Friday Financial Five–July 26th, 2013

Friday, July 26, 2013

Dan Forbes, GoLocalProv Financial Expert

 

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Measuring pension returns

Indicating that the 11 percent return for the pension’s last fiscal year missed out on over $700 million in possible income might be a bit misleading. The pension’s allocation, expenses, and increased use of hedge funds are all fair game and questions on these issues should be met with transparency by the treasurer’s office. Comparing pension returns to that of an all equity index, or any index represented by one asset class, isn’t helpful because it’s counter-intuitive to sound fiscal management by the state. The fund is meant to grow and provide income to retirees while minimizing risk, necessitating use of multiple asset types.

Fannie Mae to exit stage right

Fannie Mae, the government backstop to the residential lending market, is being targeted on all sides. President Obama indicated this week that it’s time to “turn the page” on Fannie Mae and Freddie Mac. The House Financial Services Committee passed legislation (Protecting American Taxpayers and Homeowners Act) that gets rid of the companies by 2018. The Senate hasn’t voted but is still working on legislation. Everyone is on board. The hard part is figuring out how to remove the companies while retaining the fees they currently contribute to the budget.

The FDIC weighs in on payday loans

Payday loans have been a hot topic in the state and Mark Pearce, director at the Federal Deposit Insurance Corporation, recently spoke on the FDIC’s perspective. Nearly one in five households without a bank account used these short term, high interest instruments within the last twelve months. Pearce pointed to a pilot program the FDIC implemented in 2007 that had success. The infrastructure is in place for small community banks to offer small dollar loans with traditional underwriting principles. It’s a matter of getting the banking community and educated consumers on the same page.

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Variable annuities on a fee-diet

Despite ever increasing sales, the general consensus on traditional variable annuities is that they’re expensive and difficult to understand. Fidelity, Jefferson National, and Vanguard are all leaders in offering fee based annuity products, attempting to reduce the yearly cost of buying the VA’s primary benefit, tax deferral. For those with income tax concerns, the annuity is always going to be a consideration. Policy holders outside of an expensive surrender period may consider lowering annuity costs.

Municipal bond interest on the table

Mutual fund companies that offer municipal bond funds are in Washington, D.C. this week battling for the continuation of tax free municipal income, just one of the items on the table for the Senate Finance Committee’s deadline today. Making municipal bond income taxable would not only affect the bond market, but also the budgets of local governments.

 

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].

 

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