‘Borders on malpractice’ an outrageous assertion

I found your statement, in the Aug. 20 issue, that “some advisers suggest that disregarding home equity [in asset allocation strategies] borders on malpractice” an outrageous assertion. Whether or not you found an adviser idiotic enough to make such a statement is irrelevant. For a publication like InvestmentNews to publish a hyperbolic, incendiary remark like that is irresponsible.
I have been a planner/adviser for more than 25 years and even wrote an article in the 1980s detailing the differences between investment assets, personal-use assets and business assets. This is not a new issue, and hardly one worthy of debate at this late date. Experienced planners know the difference between these various types of assets and act accordingly. To suggest that malpractice is at issue here is ludicrous.
By the way, not treating a house (or houses) as an investment asset in an allocation model does not mean that a planner ignores the effect of the asset on the client’s financial plan.
An accusation of “malpractice” is always to be taken seriously. What would you think if some attorney somewhere decided to make a case on such a flippant statement? I think you owe your readers who do not include a client’s home in an allocation model (which is virtually all of them) an apology.
Clark Blackman II, CFA, CFP, CPA/PFS
President and chief executive
Alpha Wealth Strategies LLC
Kingwood, Texas

N.Y. teachers’ 403(b) a tax-exempt windfall
The state and city of New York cheat themselves by treating the voluntary Teachers’ Retirement System 403(b) Investment Plan as a “pension or retirement system.”
The 8.25% interest rate constitutionally mandated for the savings accounts of members of Tiers 1 and 2 of the TRS “pension or retirement system” is also applied to the savings accounts of members of the voluntary 403(b) Investment Plan. Such application reveals a complete lack of understanding of what constitutes a “pension or retirement system” under Article V, Section 7 of the New York constitution, commonly referred to as the “impairment clause.”
The clause states: “After July 1, 1940, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.”
Because it is a supplemental or voluntary savings plan, the TRS 403(b) Investment Plan is clearly not covered by the impairment clause of the constitution. It is the benefits derived from the “pension or retirement system” which are covered by the impairment clause. This distinction is elementary to all but the trustees of the TRS.
Invariably, whenever there is an impairment clause challenge, it is one that is financially hurtful to the members of the pension or retirement system. Not in this instance. The misapplication of the impairment clause to the voluntary TRS 403(b) Investment Plan has cost the state’s taxpayers $250 million dollars annually in interest payments that are not constitutionally mandated. This is illegal and requires an immediate legislative remedy.
But there is more to this story. Pensions of state and local governments and the federal government are received tax free by residents of New York. This means that the pension a New York resident receives from the TRS pension or retirement system is 100% exempt from New York state, city of New York and city of Yonkers income tax.
When it comes, however, to the income derived from voluntary
supplemental-investment plans — i.e., an [individual retirement account], 457(b), 401(k) or 403(b) — there is only a partial exclusion of $20,000. This means that if you withdraw $50,000 from one of the aforementioned accounts, $30,000 is taxable income, while $20,000 is tax free. So where’s the beef? The beef lies in the fact that the entire $50,000 withdrawal from the TRS 403(b) plan is received tax free. How could this be? It’s because withdrawals from the TRS 403(b) plan are improperly treated as pension income and not 403(b) income. This means that if a resident of New York receives a TRS pension of $75,000 annually and withdraws another $50,000 annually from their TRS 403(b) account, they pay no taxes on $125,000 of retirement income, when we all know that they should be paying taxes on $30,000.
Boy, does it pay to be a member of the TRS 403(b) Investment Plan. You reduce your current tax bill by contributing pretax dollars to an investment plan, and in violation of Article V, Section 7 of the state constitution, you get an 8.25% interest rate applied to this voluntary pretax investment account, a rate not available to members of the New York City deferred-compensation plan. Then, during retirement, the New York tax collector tells you that the payments you receive from your pretax TRS 403(b) account are entirely exempt from state, city of New York and city of Yonkers income tax.
This is clearly illegal and must be remedied immediately. What are you going to do about it, Gov. Spitzer and Mayor Bloomberg?
Joel Frank
Marlboro, N.J.
Editor’s note, the writer, a former New York City high school accounting teacher, is a pension columnist for The Chief-Civil Service Leader newspaper.
How to benchmark for risk reduction
I just read your [Aug. 27] article about benchmarking [“Target date benchmarks miss the mark”] and loved it! I can’t tell you how many advisers out there feel lost with benchmarking. So many advisers want to immediately turn their performance reporting into report cards when initially they were created to be retention documents. One of the ways advisers can give real value to their clients is to actually work with them to determine what the right type of return volatility for them is.
Target date funds are marketed to the retiring investor who wants a diversified portfolio that slowly reduces risk over time so that when they reach distribution, they can have the income they need but still be invested for growth in the future. As the article mentioned, how do we benchmark that?
Traditional ways:
• Track against the major markets (Standard & Poor’s, MSCI, Lehman Aggregate). Flaw: Diversified accounts can’t really be compared against single asset classes.
• Mimic the asset allocation of the target fund and fill with indexes. Flaw: More than 90% of the value created by managers is through asset allocation; this process just eliminates that value and focuses only on their ability to pick stocks.
Possible solutions and ideas:
• Investors care about only two things: retiring comfortably and knowing they won’t outlive their assets. Beating the S&P 500 stock index is not a real accomplishment. (“We failed to build up your portfolio the three years before your retirement date, but the good news is, we beat the S&P 500.”)
Therefore, an objective rate of return is what they need — let’s say 8% a year. How do we meet that? With a well-diversified portfolio (asset allocation funds, etc.). We know that over a certain period of time, we can average X amount of return with Y amount of variation (looking at 30-plus years of historical asset class performance).
Instead of giving a benchmark that really doesn’t matter, give them one that does: objective return. Now, most people would say an objective rate of return is always positive and therefore impossible to beat.
So the solution is to set the objective with a set volatility. Tell investors we can expect X amount of volatility per period, such as each quarter, year-to-date, one-year, three-year, and so on, and still meet our objective growth target over Y amount of years. So, theoretically, as long as your investors’ circumstances don’t change and they are in the “acceptable” volatility range, they can rest easy.
Tom McCarthy
Regional consultant
AssetMark Investment Services
Pleasant Hill, Calif.

‘Respected benchmarks’dismissed as inadequate
I think the Aug. 27 article on target date benchmarks,” Target date indexes miss the mark” was blatantly unfair to the Dow Jones Target Date indexes.
The article simply dismissed these existing and respected benchmarks as inadequate. How could you publish an article that attacks the existing effort without even saying specifically what was seen as wrong with them?
These benchmarks were rigorously designed and constructed to find the elusive common ground for investors and fiduciaries who choose a target date investment or series. My hope is that readers will see past the obvious shortcomings of this article and seek more information regarding the Dow Jones Target Date indexes.
Rodney H. Alldredge
Chief investment officer
Global Index Advisors Inc.
Atlanta
Editor’s note: The writer is a consultant to Dow Jones & Co. Inc. of New York on the design of the Dow Jones Target Date Indexes. The article in question did not single out any target date indexes in reporting on a study by The Vanguard Group Inc. of Malvern, Pa.

Comp comparison isn’t apples to apples
Considering that a typical hedge fund doesn’t have $657 million in [assets under management], I suspect the “typical hedge fund manager” does not receive said amount in annual compensation [“Hedge fund pay blows others away,” Aug. 29].
The chief executive compensation cited in the Short Interests item was from the “Top 20 CEOs.” The hedge fund comp was from the “typical” manager. Sounds rather arbitrary. I smell an agenda.
Patrick Sweeny
Principal
Symmetry Partners LLC
Glastonbury, Conn.

Related Topics: Letters To The Editor