Investment/Financial Market Updates
This post was adapted from the 11/21 President’s Weekly Email.
As a little bit of background, UAEA is one of 6 City groups that meets frequently to discuss employee benefits and potential ongoing issues. These meetings are referred to as the 6-sided partnership and include the other employee associations. We currently meet several times a year to receive updates on 457 and 401k programs and review recommendations made by our Cities’ financial advisors about investment options. We mainly try to keep investment fees low for the City while ensuring that employees have advisor support and plenty of investment options. We DO NOT play a role in deciding the investments made by your individual 457 or 401k programs - that is up to you and your financial advisor.
Due to the work we do, UAEA and the other members of the 6-sided partnership were invited to the annual AZDC (Arizona Defined Contribution) conference this week. There we learned a little bit more about the current state of the investment market, Nationwide, and AZRS. I took away a few things that I wanted to share with UAEA members, but want to be clear that I am not a financial advisor and that you should not look to me as a source of financial advice. Any information in here is based on my notes/recollections of a few speakers at a conference for investment professionals - take everything in here with a grain of salt. I am also not equipped to answer questions about investing, financial markets, or how to structure your 457k - please contact Tempe’s Nationwide account advisor (nancy.feilbach@nationwide.com) if you need actual investment advice. Doing so also counts towards your 100 healthcare points, so it's a win-win.
Regardless, here are my main takeaways from that conference, condensed from about 6 hours of speakers.
Upcoming market factors:
The speakers at the conference generally felt that there are too many unknowns right now to make an accurate prediction about what will happen in the market over the next year. That said, they believe there are a few major trends that will heavily shape how the market moves. Those include the growth of AI technology (which will likely be good for investment funds as the US has a competitive edge over other nations), the likelihood of federal deregulation (which would be good for investment funds as it historically correlates with market growth), and the likely implementation of tariffs (which will likely be bad for investment funds as it will drive up the price of inputs for many industries). Again, none of the speakers felt confident that they knew anything about the future but noted that their funds would be closely watching those trends and making adjustments to their portfolios as needed.
What does this mean for your deferred compensation? Again, I am not a financial advisor and really can’t give any advice that is applicable to all people at all stages of their retirement journey. That said, the consistent advice seemed to be that it's easier to weather unpredictable markets if your retirement portfolio is diversified and multi-pronged. Tempe employees are already advantaged since we will have access to Social Security, ASRS (Arizona State Retirement System), and our 457k plans, but you can choose to diversify your 457k plan even further if you would like, either at tempedcp.com or with the assistance of our financial advisor.
Possible upcoming investment changes:
I cannot say this enough - I am not a financial advisor. That said, I think the speakers outlined some possible changes that may be coming to retirement plans in 2025. If any of these concern you…talk to our Nationwide advisor and make decisions accordingly.
A very likely scenario that investment portfolios are planning for is that the 2017 federal tax cuts will be extended. If that happens, the likely scenario is that the federal government will try to make them somewhat revenue-neutral. One way they could easily do this would be by cracking down on tax-deferral options in retirement funds. Changing retirement fund options is not a politically popular move, but based upon what think tanks are discussing right now some of the following may be proposed or implemented in the next few years. This includes passing laws which would push people towards Roth IRA plans (which tax contributions immediately), converting existing retirement plans to Roth plans, requiring all catchup contributions to be in Roth plans, capping the amount people can put into catchup accounts, capping the amount people can put into retirement accounts entirely, eliminating options that allow people to convert their existing plan to Roth plans, and/or capping accumulated retirement saving. This was only one part of a 45 minute talk so I literally know no more than what is written here - all the speakers said is that these are possibilities being discussed and they don’t know what direction the government might go in. If you think any of this is likely and/or might impact your retirement…talk to a financial advisor before January 2025.
Other Takeaways:
Representatives from multiple unions across the state were in attendance and they offered a few general pieces of advice based on many years of experience working with employees.
First, they strongly suggested that employees should be contributing from the very beginning of their employment. Even if you’re not making a lot of money at the start of your career, the benefits of interest outweigh the benefits of contributing large amounts of money at a later date. You can play catchup at different points throughout your career but the amount you need to start donating on a regular basis rises considerably as you approach the end of your employment.
Second, they reiterated the importance of diversification and shifting risk over time. Ultimately, how you invest is up to you, but the general strategy seems to be reducing the risk of your investment portfolio over time as you approach retirement. Yes, there’s a lot of uncertainty in the markets right now, but by lowering your risk exposure you can weather major market changes over the course of your career.
Third, they all seem to be of the opinion that ASRS is in good shape. At our member’s meeting last week our Nationwide Representative said that ASRS is one of the healthiest state pension plans in the country and could currently pay out to members for another 80 years even if all contributions ceased today. This conference also noted that ASRS had returned over 7% in the last year (compared to 2.7% anticipated growth in the S^P 500 in 2024). ASRS benefits from having the majority of their investment decisions made in-house, compared to hiring outside advisors who take significant commissions. I’ll try to do a write-up explaining the details of ASRS for our members in the next few months but the general takeaway is that you should be reasonably assured that the plan will be around when you retire.
Fourth, they reminded attendees to check their beneficiary information and update it every few years. One member of a fire union noted that a firefighter in his City started an investment account in his twenties and named his mother as the sole beneficiary. He tragically passed after 15 years of contributions and all the money was given to the mother even though he had since married and was estranged from her. Unfortunately, there was nothing that could be done so his wife lost out on a large chunk of his estate. This situation will not apply to everyone but could have massive repercussions if it does - please consider checking that information before the end of the year and making changes if needed.
Lastly, I want to note that a series of comprehensive changes to retirement accounts known as the Secure 2.0 act started taking effect this year. This included a number of ways that people can withdraw money from their 457 or 401k plans early without tax penalties. This does not mean that the 457k is now a bank account, but rather that there are a number of situations such as domestic violence or natural disasters that would allow people to withdraw funds (in many cases no more than $10k or half of an account’s value, whichever is lesser) to deal with the situation and rebuild their lives. I can not speak to the specifics of any situation you may be facing that would require use of this but if it's something you may need, consider reaching out to our financial advisor.