Category: Economics

If you’ve ever been told to “sit tight and stay the course” when the market is dropping and your investment account is worth less than it was just moments ago, you’re not alone. Financial advisors, including Betterment, love this mantra and repeat it anytime there’s a market downturn—which every investor should be prepared to navigate at some point.

But being told to do nothing when your account balance is dropping can feel like an inadequate response. And, unless your investment strategy has been designed from the ground up to anticipate and react to market volatility, you may be right.

The reason Betterment can confidently advise our customers not to react or adjust their investment strategy during a market downturn is because our entire platform was designed with inevitable downturns of the market in mind.

In this article, I’ll cover how our investment portfolio creation process, ongoing automated account management system, and dynamic advice, are designed with market fluctuations in mind, so that you can “sit tight and stay the course” and feel confident it’s actually the right thing to do.

Our portfolios are constructed with market volatility in mind.

Betterment’s portfolio construction process strives to design a portfolio strategy that is diversified, increases value by managing costs, and enables good tax management. Ultimately, our goal is to help you build wealth.

This means: Our intent is to create portfolios designed to have the greatest chance of making money and also not losing it.

At a baseline, our allocation recommendations are based on various assumptions, including a range of possible outcomes, in which we give slightly more weight to potential negative ones, by building in a margin of safety—otherwise known as ‘downside risk’ or uncertainty optimization.

So, even before you’ve invested your first dollar, your portfolio has already been designed to account for the market fluctuations you will inevitably experience throughout the course of your investment journey, even the big downturns like 2008 and the more recent market crash in 2020.

Furthermore, our risk recommendations consider the amount of time you’ll be invested for. For goals with a longer time horizon, we advise that you hold a larger portion of your portfolio in stocks. A portfolio with greater holdings in stocks is more likely to experience losses in the short-term, but is also more likely to generate greater long-term gains. For shorter-term goals, we recommended a lower stock allocation. This helps to avoid large drops in your balance right before you plan to withdraw and use what you’ve saved.

All you have to do is:

Tell us what you are saving for (your investing goal).Let us know how long you plan to be invested (your time horizon).

We take care of the rest.

By using your personal assumptions, in conjunction with our general downside risk framework, we’re able to recommend a globally diversified portfolio of stock and bond ETFs that has an initial risk level recommended just for you.

And because we weigh investment time horizon and below-average market performance more heavily, our algorithm allows for some breathing room. If you wish to deviate from our advice— like increasing or decreasing your exposure to stocks or bonds, slightly beyond our default recommendation but still within a reasonable bound—we’ll still maintain the integrity of a properly diversified portfolio and investment strategy designed to meet your specific objective.

After all, the chance of reaching any investing goal increases when the investor is comfortable committing to their strategy and staying the course in both good and bad markets.

Our automated portfolio management features keep you on track during downturns.

How we construct our globally diversified portfolios and the risk framework we apply to each investor’s specific allocation recommendation is just the starting point. It’s our ongoing and automated portfolio management that provides the additional value-add that’s hard to replicate elsewhere, especially in times of heightened volatility.

Our automated features like allocation adjustments over time, portfolio rebalancing, tax loss harvesting for those who select it, and updated advice when you need it, are what help most.

utomated Allocation Adjustments

When we ask you to tell us about your investment objective, including how long you plan to be invested for, it helps us choose the appropriate asset allocation for you throughout the course of your investment timeline, not just in the beginning.

For most Betterment goals, we recommend that you scale down your risk as your goal’s end date gets closer, which helps to reduce the chance that your balance will drastically fall if the market drops. This is an especially important consideration for an investor who plans to use their funds in the near term.

We call this recommendation of a gradual reduction of stocks in favor of bonds, a goal’s glidepath. And instead of leaving this responsibility up to you, you can opt into our “auto-adjust” feature, which means our system monitors your account and adjusts your portfolio’s allocation automatically over time.

utomated Portfolio Rebalancing

The allocation that we choose for you, at any given time, is our best estimate of the combination of assets that will help you reach your goal by the date you’re aiming for. But, unless each asset you are invested in has the same exact returns, normal stock market fluctuations will likely cause your actual allocation to drift away from your portfolio target, which is calculated to be the optimal level of risk you should be taking on.

We call this process portfolio drift, and though a small amount of drift is perfectly normal—and a mathematical certainty—a large amount of drift could expose your portfolio to unwanted risks.

When the market fluctuates, not all of your investments are dropping to the same exact degree. For example, stocks are generally more volatile than bonds.

As you can imagine, a period of sustained volatility could mean a significant shift in how your portfolio is actually allocated, relative to where it should be. Left unchecked, this drift could be especially harmful to your portfolio’s performance, which is why at Betterment, our portfolio management system provides ongoing monitoring of your portfolio in order to determine whether rebalancing is needed.

While we generally use any cash inflows, like deposits or dividends, and outflows, like withdrawals, to help rebalance your portfolio organically over time, when a significant market drop occurs, there can be a need to sell investments in order to adjust your portfolio back to its optimal allocation.

Consider an instance where the value of your stock investments has dropped significantly and now your bond investments are overweighted relative to your stocks. Our rebalancing system might be triggered to correct the drift. Not only would our automated rebalancing seek to ensure your portfolio’s allocation is realigned relative to its target, it would also mean buying stocks at their currently cheaper price point, setting you up nicely for any market recovery.

Furthermore, if effective rebalancing does require selling investments in a taxable account, the specific shares to be sold are selected tax-efficiently using our TaxMin method. This is designed to ensure that no short-term gains are realized. We never want the tax impact of maintaining proper diversification to counter the benefits of applying our risk framework.

utomated Tax Loss Harvesting

Tax Loss Harvesting is a feature that may benefit you most when the market is volatile. After all, if there aren’t any losses in your account, we can’t harvest them. Our automated TLH software monitors your account for opportunities to effectively harvest tax losses that can be used to reduce capital gains that you have realized through other investments in the same tax year.

This can potentially reduce your tax bill, thereby increasing your total returns, especially if you have a lot of short-term capital gains, which are taxed at a higher rate than long-term capital gains.

And, if you’ve harvested more losses than you have in realized capital gains, you can use up to an additional $3,000 in losses to reduce your taxable income. Any unused losses from the current tax year can be carried over indefinitely and used in subsequent years.

Our dynamic financial advice works for you during market fluctuations.

Much like the automated features described in the section above, the advice we give our customers is dynamic and updates automatically based on many factors, including market performance.

Just as your car’s GPS recommends the best route to take to reach your destination, Betterment recommends a tailored path toward reaching your financial goals. And just as the GPS updates its recommended route based on road conditions and accidents, we update our advice based on various circumstances, such as a market downturn.

In addition to recommending a starting risk level tied to your specific objective, we also estimate how much you need to save.

In the case of a really big market drop, we might advise you to do something about it, such as make a single lump-sum deposit, which will help keep your portfolio on track. Recognizing that coming up with sizable excess cash can be tough to do, we’ll also suggest a recurring monthly deposit number that may be more realistic. And, if it’s early on in a long-term goal, it’s unlikely you’ll need to change anything significantly, because you still have a lot of time on your side.

Conclusion

The path to investment growth can be bumpy, and negative or lower than expected returns are bound to make an investor feel uncertain. But, staying disciplined and sticking to your plan can pay off.

Betterment has been purpose-built with all the worst and the best the market may throw at us in mind, by focusing on three key elements: intentional portfolio construction, automated portfolio features, and advice that reacts to market conditions.

Feel confident that Betterment’s hard at work, for you, so that you can truly “sit tight and stay the course.”

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Are you thinking about starting a 401(k) plan or have a plan and are feeling overwhelmed with your current responsibilities? If you answered “yes” to either of these questions, then it might be time to create a 401(k) committee, which can help improve plan management and alleviate your administrative burden.  Want to learn more? Read on for answers to frequently asked questions about 401(k) committees.

1. What is a 401(k) committee?

A 401(k) committee, composed of several staff members, provides vital oversight of your 401(k) plan. Having a 401(k) committee is not required by the Department of Labor (DOL) or the IRS, but it’s a good fiduciary practice for 401(k) plan sponsors. Not only does it help share the responsibility so one person isn’t unduly burdened, it also provides much-needed checks and balances to help the plan remain in compliance. Specifically, a 401(k) committee handles tasks such as:

Assessing 401(k) plan vendorsEvaluating participation statistics and employee engagementReviewing investments, fees, and plan design

2. Who should be on my 401(k) committee?

Most importantly, anyone who serves as a plan fiduciary should have a role on the committee because they are held legally responsible for plan decisions. In addition, it’s a good idea to have:

Chief Operating Officer and/or Chief Financial OfficerHuman Resources DirectorOne or more members of senior managementOne or more plan participants

Senior leaders can provide valuable financial insight and oversight; however, it’s also important for plan participants to have representation and input. Wondering how many people to select? It’s typically based on the size of your company – a larger company may wish to have a larger committee. To avoid tie votes, consider selecting an odd number of members.

Once you’ve selected your committee members, it’s time to appoint a chairperson to run the meetings and a secretary to document decisions.

3. How do I create a 401(k) committee?

The first step in creating a 401(k) committee is to develop a charter. Once documented, the committee charter should be carefully followed. It doesn’t have to be lengthy, but it should include:

Committee purpose – Objectives and scope of authority, including who’s responsible for delegating that authorityCommittee structure – Number and titles of voting and non-voting members, committee roles (e.g., chair, secretary), and procedure for replacing membersCommittee meeting procedures – Meeting frequency, recurring agenda items, definition of quorum, and voting proceduresCommittee responsibilities – Review and oversight of vendors; evaluation of plan statistics, design and employee engagement; and appraisal of plan compliance and operationsDocumentation and reports – Process for recording and distributing meeting minutes and reporting obligations

Once you’ve selected your committee members and created a charter, it’s important to train members on their fiduciary duties and impress upon them the importance of acting in the best interest of plan participants and beneficiaries. With a 401(k) committee, your plan should run more smoothly and effectively.

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TABLE OF CONTENTS

Define What Retirement Means To YouSetting Up Your Retirement Projections At BettermentUnderstanding Betterment’s RecommendationsTaking Action

Savings towards retirement is one of the most popular reasons people use Betterment. This makes sense, since almost everybody dreams of retiring some day (or at least having the option to quit working or switch careers, if they choose).

That’s why Betterment offers retirement tools in your account that allow you to define what retirement means to you, and then run projections that give guidance on whether your goal is on-track or off-track. Our advanced projections include key inputs like Social Security, inflation, life expectancy, and even investment accounts not held at Betterment.

Once you have your retirement projections setup in your retirement goal, Betterment will give you personalized advice on how much you should be saving towards retirement, which accounts are most optimal for you, and how you should be invested. You can even run different “what-if” scenarios to see how things like retiring earlier, or saving more, affect your projections.

Of course, we make it easy for you to then take action and make your money work for you. For example, you can open various types of retirement accounts. You can also enable our many automated tools to help you save more, manage your investments, and manage taxes. We even work to make rolling over other retirement accounts as easy as possible.

Let’s walk through each of these areas in more detail, so you can learn how to make the most of Betterment’s retirement planning tools.

Define what retirement means to you.

Each person’s retirement plan is unique. That’s why we allow you to tell us how and when you’d like to retire, and then we shape our advice around those inputs. Afterall, our advice will be very different if you plan on retiring at age 55 vs. age 75. This is what we call goal-based investing, where you tell us your various financial goals, and we give you advice on how to achieve them.

For many individuals, the initial step of defining retirement can be difficult. This is understandable. We often hear questions like “how do I know how much money I’ll spend in retirement?” or “can I retire tomorrow?” Don’t worry. Betterment built tools to help you answer these tough questions.

Once you open a retirement goal in your Betterment account, our retirement planning tool will walk you through how to estimate both your retirement spending and retirement age in order to set up your plan.

Estimating Retirement Spending

How much you would like to spend during your retirement is the most important driver of your retirement plan, but it is often the hardest part to predict. Maybe your kids will be independent by then, but health care may cost more. Maybe your house will be paid off, but you’ll also want to travel more. These are just a few examples of how some spending categories may decrease, while others may increase.

If you’re one of the few who happen to have a good idea of what you’d like to spend during retirement, we allow you to simply input that number. For those who are unsure, we have a helpful calculator that will automatically estimate a spending number for you. This number can serve as a starting point, but you can always override it.

We then estimate your retirement spending by running key data points through a spending estimate formula. This formula includes expected wage increases (which tend to be higher than general inflation), cost of living data for your particular zip code, and an estimated percentage of income used to support your lifestyle (i.e. spent on goods and services) based on data from individuals with similar income to you. While not an exhaustive list, these data points provide a useful spending overview that are factored into our advice.

Estimating Retirement Age

When you’ll retire is also difficult to predict. The choice isn’t always yours to make either, as can be the case with unexpected health issues or being forced out of work.

As with your retirement spending, if you have a particular retirement age in mind, you can simply enter it into our system. For those who are unsure, we default you to age 68, which is just beyond Full Retirement Age (FRA), as defined by the Social Security Administration, for many of our customers.

Making Changes And Updates

We know that life happens, and things change. The retirement plan you set up in your 30’s or 40’s may become outdated. That’s why we build flexibility into our retirement projections, and allow you to make changes to your plan.

You can easily update your desired retirement spending or desired retirement age at any time. When you do, we will automatically update our projections based on your new inputs. This way, you can ensure your retirement plan is always up-to-date.

In fact, we encourage you to review your retirement projections periodically for this exact reason. As a general guideline, you should review your retirement projections once per year, or after any major life event like a promotion, change in marital status, birth of a child, or other similar event.

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Setting Up Your Retirement Projections At Betterment

Now that you’ve defined what retirement means to you, it’s time to run some projections and determine if you seem on-track or off-track to meet your retirement goal. Betterment will calculate this for you, but first we need to gather some information about your situation. The more information you tell us, the more accurate our corresponding projections can be.

Existing Savings: Tell us which accounts you already have for retirement, so we can give you credit for the savings you already have. This should not include accounts that are set aside for other purposes, like emergency funds, buying a house, or your kid’s college. But it should include retirement accounts, even if they are not held at Betterment. Common examples of this are 401(k)s and your spouse’s retirement accounts as well. We recommend syncing these accounts to your Betterment account.Planned Future Savings: We can also factor in future retirement savings that you expect to make. Under each account, you can tell us how much you plan to contribute per year. You can even include employer matches, if applicable, to your workplace retirement accounts.Social Security Benefits: Social Security plays a key role in retirement for millions of Americans. We use your current income to estimate Social Security benefits according to the U.S. Social Security Administration’s benefit rules. We also adjust expected Social Security benefits based on projections from the Trustees Report. However, this is just an estimate, and you may prefer to instead login to your online Social Security account to view your official estimate and use that instead.Other Retirement Income: Some individuals may have other sources of retirement income, such as a pension or rental income. If this applies, you can enter that information into your projection inputs as well.Life Expectancy: We default your life expectancy to age 90, which is a conservative estimate compared to average life expectancies. Women tend to live longer than men, so keep this in mind as you adjust your retirement plan. You can always override our default age, if you’d like.

With all of these inputs, your retirement plan should be personalized to your situation. We then use our Goal Projection and Advice methodology to estimate if you appear to be on-track to reach your retirement goal or not. If you’re off-track, that’s okay. We’ll give you recommendations to get on-track, and make it easy to take action on those recommendations. We don’t expect change to happen overnight, and even knowing where you stand is a great first step.

Understanding Betterment’s Recommendations

With your retirement projections in place, Betterment can now give you personalized recommendations to help you get on-track, or even if you are already on-track, to help maximize your savings and investments. The recommendations we give should answer many common questions we hear from customers, such as:

How much should I be saving?Which accounts should I contribute to?How should I be invested?

How much should I be saving?

One of the most important recommendations we can give is telling you how much we estimate you should be saving per year to be on-track for retirement. Betterment will give you this top line number so that you have a target in mind to strive towards.

Which accounts should I contribute to?

For many people, you will need to combine multiple accounts to reach your goals and optimize your savings. Once you know how much you should be saving, we will also tell you which mix of accounts you should be putting those savings into, and show that to you in a prioritized list. This list includes things like tax bracket, employer match info, account fees, contribution limits, and more. This helps make sure your money is working as hard as possible for you.

In particular, the use of tax-advantaged retirement accounts are an important benefit to consider when saving for retirement. Contributions to Traditional 401(k), Traditional 403(b), and Traditional IRA accounts are typically tax-deductible, which means you contribute on a pre-tax basis and normally don’t pay taxes until you make withdrawals. Contributions to Roth 401(k), Roth 403(b), and Roth IRA accounts are not tax-deductible, which means you contribute on an after-tax basis but they grow tax-free.

How you contribute to your retirement accounts now can make a big difference over time. The earlier you invest, the more possibility there is for your investments to appreciate. This is especially true for retirement savings, because when you use tax-advantaged retirement accounts, such as IRAs or 401(k)s, all that time spent in the market can lead to benefits in tax-free growth.

How should I be invested?

Another critical component of your retirement plan is making sure you are invested appropriately. Betterment’s tools will give you feedback on key areas of your investments, even on your non-Betterment accounts. Our tools will give you feedback on how risky your investments are and if that risk level is appropriate given your time horizon to retirement.

As a default for our recommended actions, if you have 20 or more years until you retire, we recommend 90% stocks. Then, our investment advice reduces your risk over time until your retirement date, when it hits 56% stocks. Finally, it glides down to 30% stocks during retirement.

Our tools will also analyze your external accounts to determine if you seem to be paying more fees than you have to, and if you have too much cash sitting in your retirement accounts.

Taking Action

Even the best retirement plan won’t do you much good if you don’t take action. With Betterment’s smooth interface and powerful automation, taking action has rarely been easier.

Open multiple retirement accounts: Many people can benefit from having multiple retirement accounts, like Roth and Traditional accounts. This can help you optimize for taxes and save beyond the contribution limits that some accounts have.Enable tax management algorithms: Optimizing for taxes can help your money work harder for you. Betterment is known for our advanced tax strategies like tax loss harvesting and tax coordination, which can both be put on autopilot in your Betterment accounts at the flip of a switch.Select a portfolio strategy: Betterment offers multiple portfolio strategies, which allow you to customize your investments and choose the strategy that best fits your needs and preferences.Enable investment management algorithms: Betterment allows you to automate many areas of investment management like rebalancing and auto-adjusting your investments over time.Roll over retirement accounts: Consolidating your investment accounts into Betterment may help you ensure your retirement portfolio is working together in a seamless, automated manner.Enable automatic deposits: Making retirement savings automatic can help you save more, and make maxing out your retirement accounts easier.Add beneficiaries: Adding beneficiaries can help ensure your money goes where you want it to, even after you pass away.

All of these actions are important in setting up a comprehensive retirement plan that incorporates savings, investments, taxes, and more. Generally speaking, the earlier you start, the better off you’ll be. Start taking the above actions to set up your retirement plan at Betterment today.

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401(k) plans can help you save for retirement in a significantly tax-advantaged way. However, the Internal Revenue Service (IRS) requires that you start taking withdrawals from their qualified retirement accounts when you reach the age 72. These withdrawals are called required minimum distributions (RMDs).

Why do I have to take RMDs?

In exchange for the tax advantages you enjoy by contributing to your 401(k) plan, the IRS requests collection of taxes on these amounts when you turn 72. The IRS taxes RMDs as ordinary income, meaning withdrawals will count towards your total taxable income for the year.

Generally, the IRS collects taxes on the gains in retirement accounts such as 401(k)s. However, if Roth 401(k) account assets are held for at least 5 years, Roth 401(k) funds are not taxed. Because there are taxes being paid to the government, these distributions are NOT eligible for rollover to another account.

When do I have to start taking RMDs?

Before the 2019 SECURE Act, RMDs applied to employees who turned 70 ½. However, this legislation increased the RMD age to 72 starting in 2020.

You may remember that the CARES Act, passed in March 2020 in response to the COVID-19 crisis, temporarily waived RMDs for 2020. RMDs resumed for the 2021 plan year with the newly increased age limit of 72.

How much do I have to withdraw?

RMDs are calculated based on your age and your account balance as of the end of the previous year. To determine the required distribution amount, Betterment divides your previous year’s ending account balance by your life expectancy factor (based on your age) from the uniform lifetime table (shown below). As a note, if you had no balance at the end of the previous year, then your first RMD will not occur until the following year.

Uniform Lifetime TableAge of Plan ParticipantLife Expectancy (in Years)7027.47126.57225.67324.77423.87522.97622.07721.27820.37919.58018.78117.98217.18316.38415.58514.88614.18713.48812.78912.09011.49110.89210.2939.6949.1958.6968.1977.6987.1996.71006.31015.91025.51035.21044.91054.51064.21073.91083.71093.41103.11112.91122.61132.41142.1115 and older1.9

Additionally, if you have taken a cash distribution from your 401(k) account in any given year you are subject to an RMD, and that distribution amount is equal to or greater than the RMD amount, that distribution will qualify as the required amount and no additional distribution is required.

Does everyone who turns 72 need to take an RMD?

Turning 72 in a given year doesn’t mean that you have to take an RMD. Only those who turn 72 in a given year AND meet any of the following criteria must take an RMD:

You have taken an RMD in previous years. If so, then you must take an RMD by December 31 of every year.You own more than 5% of the company sponsoring the 401(k) plan. If so, then you must take an RMD by December 31 every year.You have left the company (terminated or retired) in the year you turned 72. If so, then the first RMD does not need to occur until April 1 (otherwise known as the Required Beginning Date) of the following year but must occur consecutively by December 31 for every year.>Example: John turned 72 on June 1, 2021. John also decided to leave his company on August 1, 2021. He has been continuously contributing to his 401(k) account for the past 5 years. The first RMD must occur by April 1, 2022. The next RMD must occur by December 31, 2022 and every year thereafter.>NOTE: that this criteria means that you do NOT need to take an RMD if you meet the RMD age and are still working.You are a beneficiary or alternate payee of an account holder who meets the above criteria.

What are the consequences of not taking an RMD?

Failure to take an RMD for a given year will result in a penalty of 50% of the amount not taken on time by the IRS.

How do I take an RMD?

Your employer will notify you that you may be subject to an RMD and provide you with an RMD form. You will need to fill and return this form to your employer for approval. Betterment will process the RMD and the distribution will be delivered via the method of your choice (check or ACH).

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Today, we are excited to announce that we will begin integrating the $VOTE ETF, recently launched by Engine No. 1, into all of Betterment’s Socially Responsible Investing portfolios.

This new ETF invests in 500 of the largest U.S. companies, weighted according to their size, with a management fee of only .05%. You might think that this sounds a lot like a garden variety index fund tracking the S&P 500—a commodity for many years now.

So, why the excitement?

In short, $VOTE represents a highly innovative approach to pushing the economy towards sustainability via index fund investing. It may be “passive” in the traditional sense—buying shares in companies purely based on an index—but it is “active” when it comes to engaging with those companies as a shareholder.

Beyond Divestment: What’s Shareholder Engagement?

Historically, values-aligned investing has often been synonymous with avoiding the purchase of certain stocks—a practice often referred to as “divestment.” The alternative to divestment is “engagement.” By owning a stock, and using your rights to vote on shareholder resolutions, you can attempt to change the company’s activities from the inside.

Vanguard, BlackRock, and State Street—the “Big Three” largest fund managers—are collectively the biggest shareholders in most companies, but have historically been reluctant to rock the boat and aggressively challenge management. As a result, when it comes to investing through index funds, the full potential of shareholder engagement to drive change hasn’t been tapped.

Engine No. 1’s new $VOTE ETF promises to change that. To understand why, it helps to understand the mechanics of how shareholders can push for change.

Proxy Voting

Purchasing stock in a company grants you not just a share of its profits, but also the right to influence its decision-making. This process is called “proxy voting,” which can be a powerful tool with the potential to transform the entire economy, company by company.

Publicly traded companies operate like quasi-democracies, accountable to their shareholders. They hold annual meetings, where shareholders can vote on a number of topics. Shareholders who disagree with some aspect of how a company’s business is conducted can engage with management, and if they feel they aren’t being heard, can present an alternate course of action by making a “shareholder proposal.”

If they can persuade a majority of all shareholders to vote in support of the proposal, they can overrule management. When more drastic change is warranted, such “activist” shareholders can seek to replace management entirely, by nominating their own candidates for the company’s board of directors.

Shareholder Activism: Social Change Through Engagement

Social change via shareholder activism has a storied history. As early as 1951, in a seminal case, civil rights leader James Peck took the fight to the proxy arena, by filing a shareholder proposal with the Greyhound Corporation, recommending that the bus operator abolish segregated seating in the South.

Seventy years later, on May 26, 2021, activist hedge fund Engine No. 1 stunned the corporate world by winning a proxy battle against the current leadership of ExxonMobil, persuading a coalition of shareholders to elect three of its own candidates to the board—the first ever climate-centered case for change.

Engine No. 1 argued that Exxon’s share price was underperforming that of its peers because the company was unprepared for the transition away from fossil fuels. It nominated candidates for the board that would push the oil giant to embrace renewable energy. Against all odds, holding just .02% of Exxon’s stock, Engine No. 1 prevailed.

Corporate boardrooms across the entire S&P 500 are buzzing, asking what the Exxon coup means for them. Where will environmentally and socially conscious investors strike next? These questions are warranted: The Exxon campaign was a first, but it surely won’t be the last.

“Index Activism”: Bringing Power To The People

Individual investors are increasingly aware of proxy voting as a domain by which their portfolios can channel their values. In a recent Morningstar report, 61% of those surveyed said that sustainability should be factored into how votes attributable to their 401(k)s are cast.

However, most Americans, including Betterment customers, don’t buy stock of companies like Greyhound or Exxon directly, but through index funds.

When you buy a share of an index fund, the index fund manager uses your money to buy stocks of companies on your behalf. As a shareholder of the fund, you benefit financially when these underlying stocks rise in value, but the index fund is technically the shareholder of each individual company, and holds the right to participate in each company’s proxy voting process.

As more investors tell the industry that they want their dollars to advance sustainable business practices, the Big Three have been feeling the pressure to work these preferences into their proxy voting practices.

This year, they are showing some signs of change. Notably, the Big Three ultimately joined Engine No. 1’s coalition, which could not have prevailed against Exxon without their support. However, even if the Big Three, who manage trillions on behalf of individual investors, continue to side with the activists, what’s missing is a way for individuals to invest their dollars not just to support these campaigns, but to spearhead them as well.

What Makes $VOTE Special

Activist shareholder campaigns are generally led by hedge funds, and what happened with Exxon was no exception. However, by launching an ETF that anyone can invest in, Engine No. 1 is looking to break that mold.

In 2020, investors poured $50 billion into sustainable index funds—double that of 2019, and ten times that of 2018. The $VOTE ETF should bring even more investors off the sidelines, and into sustainable investing, for two reasons.

First, rather than dilute its efforts, $VOTE intends to spearhead a handful of campaigns, pushing companies to improve their environmental and social practices. A focus on the highest impact, and most powerful narratives, will continue to raise awareness for the power of shareholder activism.

Second, $VOTE is designed for mass adoption, not as a niche strategy. With a management fee of only .05%, and tracking a market cap weighted index, $VOTE is designed to ensure no trade-off to long-term returns. It is also well-suited for those investing for retirement—and as of today, it will make its way into its first ever 401(k) plan, via Betterment for Business.

What Does $VOTE Mean For Investors?

We know that many of our customers want to invest for real impact, especially if they can do so without sacrificing their long-term financial goals. If you’re investing through any of Betterment’s three Socially Responsible Investing portfolios, $VOTE will have a target weight equal to 10% of your exposure to the U.S. stocks.

With $VOTE in your portfolio, you’ll know that your dollars are directly supporting whatever engagements Engine No. 1 launches next. As their subsequent work unfolds, we will be monitoring their efforts, and updating our customers on the impact their investments are driving.

Now that $VOTE exists, anyone—not just Betterment customers—can invest in it, which is a great thing. The bigger it gets, the more it can drive change, and you, as an investor, get to help write the next chapter.

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At Betterment, we’re using Julia to power the projections and recommendations we provide to help our customers achieve their financial goals. We’ve found it to be a great solution to our own version of the “two-language problem”–the idea that the language in which it is most convenient to write a program is not necessarily the language in which it makes the most sense to run that program. We’re excited to share the approach we took to incorporating it into our stack and the challenges we encountered along the way.

Working behind the scenes, the members of our Quantitative Investing team bring our customers the projections and recommendations they rely on for keeping their goals on-track. These hard-working and talented individuals spend a large portion of their time developing models, researching new investment ideas and maintaining our research libraries. While they’re not engineers, their jobs definitely involve a good amount of coding. Historically, the team has written code mostly in a research environment, implementing proof-of-concept models that are later translated into production code with help from the engineering team.

Recently, however, we’ve invested significant resources in modernizing this research pipeline by converting our codebase from R to Julia and we’re now able to ship updates to our quantitative models quicker, and with less risk of errors being introduced in translation. Currently, Julia powers all the projections shown inside our app, as well as a lot of the advice we provide to our customers. The Julia library we built for this purpose serves around 18 million requests per day, and very efficiently at that.

 

Examples of projections and recommendations at Betterment. Does not reflect any actual portfolio and is not a guarantee of performance.

Why Julia?

At QCon London 2019, Steve Klabnik gave a great talk on how the developers of the Rust programming language view tradeoffs in programming language design. The whole talk is worth a watch, but one idea that really resonated with us is that programming language design—and programming language choice—is a reflection of what the end-users of that language value and not a reflection of the objective superiority of one language over another. Julia is a newer language that looked like a perfect fit for the investing team for a number of reasons:

Speed. If you’ve heard one thing about Julia, it’s probably about it’s blazingly fast performance. For us, speed is important as we need to be able to provide real-time advice to our customers by incorporating their most up-to-date financial scenario in our projections and recommendations. It is also important in our research code where the iterative nature of research means we often have to re-run financial simulations or models multiple times with slight tweaks.Dynamicism. While speed of execution is important, we also require a dynamic language that allows us to test out new ideas and prototype rapidly. Julia ticks the box for this requirement as well by using a just-in-time compiler that accommodates both interactive and non-interactive workflows well. Julia also has a very rich type system where researchers can build prototypes without type declarations, and then later refactoring the code where needed with type declarations for dispatch or clarity. In either case, Julia is usually able to generate performant compiled code that we can run in production.Relevant ecosystem. While the nascency of Julia as a language means that the community and ecosystem is much smaller than those of other languages, we found that the code and community oversamples on the type of libraries that we care about. Julia has excellent support for technical computing and mathematical modelling.

Given these reasons, Julia is the perfect language to serve as a solution to the “two-language problem”. This concept is oft-quoted in Julian circles and is perfectly exemplified by the previous workflow of our team: Investing Subject Matter Experts (SMEs) write domain-specific code that’s solely meant to serve as research code, and that code then has to be translated into some more performant language for use in production. Julia solves this issue by making it very simple to take a piece of research code and refactor it for production use.

Our approach

We decided to build our Julia codebase inside a monorepo, with separate packages for each conceptual project we might work on, such as interest rate models, projections, social security amount calculations and so on. This works well from a development perspective, but we soon faced the question of how best to integrate this code with our production code, which is mostly developed in Ruby. We identified two viable alternatives:

Build a thin web service that will accept HTTP requests, call the underlying Julia functions, and then return a HTTP response.Compile the Julia code into a shared library, and call it directly from Ruby using FFI.

Option 1 is a very common pattern, and actually quite similar to what had been the status quo at Betterment, as most of the projections and recommendation code existed in a JavaScript service.

It may be surprising then to learn that we actually went with Option 2. We were deeply attracted to the idea of being able to fully integration-test our projections and recommendations working within our actual app (i.e. without the complication of a service boundary). Additionally, we wanted an integration that we could spin-up quickly and with low ongoing cost; there’s some fixed cost to getting a FFI-embed working right—but once you do, it’s an exceedingly low cost integration to maintain. Fully-fledged services require infrastructure to run and are (ideally) supported by a full team of engineers.

That said, we recognize the attractive properties of the more well-trodden Option 1 path and believe it could be the right solution in a lot of scenarios (and may become the right solution for us as our usage of Julia continues to evolve).

Implementation

Given how new Julia is, there was minimal literature on true interoperability with other programming languages (particularly high-level languages–Ruby, Python, etc). But we saw that the right building blocks existed to do what we wanted and proceeded with the confidence that it was theoretically possible.

As mentioned earlier, Julia is a just-in-time compiled language, but it’s possible to compile Julia code ahead-of-time using PackageCompiler.jl. We built an additional package into our monorepo whose sole purpose was to expose an API for our Ruby application, as well as compile that exposed code into a C shared library. The code in this package is the glue between our pure Julia functions and the lower level library interface—it’s responsible for defining the functions that will be exported by the shared library and doing any necessary conversions on input/output.

As an example, consider the following simple Julia function which sorts an array of numbers using the insertion sort algorithm:

In order to be able to expose this in a shared library, we would wrap it like this:

Here we’ve simplified memory management by requiring the caller to allocate memory for the result, and implemented primitive exception handling (see Challenges & Pitfalls below).

On the Ruby end, we built a gem which wraps our Julia library and attaches to it using Ruby-FFI. The gem includes a tiny Julia project with the API library as it’s only dependency. Upon gem installation, we fetch the Julia source and compile it as a native extension.

Attaching to our example function with Ruby-FFI is straightforward:

From here, we could begin using our function, but it wouldn’t be entirely pleasant to work with–converting an input array to a pointer and processing the result would require some tedious boilerplate. Luckily, we can use Ruby’s powerful metaprogramming abilities to abstract all that away–creating a declarative way to wrap an arbitrary Julia function which results in a familiar and easy-to-use interface for Ruby developers. In practice, that might look something like this:

Resulting in a function for which the fact that the underlying implementation is in Julia has been completely abstracted away:

Challenges & Pitfalls

Debugging an FFI integration can be challenging; any misconfiguration is likely to result in the dreaded segmentation fault–the cause of which can be difficult to hunt down. Here are a few notes for practitioners about some nuanced issues we ran into, that will hopefully save you some headaches down the line:

The Julia runtime has to be initialized before calling the shared library. When loading the dynamic library (whether through Ruby-FFI or some other invocation of `dlopen`), make sure to pass the flags `RTLD_LAZY` and `RTLD_GLOBAL` (`ffi_lib_flags :lazy, :global` in Ruby-FFI).If embedding your Julia library into a multi-threaded application, you’ll need additional tooling to only initialize and make calls into the Julia library from a single thread, as multiple calls to `jl_init` will error. We use a multi-threaded web server for our production application, and so when we make a call into the Julia shared library, we push that call onto a queue where it gets picked up and performed by a single executor thread which then communicates the result back to the calling thread using a promise object.Memory management–if you’ll be passing anything other than primitive types back from Julia to Ruby (e.g. pointers to more complex objects), you’ll need to take care to ensure the memory containing the data you’re passing back isn’t cleared by the Julia garbage collector prior to being read on the Ruby side. Different approaches are possible. Perhaps the simplest is to have the Ruby side allocate the memory into which the Julia function should write it’s result (and pass the Julia function a pointer to that memory). Alternatively, if you want to actually pass complex objects out, you’ll have to ensure Julia holds a reference to the objects beyond the life of the function, in order to keep them from being garbage collected. And then you’ll probably want to expose a way for Ruby to instruct Julia to clean up that reference (i.e. free the memory) when it’s done with it (Ruby-FFI has good support for triggering a callback when an object goes out-of-scope on the Ruby side).Exception handling–conveying unhandled exceptions across the FFI boundary is generally not possible. This means any unhandled exception occurring in your Julia code will result in a segmentation fault. To avoid this, you’ll probably want to implement catch-all exception handling in your shared library exposed functions that will catch any exceptions that occur and return some context about the error to the caller (minimally, a boolean indicator of success/failure).

Tooling

To simplify development, we use a lot of tooling and infrastructure developed both in-house and by the Julia community.

Since one of the draws of using Julia in the first place is the performance of the code, we make sure to benchmark our code during every pull request for potential performance regressions using the BenchmarkTools.jl package.

To facilitate versioning and sharing of our Julia packages internally (e.g. to share a version of the Ruby-API package with the Ruby gem which wraps it) we also maintain a private package registry. The registry is a separate Github repository, and we use tooling from the Registrator.jl package to register new versions. To process registration events, we maintain a registry server on an EC2 instance provisioned through Terraform, so updates to the configuration are as easy as running a single `terraform apply` command.

Once a new registration event is received, the registry server opens a pull request to the Julia registry. There, we have built in automated testing that resolves the version of the package that is being tested, looks up any reverse dependencies of that package, resolves the compatibility bounds of those packages to see if the newly registered version could lead to a breaking change, and if so, runs the full test suites of the reverse dependencies. By doing this, we can ensure that when we release a patch or minor version of one of our packages, we can ensure that it won’t break any packages that depend on it at registration time. If it would, the user is instead forced to either fix the changes that lead to a downstream breakage, or to modify the registration to be a major version increase.

Takeaways

Though our venture into the Julia world is still relatively young compared to most of the other code at Betterment, we have found Julia to be a perfect fit in solving our two-language problem within the Investing team. Getting the infrastructure into a production-ready format took a bit of tweaking, but we are now starting to realize a lot of the benefits we hoped for when setting out on this journey, including faster development of production ready models, and a clear separation of responsibilities between the SMEs on the Investing team who are best suited for designing and specifying the models, and the engineering team who have the knowledge on how to scale that code into a production-grade library. The switch to Julia has allowed us not only to optimize and speed up our code by multiple orders of magnitude, but also has given us the environment and ecosystem to explore ideas that would simply not be possible in our previous implementations.

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Money and emotions have long gone hand-in-hand, and this is no more apparent than during significant financial crises. From the 2008 market crash to COVID-19’s economic impact, we’ve seen first hand how money has the ability to impact our stress levels, mental health and personal relationships. And yet in times of particular financial strife—or likely because of it— many people take actions with their money that often undermine their emotional wellbeing, sacrificing long-term happiness for short-term pleasure without even realizing it at the time.

This trend toward short-termism grew in 2020: people stuck inside, on screens all day and kept from their normal activities sought new ways to fill their time and energy. Many took up day trading, culminating in one of the wildest rides at the beginning of 2021 (and recent surges demonstrating people are still trying to head to the moon) with Gamestop, AMC, Blackberry and other retail stocks caught in the middle of a clash between amateur retail and institutional investors.

Following this eventful start to the year, Betterment was curious to see both the immediate and long-term impact this had on investors, particularly those involved in the action. In this report — a survey of 1,500 active investors conducted by a third party — we took a look at the rise of day trading activity and the impact it did (or didn’t have) on people’s behavior. From their own forecasts, it looks like “the rise of the day trader” is here to stay — but forecasting is hard. None of us would have bet on the pandemic and the changes it’s causing. People actually aren’t very good at forecasting their own preferences and behavior in the future, so it will be interesting to see if said forecasts actually come to fruition.

Regardless, at Betterment we welcome the addition of consumers looking to learn more about the markets and, ultimately, how to balance their portfolios for the long-term too.

Section One: The Rise Of Day Trading Activity

With movie theaters, stadiums, bars and restaurants closed, many people took up day trading during the COVID-19 pandemic. Half of our total respondents said they actively day trade investments, and nearly half of those day-traders (49%) have been doing it for 2 years or less.

While most day traders indicated their main reason for doing so was that they believed they could make more money in a shorter period of time (58%), many (43%) also indicated it was because it is fun and entertaining. Of those who look to day trading for fun/entertainment, half (52%) said it was to make up for the bulk of their other hobbies—like sports, live music, social gatherings, gambling—not being available due to COVID-19.

 

And these day traders have fully acknowledge that COVID-19 played a big impact role in their market activity overall: 54% indicated they trade more often as a result of COVID-19; and interestingly, 58% said they expect to day trade more as normal activities return and COVID-19 restrictions are lifted, likely as a result of what they learned during this downtime. Only 12% said they expect to trade less.

More than half (58%) are using less than 30% of their portfolio to actively trade individual securities or stocks. Nearly two thirds also allow an advisor (either online or in-person) to manage a separate part of their portfolio.

Betterment’s Point Of View:It is interesting to see more respondents expect to day trade more after the pandemic than are currently day trading: we imagine it is hard for people to forecast themselves into the future and imagine doing things differently than they are now. However, what is positive to see is these people aren’t using an excessive amount of their portfolio to day trade. The majority of investors day trade with a minority of their total investing balance, and delegate day-to-day management of the larger portion of their portfolio to an advisor.

Passing hobby or not, how educated is the average day trader on what they’re buying and what they stand to gain—or lose? Sixty one percent rely on financial news websites to decide which stocks to buy, but nearly half (42%) are influenced by social media accounts, showing just how powerful “memestocks” can be.

Betterment’s Point Of View:More than half of the respondents suggested they buy stocks based on company names they’re familiar with, but we’ve seen this lead to issues in the past—with “ticker mis-matches,” where people trade the ticker of a stock that isn’t the correct company. For example, after a tweet from Elon Musk about Signal (a non-profit messaging app), a different company’s stock was sent soaring 3,092%.

We also asked day trader respondents if they consider capital gains taxes when deciding to sell their investments. While the majority (60%) indicated that it influences them to hold onto stocks longer to avoid short-term capital gains, 14% said they weren’t aware there was a difference in taxes based on how long they hold a stock. Another 17% said they simply don’t care about the short-term capital gains tax.

Who invested their stimmys?

Almost all (91%) respondents received some stimulus money, and nearly half (46%) invested some of that money; of those who did invest it, 70% invested half or less of their stimulus. Day trader and male respondents were more likely to invest then their counterparts, as represented in the graphic below.

This is in contrast to our COVID-19 investor sentiment survey from 2020, where only 9% of respondents indicated they put some of their stimulus money towards investment. Last year’s response pool was primarily focused on building out their emergency funds, with 40% putting money into a safety net. This is a good indication that respondents are more comfortable with their financial situations this year, compared to the throes of the pandemic.

Section Two: Memestocks Understanding And Involvement

We asked all respondents how well they understood what occurred in the stock market in January & February surrounding “memestocks” like GameStop, AMC, BlackBerry and other retail investments.

Most indicated having some level of understanding, but nearly a quarter (24%) of all respondents said they didn’t understand it well at all; and only half (51%) of day trader respondents said they understood what happened very well.

Nearly two-thirds (64%) of all survey respondents said they did not actively purchase any popular retail investments (GameStop, AMC, BlackBerry, etc.) during the stock market rally in January or February. But those that DID were primarily day traders.

Of all respondents that did buy in actively, 55% are still holding onto all their investments. Only 2% of those that sold these investments sold everything at a loss; 44% sold all for a profit and 54% sold some at a profit and some at a loss.

Of those that bought into memestocks, there is a near universal consensus that they will continue investing in stocks like these that get a lot of attention in the future—97% said they’re at least somewhat likely to invest.

 

Betterment’s Point Of View:It is interesting to see the majority of respondents holding onto their investments – are they expecting another high or holding on because they don’t want to admit they made a bad investment? Disposition Effect says people tend to hold on until they get back to zero loss; but seeing so few sell entirely for a loss is encouraging. However, 60% previously said thinking of short-term capital gains taxes encourages them to hold onto their investments longer, which is good to see.

Section Three: Money And Stress Factors

It’s no secret that money and stress are linked, so we wanted to take a look at respondents’ money habits and how that may be impacting stress levels. The consensus is that for better and for worse day traders and younger generations are more engaged with their finances.

 

We asked respondents how much they stress about their finances on a daily basis—three quarters said they stress to some degree. Interestingly, when we looked a layer deeper, day traders are much more stressed than non-day trader—86% indicated they stress to some degree, vs 65% of their counterparts.

Unsurprisingly, younger generations are more stressed about their finances than older ones.

 

In looking at the causes of the stress: respondents are nearly equally concerned about money in the short term, near term future, and long term future with the top 3 financial stress factors being their daily expenses (43%), how much money they will have in retirement (43%), and how much money they have saved (42%).

We asked respondents how often they are checking their bank account and investment portfolio balances –  39% are looking at their bank account balances every day, with 11% of those checking multiple times a day; 37% also check their investment portfolio balances every day, with 16% of those checking multiple times a day.

When we look a layer deeper, we find that day traders are checking both their bank account and investment portfolio balances significantly more than non-day traders.

 

Interesting Bank Account Habits

50% of day traders indicated they check at least once a day (18% multiple times) vs 29% of non-daytraders (5% multiple times).Men check their accounts more often—41% at least once a day (13% multiple times) vs 36% of women (8% multiple times).46% of Gen Z/Millennials and Gen X both said they check their accounts at least once a day, whereas only 28% of Boomers said the same.Those making more money actually check their accounts more often—42% respondents making $100K or more check every day, compared to 39% of those making between $50-100K and 35% of those making less than $50K.

Interesting Investment Account Habits

Unsurprisingly, 56% of day traders said they check their investment portfolio balances every day (25% multiple times a day), whereas only 18% of non-day traders said the same.41% of men check every day, compared to 30% of women.47% of Gen Z/Millennials check every day, compared to 41% of Gen X and 22% of Boomers.42% of those making 100K or more check every day, compared to 35% making between $50-100K and 30% of those making less than $50K.

Betterment’s Point Of View:The differences between men and women here are in line with research we’ve seen elsewhere. Women are less focused on market performance, and more focused on the end financial outcome. They also tend to invest at lower risk levels, so are less likely to see extreme ups and downs. Additionally, Women tend to be less competitive/score based in general, so are less interested in monitoring the game.

Encouragingly, when we asked people how they felt checking these accounts, the positive responses outweighed negative options for both. Interestingly, day traders were significantly more excited for both (21% for bank accounts, 25% for investments) than non-day traders (4% and 12%, respectively) as well.

 

Most respondents (89%) indicated they’re putting some money away every month, but it’s equally split as to where that money is actually going.

Conclusion

At Betterment, we have often compared day trading to going to Vegas—have a great time, enjoy yourself, but be prepared to come back home with fewer dollars in your wallet and a hangover.  The trends outlined in this report seem to indicate that more people are dipping their toe into the investing pool and (so far) few have decided to walk away. Whether this trend will continue—and the long term impact it will have on people’s finances, health, stress, etc.—remains to be seen.

And for those who want to avoid the FOMO of the next big memestock, but aren’t sure of the best way to get started—a simple alternative is investing in a well diversified portfolio. That way, whenever someone asks if you own the hottest thing, you can say “yes”, regardless of what it is.

Methodology

An online survey was conducted with a panel of potential respondents from April 26, 2021 to May 3, 2021. The survey was completed by a total of 1,500 respondents who are 18 years and older and have any kind of investment (excluded if only 401k). Of the 1,500 respondents, 750 of them actively day traded their investments while the other 750 did not. The sample was provided by Market Cube, a research panel company. All respondents were invited to take the survey via an email invitation. Panel respondents were incentivized to participate via the panel’s established points program, regardless of positive or negative feedback. Participants were not required to be Betterment clients to participate.

Findings and analysis are presented for informational purposes only and are not intended to be investment advice, nor is this indicative of client sentiment or experience.

Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, unless stated otherwise.

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On May 5th, the House Ways and Means Committee unanimously passed the Securing a Strong Retirement Act of 2021. The bill is expected to be voted on later this summer by the full House, where it’s already seeing strong support.

The new bill, nicknamed SECURE Act 2.0, builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans.

Key provisions of SECURE Act 2.0 related to 401(k) plans include:

Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt.Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee.Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5).  The new bill increases the RMD age even further: to 73 in 2022; 74 in 2029 and ultimately 75 in 2032.Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2021. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64.Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes.One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to two years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan.Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act,  employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2022 to allocate profit sharing and elective deferrals for the 2021 plan year.Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years.Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification.Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP, and coverage testing.Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements.Retirement savings lost and found – SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants” are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs.Want a better 401(k)?
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In the US, approximately 33% of households have a taxable investment account—often referred to as a brokerage account—and approximately 50% of households also have at least one retirement account, like an IRA or an employer-sponsored retirement account.

We know that the medley of account types can make it challenging for you to decide which account to contribute to or withdraw from at any given time.

Let’s dive right in to get a further understanding of:

What accounts are available and why you might choose them.The benefits of receiving dividends.Betterment’s powerful tax-sensitive features.

How Are Different Investment Accounts Taxed?

Taxable Accounts

Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions.

Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars, and any capital gains you incur by selling assets, as well as any dividends you receive, are taxable on an annual basis.

While there is no deferral of income like in a retirement plan, there are special tax benefits only available in taxable accounts such as reduced rates on long-term gains, qualified dividends, and municipal bond income.

Key Considerations

You would like the option to withdraw at any time with no IRS penalties.You already contributed the maximum amount to all tax-advantaged retirement accounts.

Traditional Accounts

Traditional accounts include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs).

Traditional investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies.

Key Considerations

You expect your tax rate to be lower in retirement than it is now.You recognize and accept the possibility of an early withdrawal penalty.

Roth Accounts

Includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs)

Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies.

Key Considerations

You expect your tax rate to be higher in retirement than it is right now.You expect your modified adjusted gross income (AGI) to be below $140k (or $208k filing jointly).You desire the option to withdraw contributions without being taxed.You recognize the possibility of a penalty on earnings withdrawn early.

Beyond account type decisions, we also use your dividends to keep your tax impact as small as possible.

Four Strategies Betterment Uses To Help You Limit Your Tax Impact

1. We use any additional cash to rebalance your portfolio.

When your account receives any cash—whether through a dividend or deposit—we automatically identify how to use the money to help you get back to your target weighting for each asset class.

Dividends are your portion of a company’s earnings. Not all companies pay dividends, but as a Betterment investor, you almost always receive some because your money is invested across thousands of companies in the world.

Your dividends are an essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor—your portfolio is also getting a quick micro-rebalance that helps keep your tax bill down at the end of the year.

And, when market movements cause your portfolio’s actual allocation to drift away from your target allocation, we automatically use any incoming dividends or deposits to buy more shares of the lagging part of your portfolio.

This helps to get the portfolio back to its target asset allocation without having to sell off shares. This is a sophisticated financial planning technique that traditionally has only been available to larger accounts, but our automation makes it possible to do it with any size account.

Beyond dividends, Betterment also has a number of features to help you optimize for taxes. Let’s demystify these three powerful strategies.

Performance of S&P 500 With Dividends Reinvested

Source: Bloomberg. Performance is provided for illustrative purposes to represent broad market returns for the U.S. Stock Market. The performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific U.S. Stock Market funds in the Betterment portfolio will differ from the performance of the broad market returns reflected here.

2. Tax loss harvesting.

Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested.

When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill.

In fact, if losses outpace gains in a tax year you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years.

How do I do it?

When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure.

Ideally, you would buy back the same investment you just sold. After all, you still think it’s a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock.

Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is turn on Tax Loss Harvesting+ in your account.

3. Asset location.

Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix.

For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account.

In doing so, interest income from bonds—which is normally treated as ordinary income and subject to a higher tax rate—is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate, capital gains tax rates instead of ordinary income tax rates. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden.

Here’s what asset location looks like in action:

4. We use ETFs instead of mutual funds.

Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you.

While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In fact, most of the largest stock ETFs have not passed through any capital gains in over 10 years. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees.

We go the extra mile for your money.

Following these four strategies can help eliminate or reduce your tax bill, depending on your situation.

At Betterment, we’ve automated these and other tax strategies, which means tax loss harvesting and asset location are as easy as clicking a button to enable it. We do the work, and your wallet can stay a little fuller.

Learn more about how Betterment helps you maximize your after-tax returns.

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Key 401(k) Compliance Dates

While many of these responsibilities are handled by Betterment, as a 401(k) plan sponsor it’s important that you are aware of important dates and deadlines associated with administering your plan.

DateResponsibilityPrevious Plan YearCurrent Plan YearJan 31BettermentIRS Forms 1099-R available to participants.Feb 10BettermentAnnual Return of Withheld Federal Income Tax (Form 945) due.Mar 1ParticipantDeadline for employees who participated in multiple plans to notify sponsors of excess deferrals (402(g) excess).Mar 15BettermentDeadline for refunds to participants for failed ADP/ACP tests(s). Failure to meet this deadline could result in a 10% tax penalty for plan sponsors.Mar 15Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for incorporated entities.¹ Failure to meet this deadline could preclude plan sponsor from tax deductibility.Deadline to establish plan for the prior tax yearApr 1Plan SponsorDeadline to confirm that Initial Required Minimum Distributions (RMDs) were taken by participants who: turned 72 ² before previous year-end; are retired/terminated; and have a balanceApr 15 ³Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for LLCs, LLPs, sole proprietorships (unincorporated entities).¹ Failure to meet this deadline could preclude plan sponsors from tax deductibility.Apr 15BettermentDeadline to complete corrective distributions for 402(g) excess deferrals.Jul 29 ⁴Plan SponsorDeadline to distribute Summary of Material Modifications (SMM) to participants (only if plan was amended).Jul 31 ³Betterment ⁴Deadline to electronically submit Form 5500 (and third-party audit if applicable) OR request an extension (Form 5558).Sep 30Plan SponsorDeadline to distribute Summary Annual Report (SAR) to participants and beneficiaries (unless Form 5500 extension filed; deadline to distribute will be December 15).Oct 1Plan SponsorDeadline to establish a new safe harbor match 401(k) plan.Oct 15 ³Plan SponsorDeadline to electronically submit Form 5500 and third-party audit, if applicable, if granted a Form 5558 extension.Dec 1Plan Sponsor (Notices prepared by Betterment)Deadline to distribute supplemental safe harbor notice to participants for safe harbor (“maybe”) plans. ⁵Dec 1Plan Sponsor (Notices prepared by Betterment)If applicable, distribute to participants for next plan year: Safe harbor notice, Qualified default investment alternative (QDIA) notice, Automatic enrollment noticeDec 1Plan Sponsor (Amendment drafted by Betterment)Deadline to execute amendment to make a traditional plan any type of safe harbor plan (match or nonelective).Deadline to execute amendment to make a traditional plan a safe harbor match plan for following plan yearDec 15Plan Sponsor (SAR prepared by Betterment)Deadline to distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension.Dec 31Plan SponsorDeadline to make safe harbor and other fixed employer contributions.Deadline for Annual Required Minimum Distributions (RMDs). ArtDec 31Plan SponsorDeadline to execute amendment to make traditional plan a 3% safe harbor nonelective plan for the current plan year

 

¹ Assumes calendar tax year. Additionally, if your company files a tax extension, you have until the extension deadline to fund the contributions.

² This was increased from 70½ in 2019 and earlier years.

³ Or first business day thereafter.

⁴ 210 days after the year end of the effective amended date, which is July 28 in leap years.

⁵ Safe harbor “maybe” Plans (specified in the plan document) are able to adopt a safe harbor nonelective plan 30 days before the end of the plan year. Please review your plan document to confirm if the plan has adopted such a provision.

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https://www.toroption.co/?p=166