IMG_0014b copy (1)

Subscribe by Email

If you have thought about hiring a financial advisor but don’t know where to start, contact me and I would be happy to have a free, no obligation discussion on what kinds of services we can provide!

Are Target Date Funds Prudent Retirement Investments?

If there was ever an easy investment option to understand, it would be the target date fund. Most retirement plans offer a series of mutual funds that are meant to guide their investors into retirement. Should you be putting all of your assets and faith into these funds?

Target Date Fund Overview

Vanguard, Fidelity, and T. Rowe Price are the dominant players in this space. Each offers a set of funds titled with the year that its investors expect to retire. These include the Fidelity Freedom 2040 fund or the Vanguard Target Retirement 2045 fund. The philosophy behind these funds is that they will allocate you into stocks and bonds based on the length of time that you have until retirement. For someone young that will not retire until the year 2050, the fund will be heavy in stocks (such as 80%). This will become less risky as you age. For someone who may retire in the year 2025, they do not want to be so heavily invested in stocks. Instead, they will have a less risky allocation (such as 40% in stocks).

However, the target date fund takes a very simplistic view: someone retiring in 2025 with $1 million and someone retiring in 2025 with $10 million should have very different investment allocations, which these funds do not account for. This is the issue with overly simplistic investment options.

Choosing Your Own Funds

In addition to target date funds, participants should also have the option to choose their own investments across many asset classes. This may include the Fidelity large cap fund, the Vanguard small cap fund, or the DFA international fund. If you were to choose a Vanguard target date retirement fund, they would be invested in all Vanguard funds for these asset classes- the Vanguard large cap fund, the Vanguard small cap fund, and the Vanguard international fund.

Frankly, I’m not a huge fan of either of these options. First, the downside to choosing your own investments is that it leaves you vulnerable to your own biases and behavior. There have been too many times where I have seen participants that hold just the international and small cap fund, where they then miss out on the various other asset classes who outperform. In 2008, many investors near the age of retirement were 100% in stock, only to see their savings drop 50% once the recession hit, extending their working years another decade.

The target date fund is a better, but not great alternative. I call it the “set it and forget it” option. Let’s say you are lucky to be offered cheap investment options and buy the Vanguard 2050 fund. You will pay Vanguard 0.16% of your assets to then hold Vanguard funds (VTSMX at an additional 0.16%, VGTSX at an additional 0.19%, VBMFX at an additional 0.16%, etc). As you get older, they will move your money from risky Vanguard funds to less risky Vanguard funds. They will also charge you 0.16% to do that. While Vanguard is a nice option, the average target date fund expense ratio is a whopping 0.73%. Be sure you are checking who your target date fund is held with and what their expense ratio is. 

The Big Issue With Target Date Funds

While expenses are a very important part of investing, they are not the only component. Performance in each asset class has to be accounted for, and there is no mutual fund company out there that has mastered each one. While Vanguard might do well in the large cap value space, how are they doing in the emerging markets?

As an independent advisor, I am not beholden to any one company. In the portfolios I use for my clients today, I account for both expenses and performance. Out of 17 asset classes, I use Vanguard for five of them, but I can tell you that they have some downright awful mutual funds in other areas. Instead, I use mutual fund companies such as PIMCO, PowerShares, PRIMECAP, Wells Fargo, MFS, DFA, Franklin, and American Funds for these other twelve asset classes.

Model Portfolios

For our retirement plans, we offer our participants a third option called model portfolios. We give them four options: aggressive, growth, balanced, and conservative. All the participant has to do is choose from one of those four models. We then allocate their money across the 10-15 asset classes that is either aggressive (100% stock), growth (80%), balanced (60%) or conservative (40%). This allows them to have diversification across both asset classes and mutual fund families. If your employer does not offer model portfolios, consider using Morningstar’s guide to allocating investments based on your targeted risk level.

When You Leave, Roll Out To An IRA

If you are managing your own retirement account away from an employer, you have even more options. This will depend on the size of your account. It may make sense to use low cost ETFs that have no trading fees. For all accounts, other asset classes such as derivatives, commodities, and alternatives need to be considered. This is especially prudent in the low interest rate environment that we have today. Employer retirement plans typically do not allow for these as options.

Thus, depending on your level of interest and ability to monitor your portfolio, there is no blanket recommendation. If you have no interest in managing your money, target date funds provide simplicity. However, if you have made it this far in the blog, you’re likely better off choosing investments from an array of companies that are offered to you. For further assistance, you should contact someone in human resources, the advisor managing your plan, or an outside advisor such as First National Corporation to take an objective look at what options you have.


Moving Your Company’s Stock Tax Efficiently (Net Unrealized Appreciation)

The tax code is littered with little-known rules that apply to only a very small set of people at certain periods of time. These rules, however, can have substantial benefits for those impacted, such as when I wrote about the 83(b) election for individuals joining a company with vesting equity. Today, I am going to discuss a situation that will affect anyone who is currently acquiring company stock as part of their retirement plan. You don’t need to completely understand the rule, but you do need to at least be aware that you have options that could keep thousands of dollars in your pocket and away from Uncle Sam’s donation bin for the careless!

Many employers give their employees stock as a financial perk or allow them to purchase the stock at a 10-15% discount from the publicly traded rate. These benefits are designed to help keep the employee invested in the company’s broad success, beyond their specific role. The hope is that the company stock will appreciate in value at a much higher rate than other investments might. Should you be in the position where you have accumulated company stock and have seen it rise dramatically in value, considering this tax rule is prudent.

The crucial part of this concept is to understand the difference between “ordinary income tax rates” and “capital gains tax rates.” Ordinary income tax rates are the brackets you are most familiar with. These range from 10% to 39.6%. Capital gains tax rates apply to dividends and long term capital gains- these are either 15% or 20%, as the Net Investment Income tax of 3.8% does not apply here. If your income tax bracket is higher than your capital gains tax rate, and your stock has appreciated in value, the NUA election could be for you. 

Tax Rates

Let’s say that several years ago, you acquired shares that amounted to $10,000. This is your cost basis in the stock. Today, it has grown to $100,000. Thus, you have a gain of $90,000, which is your Net Unrealized Appreciation (NUA). Now, you are either leaving the company who holds this stock OR have reached age 59.5. This is also relevant if you are the one inheriting these assets.

Here’s what most people do: they roll it all into an IRA because they do not know about this rule. What that means is that when they take distributions from their IRA, they will pay taxes on the full $100,000 balance at their income tax rate. Let’s call that 33% for today. If we are talking about a retiree who will be slowly drawing this money out for decades, keeping it in the IRA may be the right move as it would enjoy tax-deferred growth.

However, this event can provide an opportunity for some MAJOR tax savings if you intend to use that $100,000 in the near future:


Here’s how it works. When your plan is distributed, you must distribute all assets from all qualified plans at your former employer, not just the one that held the shares of stock. These will go into an IRA. Your company stock will be held in a taxable brokerage account, and you will pay taxes on the cost basis: $10,000 x 33% = $3,300.

Now, that company stock is treated just as if you had bought any other company in the taxable account. When you sell it, you will be subject to capital gains taxes, 15% x the $90,000 gain = $13,500. You could sell this tomorrow, or wait several years, but you won’t pay that tax until you sell the stock. As illustrated above, this move saves you $16,200 in taxes. The NUA election is more attractive if distributions are to be taken in the near future, such as to live off of, buy a home, start a company with, etc.

As with anything, there are many factors to consider when evaluating this maneuver: how long will the money in the IRA be able to grow before a withdrawal is made? What tax rate will apply at that time? If this $100,000 is excess cash to an already established retirement plan, a lump sum today may not be desirable.

Of course, my favorite calculator website, CalcXML, can help you consider several variables when making this decision, but I would not try making this election yourself without consulting a financial planner. Having a second look at your holistic situation is crucial so that you are not forgetting certain factors, such as having enough cash on hand to pay these tax bills!

Your human resources department is not likely to make you aware of your choices, and unless you have an advisor who is trained to watch out for these issues, you could miss out on thousands of dollars worth of hard earned money without ever knowing it. If this situation pertains to you, contact



August 2016 Update From Alex Oliver and First National Corporation

Each month as part of my monthly email newsletter, I weigh in on recent events while also analyzing certain segments of the economy to help simplify the picture for my clients. With the S&P 500 hitting an all-time high in July, I figured this may be a good time to elaborate on some macro trends.

This newsletter includes four sections:

News and Notes: General commentary on the market or on what’s new at First National Corporation, sampled in this post.

July’s Market News: Headlines I have pulled that will recap the previous month.

Key Numbers As Of August 1st: This is a chart covering the Dow Jones, S&P 500, Fixed Income U.S., 30-Year Treasury, 30-Year Fixed Mortgage, and Oil (WTI) to outline levels over the past quarter, one year, and three years.

Recent Blog Posts: A summary of the five most recent blogs I have posted on

If you would like to receive this monthly newsletter, simply visit and subscribe in the right hand column, or email and I will add you to the list. Enjoy!



What a year 2016 has been thus far! After the worst start the stock markets had seen since World War II, while also riding through the volatility waves presented by the presidential election and Brexit, we saw all-time market highs this past month. The S&P 500 is now up 7.66% year to date. In fact, almost all asset classes have produced returns for investors this year: stocks, bonds, REITs, precious metals, etc.

The only drag on returns have involved commodities, weighed down by the persistent drop in the price of oil. Production of oil continues to outpace demand. Iran continues to enjoy a market with less sanctions, fracking in the United States and China have resulted in higher output from fewer rigs, and Russia’s oil dependent economy has been forced to produce more oil than normal to make up for lost revenue, further adding downward pressure on crude oil prices. Hopefully you have been making up for this at the gas pump: prices for regular gasoline currently hover at $2.18 per gallon, compared to $3.65 at this time in 2013.

This leads to the age old question when markets hit all-time highs: how much more can the bull markets run? Valuations seem to be in line with historical averages: the forward price to earnings ratio (P/E) on the S&P 500 sits at 16.6x, compared to a 25-year historical average of 15.9x. This seems to indicate that though the price of the S&P 500 has risen, it has only risen an appropriate proportion to expected earnings. Notably, this measure is not always able to predict future returns. While it was indicative of a recession in 2000 when it hovered in 24x, the forward P/E ratio hovered around 14x prior to the 2008 recession.

One reason for optimism may lie in the amount of cash still sitting on the sidelines. Historically, when you look at the entire money supply, cash accounts have made up 53.4% of it. This might make sense in times such as 2006, when a six month certificate of deposit would generate 5.24% returns. Today, cash accounts are at an all-time high, accounting for 68.9% of the money supply despite six month certificates of deposits yielding just 0.37%!

There can only be one logical explanation for this: fear. Cash accounts rose dramatically in 2009 after the stock market losses from October 2008 through March of 2009 as Americans fled for safety. In 2010, investors dipped their toes back into the water to pick up cheap stocks, but they have been selling off ever since, trying to call the next market crash. In a world where more news is readily available to everyone through their emails, mobile phones, and podcasts, events such as the U.S. debt downgrade, the Greek debt crisis, and Brexit can get blown out of proportion. Thus, we would continue to urge patience. While stock market losses are always inevitable for periods of time, holding cash today would be losing you money due to inflation.

If you have a family member or friend that could use our services, we are always thankful for a referral. Our Generational Portfolio Service (GPS) now allows us the ability to work with accounts of just $5,000 and up, which can be perfect for a retirement plan from a former employer, or cash that should be invested for short-term goals.

As always, do not hesitate to reach out with any questions, and enjoy the remainder of your summer!

Best regards,

Alex Oliver