals. If your policy is paid up so you’re no longer paying premiums, then you won’t have to do anything to keep it, so you might as well get the full benefit from it. An advisor can help you understand the best way to do that.

Q: Can you explain how FDIC insurance works? 

The Federal Deposit Insurance Corporation (FDIC) offers insurance coverage to banks as a way to protect your cash deposits against the risk of bank failure. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. 

In other words, if you have multiple individual accounts at the same bank, the combined total of these accounts is protected up to $250,000. However, if you have more than $250,000 spread across multiple individual accounts at the same bank, only $250,000 would be insured. 

Banks aren’t required to participate in FDIC insurance, and they aren’t insured automatically. They apply for coverage and pay monthly premiums, just like you pay for your health or auto insurance. Banks that choose not to participate in FDIC insurance are extremely rare, but they do exist, so it’s a good idea to confirm that your bank is a member. 

Credit unions use a separate form of insurance offered via the National Credit Union Administration (NCUA) instead. NCUA coverage is similar to FDIC insurance coverage, guaranteeing up to $250,000 per person, per institution, per ownership category. 

To take full advantage of FDIC or NCUA insurance, consider spreading your cash deposits across multiple banks and diversifying your account ownership. These two strategies can help you increase your total insured amount at each bank. And if you’re uncertain about how much cash you should have in checking and savings accounts, talk to your financial advisor.

Q: I work at a company that gives me stock as part of my retirement plan. A friend told me about NUA. How does that work? 

Net unrealized appreciation (NUA) is a tax strategy that allows you to convert what would usually be considered ordinary income into long-term capital gains instead. Since income tax rates can go as high as 37 percent (plus applicable state income tax), but long-term capital gains tax is capped at 20 percent, this swap can make a big difference to your tax bill. 

The strategy allows you to claim long-term capital gains on the difference between the current value of the company stock in your retirement plan and its price when it was originally acquired, also known as its cost basis. 

One of the other advantages of this strategy is that you do not have to pay both types of tax—income tax and capital gains tax—at the same time. Although income tax will be due when you take your stock out of your company’s retirement plan, the long-term capital gains tax on appreciation above the cost basis, known as net unrealized appreciation or NUA, does not happen until the appreciated stock is sold. 

Of course, an NUA strategy won’t be the right move for everyone. Your plan may not have the necessary features available, or you may not have a low enough cost basis. Also, NUA can only be done after certain triggering events, and you have to follow specific rules to capture the benefits. 

As always, the best idea is to consult your financial advisor or tax professional. They can help you understand whether an NUA strategy is suitable for your circumstances and what next steps you’ll need to take. 

An avid home canner for more than 15 years, Weigl goes to great lengths to acquire a stock of ripe fruit to make preserves every summer. Figs are expensive and can be difficult to find in large quantities. Plus, fresh-picked figs beat store-bought figs any day. “In the South, fig trees are plentiful, but many people don’t know what to do with them,” she says. 

“Until recently, my octogenarian neighbor and I would stalk the fig trees in our neighborhood,” she says. Each day, her late friend Ralph, a master gardener who lived across the street, would track the ripening of each neighbor’s trees—people who were obviously not picking their figs. When the branches were heavy and laden, he would text her: “Lilian’s trees are ready to be picked,” or “The Moody’s fig tree is looking good.”

Of course, their neighborhood fig watch was polite. “We always asked permission,” says Weigl. Once they had it, they’d pick figs by the pound and freeze them at peak ripeness. Later, Weigl would methodically process them in her water bath canner, turning them into lovely jars of luscious preserves.

Sadly, her partner in figs passed away earlier this year. Weigl says she misses Ralph terribly, but the jars that line her shelves are full of beautiful memories. 

Bittersweet Longing 

Home canning is an almost-magical process that turns humble fruits and vegetables into delectable treats that far outshine mass-produced jellies and pickles. Canning, pickling, and fermenting have surged in popularity with a new generation of foodies who didn’t necessarily grow up with these kitchen skills but delight in acquiring them. The homely acts of washing, chopping, simmering, and stocking a pantry can be a balm for the mind at a time when news reports are filled with calamities. 

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“I see, within myself and my peers, this nostalgia for the homemaking skills that our grandmothers and mothers had. We want to master these skills, not out of necessity but just out of the desire to have them,” says Weigl. She recalls a similar resurgence of interest in food preservation as a hobby around 2008, when mass anxiety about the markets and economy spurred a desire to get back to basics—to plant gardens and make pickles from seasonal fruits and vegetables. 

“I do think canning is having a moment, probably related to the pandemic when we were all stuck at home, looking for things to do, and wanting to be self-sufficient,” says Weigl. 

A Healthy Connection with Food 

Nikki Evers, a real estate agent in Folsom, California, makes her special salsa from jalapenos, bell peppers, and onions and gives it to her friends and family. She grows her own peppers, then enhances their goodness by fermenting them in a salt and water brine. “The natural lacto-fermentation process cultivates good bacteria,” says Evers. She puts her salsa on eggs or in salad dressing. “It’s really good for your gut health because when you eat it, you introduce healthy microorganisms into your system.” 

While Evers’s mother, aunts, and grandmother all knew how to preserve food, Evers didn’t become a canning and fermenting enthusiast until she was in her 40s and faced some troubling health issues. A marathon runner who had always been a healthy eater, “I started to get sick with stomach issues, inflammation, and achy joints,” says Evers. She found it puzzling that her doctor’s prescription medications couldn’t quell her bothersome symptoms. In fact, they didn’t resolve until she committed to some major changes in her style of eating. 

A self-proclaimed “food nerd,” Evers began reading everything she could find about the science of gut health and the nutrients in organic, heirloom vegetables. “I wanted to have a direct relationship with my food.” 

She began to grow much of her family’s food herself on their 10 acres. The large garden she has developed is both her dream and her salvation. Learning to grow and preserve tomatoes, peppers, cabbage, and other vegetables from her own land has given her the ability to eat healthy and seasonal foods all year round. 

Each year, she looks forward to starting her seedlings indoors in winter, using grow lights. By mid-March, she’ll have 320 plants in her house. “It’s very satisfying to have a little seed that I planted in a container in my house, then put it in ground when the season allows,” says Evers. 

“From July to September, I’m in my garden for two hours every morning,” says Evers. “I bring in the vegetables I’ve harvested, and that determines whether I’m going to can tomatoes or do fermenting that day. I’ll can and preserve in the evenings, making sure the vegetables don’t sit too long. Even if you have a small backyard, you can still plant a garden and benefit from growing your own food.” 

Getting Started 

Most beginners do what’s called water bath canning, which is a safe method for processing foods with high acid content. This includes most jams, jellies, pickles, and chutneys. These recipes typically include an acid, such as vinegar or lemon juice, and are brought to a boiling temperature to eliminate any potentially harmful bacteria. 

Low-acid foods, like meats, poultry, or soups, require a more advanced method that uses a pressure canner to reach temperatures of 240 degrees or higher. You can find detailed information on food safety and canning methods by searching for the words home canning on the Centers for Disease Control and Prevention (CDC) website. 

As a general rule though it’s always safest to use tested recipes from reliable sources because old-fashioned recipes aren’t always up to modern food safety standards. For example, a family recipe from generations ago may call for sealing jars with paraffin, but this material can develop pinholes and let bad bacteria in, says Weigl. 

Water bath canning requires some basic equipment: 

An easy first canning project is homemade strawberry jam. The Ball brand offers a low-sugar strawberry freezer jam recipe on its website at ballmasonjars.com, and numerous other beginner recipes are available online. “It’s the perfect entry point for lots of people. Homemade strawberry jam is 10 times better than anything at the store, and it’s a fleeting fruit,” says Weigl. 

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But the Giving Pledge is open only to billionaires—2,540 individuals worldwide, according to Forbes’ most recent list—or to those who would have billions if they hadn’t already given so much away, as are the handful of similar pledges that follow similar philanthropic principles. For instance, some billionaires who find the Giving Pledge too modest have made a different vow to give away at least 5 percent of their wealth each year. 

The core idea among these pledges is that great wealth should benefit the collective good, not only a small number of family members. And that’s a principle that anyone can follow, billionaire or not. 

In fact, financial and estate planners say giving away most of your money is something that anyone with significant assets can consider—although few do. “In my experience of 22 years, it’s exceedingly uncommon,” says Eido Walny, a Milwaukee lawyer who serves on the board of directors of the National Association of Estate Planners and Councils. 

Mike Gray, a CAPTRUST financial advisor based in Raleigh, North Carolina, says that while many people include charities in their estate plans, most have a family-first mentality, leaving most of their wealth to their adult children. But some people do put charity first. For instance, one couple that Gray works with plans to give away about $25 million, most of their assets, upon their deaths. 

Meet the Phillips 

David and Adele Phillips (using pseudonyms to protect their privacy) first met through a civic club and found they had a lot in common. Married for more than a decade now, David, 79, and Adele, 52, have no children. They live an active outdoor life dedicated to faith, community service, and each other. 

The plan to give away most of their money, they say, has evolved over the years but has been driven by those values. 

“Charitable work has always been a part of our lives,” says David, who made his money in real estate and banking. Adele, who inherited some of her wealth and still works in order to maintain her independence, says she has volunteered since childhood. “My grandfather was a pastor, so service was a very big part of our family.” 

With that background, Adele says, “It would never occur to us to spend everything we have on ourselves.” 

David and Adele have always been active fundraisers and donors. But the plan took on extra urgency, David says, after he was diagnosed with Parkinson’s disease in 2016 and was told he might have just a few years to live. While he’s outlived that initial prognosis, he says the experience “helped me realize I probably should get my plan in order.” 

Right now, the Phillipses plan to give money to several charities, including a local nature conservancy, the schools and colleges they attended, and the civic club where they met. They are also planning bequests to a few extended family members. 

The Phillipses developed their plan in partnership with their financial advisors, as well as an estate attorney, a certified public accountant, and an executor. They call this their A-team and call the executor their quarterback. “Our plan is solid,” David says, “and everyone knows who will take the lead when the time comes.” 

Planning a Major Legacy 

Inspired by the Giving Pledge or the Phillipses? To follow in their footsteps, you’ll need a plan and a team to help you execute it. “There are a lot of different ways to go about this,” Walny says, and it’s more complicated than just updating a will. 

Wills, in fact, may not be the best way to make major bequests, in part because the probate process can put unwanted public focus on your estate, says Walny. 

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Other, potentially more efficient, ways to boost lifetime giving or leave assets behind include setting up trusts, creating a family foundation, or putting money in a donor-advised fund (DAF). A DAF is a charitable investment account, administered by an established nonprofit organization. Donors recommend gifts from their accounts but don’t directly control the money. For many people, a DAF is more appealing than a family foundation because it eliminates administrative expenses and duties, Walny says. 

However, control of both family foundations and DAF accounts can be passed down to heirs, if that’s desired, giving adult children and other family members asset pools to meet their own charitable goals. 

Some people also choose to name different charities as the beneficiaries of each of their assets, such as life insurance policies or retirement accounts. Designating a charity as the beneficiary of a traditional individual retirement account (IRA) can be an especially smart move because otherwise your heirs will pay income taxes on the proceeds. “Going this path doesn’t change the amount the charity receives but effectively increases what the heirs will net,” Gray says. 

Choosing Charities 

Most people know what they are passionate about, so choosing which causes they’ll support isn’t a difficult task. But it can take some homework to vet specific organizations that support those causes. Groups such as Charity Navigator and Charity Watch are good sources of information, according to Consumer Reports. 

Even if you’ve designated a recipient, it’s smart to dig deeper, Walny says. Anyone planning a major gift should meet with charity administrators to talk about how they might align their philanthropic intentions with the group’s needs. 

He had one client, he says, who wanted his money spent on guide dogs—until the recipient organization told him that the dogs attracted so many donations that they were “living in 24-carat-gold dog houses,” while other programs were severely underfunded. The donor opted to redirect his money to those needs. In other cases, a small nonprofit may not be able to fully capitalize on a large gift if it’s a surprise, so starting the conversation early can ease the planning process for both giver and recipient. 

Giving While Living 

Sometimes, it makes more sense to give now instead of giving after your death. Of course, there are tangible tax benefits to giving while you’re alive. Some lifetime gifts, including charitable ones and those that pay direct educational and medical expenses, are exempt from annual gift and estate taxes, and there is no limit to how many such gifts you can make. By reducing the size of your estate, you also reduce the federal estate tax your heirs will pay. 

But there is also the intangible benefit of witnessing your positive impact on the world. Also, the causes you care about may need the money sooner rather than later. 

Still, Walny says, most people are concerned about running out of money by giving too much away while they’re still alive. A financial advisor can be a helpful resource in figuring out how much and how often you can give and how much you will need to conserve. 

For those who are considering large-scale philanthropy, Gray says, it can also help put your mind at ease to remember that your giving plans are flexible. “So long as you’re alive and mentally competent, you can generally change your mind about where your money goes or how much you will donate.”

This is a problem that Marti DeLiema, a University of Minnesota researcher, has spent years trying to solve. In her research, DeLiema surveyed and interviewed thousands of older adults and heard stories about losses ranging from $50 to millions of dollars in scams perpetrated over the phone, through email and social media, and on the internet. Some of the worst ones involved investment-romance scams, in which schemers acted romantically interested in their victims. 

In one scenario, the con artist talked about how he “just made half a million dollars in a crazy new coin offering on a crypto exchange.” He was charming and flirtatious, offering to share the opportunity with the other person, DeLiema says. They had multiple long conversations. But it seems he had the same conversations with numerous people. 

Victims sent money, and “when the scam finally unraveled, the older adults had lost thousands of dollars, as well as a person they had a deep romantic connection with. It’s a double whammy of pain,” says DeLiema, an interdisciplinary gerontologist and an assistant professor in the School of Social Work at the University of Minnesota, Twin Cities. 

Enlisting a financial ally, often a family member or close friend, could be the best defense against these attacks and other fiscal missteps, DeLiema says. 

A financial ally, sometimes called a financial advocate, is someone who assists you in managing your financial responsibilities, like paying bills and taxes, filing insurance claims, monitoring retirement accounts, and applying for government benefits. Financial allies can run interference on other potential problems as well. 

“There are many examples of financial exploitation or abuse by people who misuse an older person’s debit and credit cards, forge signatures, improperly transfer property, or change beneficiary designations,” says DeLiema. 

Almost everyone knows at least one friend or family member who has experienced identity theft or financial fraud. In the investment-romance scam, a financial ally “might not have stopped the first $1,000 from leaving the account, but they could have prevented the deep-pocket losses,” DeLiema says. 

An ally could be a spouse or partner, an adult child, a grandchild, a niece or nephew, a close friend, a fellow church member, or a paid professional, such as a trust officer, attorney, or accountant. Generally, this should be someone you have known for a long time and are sure you can rely on to make good decisions. 

“Your ally is someone you can depend on to have your best interest at heart,” says John Keeton, a CAPTRUST financial advisor in San Antonio, Texas. “You can lean on them to help you make well-informed decisions. This sets the groundwork for your ally to take on more responsibilities if you start to lose interest in decision-making or experience some cognitive decline.” 

Cathy Seeber, a CAPTRUST financial advisor in Lewes, Delaware, agrees. She says many advisors will ask clients to name a trusted contact in case questions arise and the client is unreachable or seems to need financial intervention. 

Similar to a financial ally, a trusted contact is someone your financial institution is authorized to communicate with if you’re unavailable. “Ideally, this contact will have a close relationship with your financial advisor, who is often the first one to notice unusual transactions or behaviors,” Seeber says. 

Selecting the Right Person 

Although some people remain financially sharp as they age, many will experience some cognitive decline, dementia, or an illness that impacts their ability to make critical choices. And those who don’t are still at risk of financial mistreatment, as new methods of money transfer; new markets, such as cryptocurrency; and new types of communication technology allow scammers to target thousands of people simultaneously. 

To help people navigate these issues, DeLiema and her colleagues created the Thinking Ahead Roadmap, a website and booklet, which provides a step-by-step guide to keeping money safe as you age. One of its strongest recommendations: Identify a financial ally by the time you retire, or sooner. 

When it comes to selecting the best candidate, people often automatically select their spouse or partner as a first choice because they believe that person understands their finances and will put their needs first. But because of the likelihood of serious health issues or the loss of a partner, DeLiema recommends that everyone choose a backup ally as well—someone who is organized and reliable. This should be someone you’re comfortable being honest with and who will listen to you. 

At first, the person might play a consulting role and offer guidance only when asked. In these early stages, they can act as a sounding board and provide assistance if you think you’ve been the victim of fraud or exploitation. Your ally can then assume additional responsibilities over time as their competence grows and as they become more familiar with your financial situation. 

However, unless you give them legal authority via a financial power of attorney (POA), they will not have the power to act on your behalf. A financial POA is a legal document that gives someone the right to make decisions about your money and property. DeLiema suggests preparing a POA document early on but signing it only when you think you need regular assistance with daily tasks, such as paying bills and taxes and monitoring investments. 

It’s a lot of responsibility, so you want to select the right person to take the driver’s seat at the right time, instead of leaving things to chance. “If you don’t make a decision, you may be manipulated into giving power of attorney to a child who should never be trusted with money,” DeLiema says. 

Most parents know which of their children they can rely on to make good financial decisions and which ones they think might try to cash in early on their inheritance, she says. In one interview, DeLiema says a woman told her that she clearly understood her adult son’s limited financial decision-making capabilities and her own responsibility to protect herself in light of them. The woman asked, “If he can’t take care of his money, how is he going to take care of our money?” 

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Navigating Family Dynamics

Instead of choosing just one contact, some people choose to enlist two or more people as their financial allies, Seeber says. “It’s almost like having a personal financial board of directors.” A small group of people working together can also reassure other family members and friends that decisions are being made in the individual’s best interest, she says. 

For example, Seeber knows one elderly woman who was experiencing short-term memory loss and turned over control of her finances to a son who lived nearby. But a second son, who lived farther away, was also given access to all her accounts so that he could keep an eye on transactions. “This way, they share accountability,” Seeber says.

When one adult child is given the authority to supervise a parent’s finances, it can cause hard feelings between siblings. But there are ways to navigate these dynamics by giving everyone separate responsibilities, says Keeton.

For example, you might ask the most monetarily savvy adult child to take over your finances while calling on another to be responsible for healthcare issues and asking a third to plan family events, he says. “You can build a role for each child, based on their interests.” 

DeLiema recommends bringing your family together to tell them about their potential roles in a single group discussion. This way, everyone will know the plan comes straight from you, reducing the risk of future disagreements about how you want your money managed and by whom. She also advises walking your allies through your current accounts, assets, income, expenses, liabilities, and long-term goals.

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Building the Foundation for Success

Throughout the process, communication is key. Your ally will need guidance to understand and accomplish what you’re trying to achieve, says Keeton. “Think of the ally as the family’s chief financial officer. You may want to consider coaching your children to manage the family finances. And ideally, you would phase them into that role, not just give them the keys overnight.” 

You can lay the groundwork when your children are young by teaching them about earning, spending, gifting, and saving, he says. Consider letting them use kids’ financial apps, like Greenlight, PiggyBot, or iAllowance, to organize their budgets and track their spending. “It’s a great way to develop financial awareness and acumen,” says Keeton. 

Keeton recommends people introduce their financial ally to their financial advisor. Adult children can be included in financial planning sessions and tax meetings to show them what you’re trying to accomplish and how you think through big decisions, he says. 

Some people are uncomfortable sharing financial information with others, including their children. “One fear I’ve heard is that people don’t want to disclose the scope of their wealth to their adult children out of fear that their children will choose to live a more lavish lifestyle or won’t pursue their own career goals knowing how much they are going to inherit,” DeLiema says. 

Utilizing the services of a corporate trustee is an alternative option if you feel that your family members aren’t well-equipped to manage your estate. “This trustee will have a fiduciary responsibility to ensure that decision-making is aligned with your overall estate plan,” says Keeton. Eventually, your ally could become well-positioned to be the executor of your will, he says. 

To make things easier for your ally, DeLiema recommends simplifying your finances as much as possible and creating an inventory of your income, debt, and other money needs. Keep this information in one place to make it easier for this person to assist you in the future. 

Most people who have a designated financial ally say the arrangement gives them confidence and peace of mind. “For many people, it’s a huge relief not to have to manage their day-to-day financial matters when things become challenging,” says DeLiema.