Other highlights from this webcast
- What is the primary mission of Vanguard’s Government Relations Office?
- What are Vanguard’s top three concerns around government policy?
- How does Vanguard’s Government Relations Office make a difference?
- What would a Vanguard advisor tell a client about tax reform legislation?
Talli Sperry: Vanguard is busy advocating on behalf of our clients. And tonight, we’ll get a lens into those efforts and how they impact us as investors.
I’m Talli Sperry, and welcome to tonight’s live webcast on Vanguard in Washington.
Now, before we dive in, if you need to access technical help, it’s available by selecting the blue widget, and that one’s on the left. You can learn more about Vanguard’s services by clicking the green Resource List widget on the far right of the player, where you can view webcast replays or listen to our latest podcast episode.
Our Government Relations team serves as Vanguard’s voice among legislators and regulators. And this evening’s discussion will cover how the government affects the financial industry—from policy issues to tax reform legislation—how the Government Relations team represents our clients, Washington’s view of the financial industry, and what’s next: upcoming policy issues that impact investors. All such important topics.
And joining us today to answer your questions on Vanguard in Washington are Bryan Lewis, a Certified Financial Planner [professional (CFP)] with Vanguard Personal Advisor Services®, who can bring us home to the individual investor’s insight on this topic. And Jerry Golden, the head of Vanguard’s Government Relations office in Washington, D.C.
Bryan and Jerry, welcome.
Bryan Lewis: Thank you.
Jerry Golden: Glad to be here.
Talli Sperry: To help us understand a bit of your expertise, could you each share briefly what exactly it is that you do here at Vanguard?
Bryan, maybe we’ll start with you?
Bryan Lewis: Sure. I’m a senior financial advisor in Vanguard Personal Advisor Services. My primary responsibility is managing portfolios for our ultra-high-net-worth clients. I’ll help them to identify their goals, build a portfolio based on their objectives, their risk tolerance, and be able to not only implement that plan, but to manage that for them on an ongoing basis.
In addition to that, we’ll help with estate planning, tax planning, charitable giving, retirement spending strategies, and all the various components to holistic wealth management. And help to increase the likelihood of our clients meeting their long-term objectives.
Talli Sperry: Great. Thanks for helping us apply all of our great thought leadership.
Jerry Golden: When you think about who Vanguard is … I have one of the best jobs you can have at Vanguard. Our work today is to get up, go to work, engage with policymakers, whether they’re regulators or members of Congress or administration officials, to make sure they understand the needs of investors and of a capital market benefit of investors.
We like to think of it as being the face, the eyes, the ears, and the voice of Vanguard here in Washington to advance Vanguard’s core purpose: to stand for all investors, to treat them fairly, and give them the best chance for investment success.
Talli Sperry: Wonderful. Well, we’re looking forward to learning from you and your very well-informed insights.
Bryan and Jerry are here to answer your questions, some of which you’ve submitted ahead of time, but it’s not too late. We invite you to continue submitting questions throughout tonight’s webcast.
Shall we begin?
Bryan Lewis: Sounds good.
Talli Sperry: Tonight’s discussion is all about you. To help Jerry and Bryan get to know you a little bit, we have two poll questions we’d like you to answer. Our first poll question is on your screen right now, and that one says, “Which of the following best describes your awareness of Vanguard’s client advocacy efforts in Washington? Very aware, somewhat aware, or unaware?”
Please take a moment to answer, and we’ll share your answers in just a moment.
While everyone responds to the poll, Jerry, let’s have you kick off our discussion by answering the first question of the evening. This one comes from Tudor in Washington, D.C., who asks, “What are the main goals of Vanguard’s Government Relations team?”
Jerry Golden: I think the main goal for us here in Washington for Vanguard and our role on behalf of investors, and on behalf of all investors, is to make sure we are on the ground, interfacing with policymakers who are going to make determinations that will have both short- and long-term impacts on investors.
What we try to do is identify public policy threats, identify public policy opportunities, and work with leaders and subject matter experts throughout Vanguard as an organization to make sure we have shaped public policy solutions that can meet the needs and goals of families who are trying to do their best to save for long-term objectives.
There’s an old quip by Barney Frank, a former congressman from Dodd-Frank fame, who once said, “You’re either at the table or you’re on the menu,” when it comes to items in Washington. And, I think, ultimately, Vanguard made a decision some time ago that the voices of investors deserve to be at the table. And if there were going to be important determinations made from a public policy standpoint that impact investors, there needs to be their voice there from the start. Instead of coming in later to try to correct something, we can be there on the front end to answer the call, to be a resource for policymakers here in Washington.
Talli Sperry: That’s great. It’s so important, Jerry, so thank you. And, no doubt, plenty more to come on that topic. But right now, let’s take a moment to see how you responded to our first poll question.
When we think of which of the following best describes your awareness of Vanguard’s client efforts in Washington, D.C., we see that most of you are unaware, about 76% of our clients, 21% are somewhat aware, and then 5% are not aware at all.
That doesn’t surprise me because this work isn’t something we talk a lot about because we’re so busy doing it.
Jerry, does that surprise you in any way?
Jerry Golden: No, it doesn’t surprise me. I think, like a lot of things within Vanguard, we’re not necessarily always going to have the highest profile. We are going to try to have the highest impact. The fact that we have clients and investors out there who may not be aware of the advocacy that Vanguard’s taking on their behalf here in Washington, I see as an opportunity. And, hopefully, we get to cover some ground that will be of interest tonight.
Talli Sperry: I think that’s great.
Bryan, does this surprise you at all?
Bryan Lewis: No. It coincides with when I have a conversation with a client and we talk about maybe the impacts of recent tax reform, we talk about how we [Vanguard] have a presence in Washington. It usually comes as a surprise.
Talli Sperry: Yes. I find the same thing with the ultra-high-net-worth clients my team works with, so that makes perfect sense.
All right, we’d like to continue to keep getting to know you, so we’ve got another poll question for our audience. And on this one we want to ask, “How likely are you to make changes to your investment portfolio based on the recent tax reform legislation?” This one’s probably a little more close to investors’ hearts. And those answers are very likely, somewhat likely, unlikely, or not sure. If you could take a moment to respond now, and then we’ll look at your responses shortly.
Okay, Bryan, you’re up on this one. Dennis, from Madison, Wisconsin, asks, “Would you consider your job to be more in line with upholding the interest of Vanguard investors or the interest of the companies Vanguard invests in?” Really interesting question.
Bryan Lewis: It is a good question. You know, when you look at, I think, first and foremost, it’s important to highlight Vanguard’s core purpose, which is to take a stand for all investors, to treat them fairly, and to give them their best chance for investment success. I think that holds true regardless of the job that you have at Vanguard, but speaking personally as a financial advisor, when I’m engaging on an advice consultation with a client, my objective is to understand their goals, their risk tolerance, their time horizon, and be able to cater to their need and provide specific advice that is customized to their situation.
When I’m providing advice, it’s specific to their needs, and I believe it’s in their best interest. Speaking from a financial advisor’s perspective, the Vanguard investor certainly takes the priority.
Talli Sperry: That’s great.
Jerry, what about you? I would imagine your answer is similar.
Jerry Golden: It sure is. I mean, I think it’s investors and it’s all investors. We often tell each other, and I think we believe it here, that Vanguard’s core purpose, it advances the needs and interests of all investors, whether you’re a Vanguard investor or not, when you think of the impact that Vanguard’s approach, Vanguard’s model, Vanguard’s structure has had on the marketplace.
One thing I’m proud of when I’m working with Vanguard leaders on a regular basis to say, in a recent conversation with one regulator or another, or in a recent conversation on Capitol Hill with this member of Congress or that committee, we have learned this, and we’d like to respond to it this way, and we’re working together to figure out, to make sure they’ve gotten all the right facts, things like competitive advantage aren’t the kinds of things you’re talking about.
The things you’re talking about are, ideally, from an investor’s outlook: What is the best for them? What is the best for their long-term savings and investment goals? What is the best for healthy capital markets, which, obviously, have an investor-centric impact?
At the same time, to just piggyback on that thought, Vanguard owns shares in more than 13,000 public companies globally. Everything we can do to create a conducive environment for economic growth is also for the benefit of the investors we’re trying to serve.
Talli Sperry: Yes. I always find it interesting how many forces at Vanguard continue to come back to that principle you both discussed, about taking that stand for investors and ensuring their success. It’s great to hear that whether a financial advisor or our work in Washington, or our work even with the companies we own shares in, we continue to move that mission through. That’s just wonderful.
Our results are in, and it looks like when we think about whether clients are likely to make changes based on tax reform legislation, I’m actually a little surprised to see that there’s 50% that are saying they are unlikely, and about 15% are saying they’re somewhat likely or not sure, and then 5% are saying very likely.
That was actually a surprise to me given the clients that I deal with.
Bryan, how about you?
Bryan Lewis: Yes. In talking with clients, I think often Vanguard’s viewed as “stay the course.” You want to be able to buy and hold, rebalance over time.
Talli Sperry: They’re listening to us. That’s good.
Bryan Lewis: Exactly. It does present an opportunity to reevaluate your investment strategy, which we’ll talk more about. But, no, that doesn’t surprise me either.
Talli Sperry: Okay, that’s great. Good to hear.
Jerry, any thoughts from you?
Jerry Golden: No. I think Bryan’s answer certainly resonates from my perspective.
Talli Sperry: Okay, great. Well, let’s go on to our other presubmitted questions—we’ve got a number of them. Please, keep sending them in. We love live questions. This keeps it engaging. We really do want to talk about what’s most important to you, so please keep telling us what that is.
For now, I’m actually going to go to Patrick’s [from Kansas City] question. Jerry, I’m going to ask you this. “What are the top three concerns that Vanguard has regarding government policy?”
Jerry Golden: As you can imagine, I think those kinds of concerns tend to be constantly reevaluated. They evolve with the times that we’re in and the needs that we face on behalf of investors and, really, what Congress and regulators and the administration might be up to at a given point in time.
I think if I were to name three, I’d probably put them into three general buckets. One would be retirement savings related, and that can reach to items like making sure enough Americans have coverage, they have access to retirement savings opportunities, that they have adequacy within their retirement savings plans, whether that’s on the retail side or through their employer. And just to make sure they’re getting the right kind of advice for those long-term savings needs.
Another bucket would be tax policy. And, as you can imagine, a lot of what Vanguard’s been focused on over time from tax policy is to make sure that investment opportunities are not harmed by tax-making decisions, that the tax incentives for items like retirement savings and for college savings are protected. Tax policy is keeping in mind how important it is for American families to be investing and to be saving.
The third one, I think, would be financial services regulation broadly. There are so many different items within that bucket, but I’d say systemic risk is one example, on a global and domestic scale. And making sure that regulations we see today are effective. We want them to be robust because we want them to protect investors, but we also want them to be efficient. I think we try to look for ways we can flag for regulators that one regulation or another could use improvement in order to meet their intended goals.
Talli Sperry: That’s great. This sounds really where I would hope we would focus, so that’s exciting to hear. Jerry, you’re stimulating a lot of discussion from our audience. I’m going to go to two live questions, and they are for you.
The first one is, “Could you please go through the mechanics of how Vanguard advocates in Washington?” That’s from Celine Ostrat.
Jerry Golden: Sure. The mechanics question is an interesting one. I think it depends on the given situation, the given moment in time, and the issue you’re working on.
I can say this, it’s firsthand. I have a small team here in Washington. We are rarely sitting at our desks in our offices. We are out there trying to engage directly with policymakers, making sure we’re learning from them what they’re focused on, what their needs are for their constituents. How can Vanguard be a resource to the determinations they’re making?
But there’s all sorts of work that will go into it, depending on which regulatory agency, which Congressional committee, or what kind of coalition of stakeholders there might be in one position or another.
I can tell you this, a common thread for any action we have with policymakers is that we always make sure for the long term we’re upholding the integrity that Vanguard has directed us to always act with.
In terms of providing balance to say, “Here’s some data, here’s analysis, here is our perspective on a public policy matter,” but to make sure there’s no hiding the ball or telling half a story. We want to make sure we are thought of as an organization that is trying to get policy right. And what you find over time is, instead of constantly having to go out to them, they’re calling you, they’re emailing you. They’re asking you to stop by because they really do find value in the information you’re providing them.
Talli Sperry: That’s so fun. It’s showing that not only are we at the table, we’re actually being invited to more tables.
Jerry Golden: I hope so. That’s right.
Talli Sperry: Yes, that’s awesome.
We’ve got another question about that type of work. And the question is from Joan Chapin, who’s asking, “How long has Vanguard been in Washington, and could you describe an issue that Vanguard has worked on and was successful in?”
Jerry, can you get practical about how we’re influencing?
Jerry Golden: Absolutely! For the first question, it’s an interesting answer. Vanguard has had some level of representation, directly or indirectly, for a long time. And because we have the ability, of course, wherever different subject matter experts or leaders from Vanguard are, to come into Washington as needed, that role has always been something we valued, and it’s always been something we’ve emphasized.
Actually having bricks and mortar, a small office in Washington to make sure we’re here and represented at all times on behalf of investors, that’s been more within the past dozen years or so. But I don’t think that’s the beginning of our engagement with Washington on behalf of investors. I think that started 42–43 plus years ago, in effect.
Talli Sperry: Well, thanks for showing us the bricks and mortar.
Jerry Golden: That’s right. Can you remind me of the second part? I apologize.
Talli Sperry: Sure. No, that’s fine. Sorry I interrupted you there.
The second question is, “Could you talk about a practical issue that we have been successful in?”
Jerry Golden: Sure. I mean, a lot of what I think Vanguard’s voice has helped manage to achieve is oftentimes, and this runs the political spectrum, from a member of Congress or a policymaker in an administration that is far to the left politically, more progressive, or to the right politically, more conservative. Oftentimes, the challenge isn’t that the policymaker you’re dealing with has bad intentions—they often have wonderful intentions. But the challenge is that there are gaps in their perspective in terms of what the consequences might be for moving in one direction or the next.
Our biggest successes have been times where different policy issues that looked like they were going to prevail managed to not prevail. A bad decision was avoided, or a harm was avoided.
Within the tax reform debate, to keep it kind of more recent, in 2017, there were a number of different provisions being contemplated as a way to offset the goal that Republican members of Congress had identified in lowering overall rates to pay for those needs, that would have been, we worried, harmful to the needs of investors.
Issue by issue, whether it was the potential for undoing the ability for so-called first in, first out capital gains treatment, or whether it was undoing current options for how retirement savings can be taxed, whether they be on a traditional basis, or mandated solely on a Roth basis, or any number of items related to the tax treatment of municipal bonds, for example. I think Vanguard tried to be an educator, tried to engage, and tried to make sure that our role was pragmatic in those discussions.
Talli Sperry: Yes, Jerry. I think it’s interesting that you bring up tax reform.
You know, Bryan, I’d love for you to comment. In light of the new tax reform overhaul, what advice would you offer clients as it relates to their investment strategy? And, interestingly enough, Samuel from Denver, Colorado, also asked this question. Thanks, Samuel.
Bryan Lewis: When you look at some of the recent tax reform, I mentioned this, typically, Vanguard’s viewed as a buy-and-hold investor, and then rebalance over time. But there is, when you look at some of the recent changes, I think it does take a little bit of an effort to be more proactive and reevaluate your investment strategies.
A couple examples of things to look at with the lower tax rates investors find themselves in. Let’s say you were in, previously, a higher tax bracket and you were using tax-exempt bonds within the portfolio. Is it more advantageous to start looking at taxable bonds as an opportunity, being mindful of the tax implications to sell those tax-exempt bonds, to shift into taxable bonds? I think it presents an opportunity to reevaluate your strategy within the bonds if you have any in a taxable account.
If you look at these lower tax rates we have, it’s presenting an opportunity to reevaluate your retirement savings strategy. If you look at investors who are in a low tax bracket now and have been traditionally contributing to a traditional 401(k) or a traditional IRA, and getting that deduction, well, you’re already in a low enough tax bracket. Would it be more advantageous to start thinking about Roth IRA contributions or Roth 401(k), if you’re eligible to do that?
I think it does highlight potential opportunities around the savings strategy as well as, potentially, Roth conversion. If you think of the tax reform that went into effect with the tax brackets, they’re scheduled to sunset at the end of tax year 2025, meaning they’re going to revert in tax year 2026 to what they were previously.
If you’re an investor who anticipates your tax bracket increasing over time, for example, a younger investor who has several years ahead as far as earning potential, maybe consider looking at the Roth piece to the portfolio, just to help balance that out. But it’s not something investors have to make changes to. If you have a solid plan, there’s nothing wrong with staying the course.
Talli Sperry: I think it’s interesting how many layers there can be to think through an investment strategy. That’s why I’m always appreciative of your practical expertise, Bryan. Thank you very much for adding some insight there.
Bryan Lewis: Sure.
Talli Sperry: I think we’ll go to one more live question. And this one looks like it’s also for Jerry. This is Douglas James asking, “Where did Vanguard stand on the recent legislation regulating advisor fiduciary responsibility to clients?”
Jerry Golden: Sure. Thanks for that question. As you can imagine, we see as core to Vanguard’s mission to uphold the concept of all investors being able to count on the advice they are receiving being in their best interests.
In concept, when both the Department of Labor, in one regulatory agency, and the SEC, in another, each began to engage on reevaluating how to define fiduciary roles and fiduciary responsibilities, Vanguard has tried to make sure that investors’ voices are heard in that process, and that the best interests of investors are upheld.
For Vanguard, from the beginning, while the concept has always been something we’ve been supportive of, we’ve tried to also make sure we’ve leaned in with regulators to help them understand how particular approaches to that goal might need to be shaped or adjusted in order to make sure that unintended harms don’t happen in that process. But work to advance a best-interest standard and to make sure that the best interests of investors are protected is ongoing for Vanguard.
Talli Sperry: Yes, and that ties right into our mission, doesn’t it?
Bryan Lewis: Yes. I think from an advisor perspective, to Jerry’s point, when I’m engaging in a consultation with a client and acting as a fiduciary—I’m a Certified Financial Planner certificant. So, you look at determining what their goals and objectives are and providing advice to that individual investor. And it’s advice that I believe is in their best interest, and certainly above anybody else’s interest, including my own.
Talli Sperry: Yes. I love working at Vanguard because I feel like we are never asked to do anything other than what’s in the best interests of the client, and that is such a joy. Bryan— Oh, go ahead, Jerry. No, that’s fine.
Jerry Golden: Sorry. I’ll add one quick point. You can tell the enthusiasm on this issue. I do think that one key point we should make sure, too, that Vanguard’s voice has tried to be there, is to make sure that we’re also helping regulators get to the point where investors are also having access to the most efficient and the most cost-effective access to high-quality advice, high-quality information, high-quality education.
And it’s helpful to know that with the direction regulators have been looking, Vanguard products and Vanguard services to retirement account investors, for example, are not materially affected by the way regulations appear to be going. We don’t pay commission-based compensation to advisors, we don’t pay for fund distribution. I think that gives us an easier ability to engage with policymakers in a way that they know where we’re coming from is really on behalf of investors.
Talli Sperry: Those are really important points. Thanks for drawing those out, Jerry. Yes, that’s great.
We are still taking live questions, and I’m going to go to one right now for Bryan. But please keep sending them in. We do want to hear your viewpoint. And I do apologize for some of the little overlaps between Jerry and I; we have a slight delay in our mikes, so we’ll continue to work on that. But please keep engaging us in discussion.
Bryan, this one is for you. This is from John Simons, who’s asking, “How did tax legislation affect the tax deductibility of investment management fees?”
Bryan Lewis: Yes, it’s certainly a hot topic as far as what’s going on. When you look at the recent tax reform, just to add a little color to this. Previously, under the former tax laws, there were miscellaneous itemized deductions that, based on a certain percentage of your adjusted gross income, if you exceeded that threshold, you were able to deduct, in this case, investment advisory fees, think of tax preparation fees. There were items that you were able to deduct, which have now been removed.
When you look at the strategy, which you can essentially revisit with your tax accountant, would be to see how you should change your strategy with how those fees were deducted from the portfolio.
For example, maybe under the former law, you had to take the advisory fee from a nonretirement account. This presents an opportunity for investors that have IRAs, specifically pre-tax IRAs, to evaluate to see if you should be taking the advisory fee there, or at least a portion of the fee from the IRA, to pay for itself. And then take the remaining amount from a nonretirement account to minimize tax implications, since taking the fee from an IRA is not considered a taxable distribution. But, when you look at the tax reform, it’s scheduled to sunset at the end of tax year 2025, so it’s not permanently removed. Unless things change, it’s scheduled to come back in tax year 2026.
Talli Sperry: I think this speaks to the alertness that investors need to have about understanding when you need to make changes and how you need to think about your portfolio, even in terms of fees. It’s very intriguing.
Bryan Lewis: Exactly.
Talli Sperry: Yes, that’s great.
All right, we’re waiting on live questions, so we’re going to go back to our presubmitted questions. I think I’ll jump to Dee in Concord, Massachusetts, who’s asking us to dive in a little deeper on how the initiatives by Vanguard, by the U.S. government … what do they mean for the individual investor?
Jerry, maybe you could start us off.
Jerry Golden: Sure. I think, at the core of the question, to my understanding, a lot of the conversations I’ll have, even when I leave Washington, D.C., and I go back to where I grew up, or where I’ve lived before, and people in my life that have nothing to do with this world, one of the more common questions you get, or complaints or concerns you might hear, and it resonates with me, and I understand where it comes from, is this idea that, with everything I’m reading and everything I’m viewing, why does it always feel like people like me, families like mine, priorities of mine, aren’t represented among policymakers in Washington. I don’t know that it’s always a big distinction necessarily for any given person on, except for this person, or except for that. The ultimate feeling is, is my voice being heard? Do I have a seat at that table?
I think what we try to do from a Vanguard perspective is make sure, at least when it comes to issues related to your goals as an investor, that your voice is there. Better regulation, better legislation is one example. Vanguard does not take a kneejerk sense of all regulation is bad or all regulation is wonderful. We just want it to be effective. We want it to be robust where it needs to be robust, but we want it to be effective. We want it to be cleaned up and make sure there are no unintended consequences.
When you think about what does the work here mean for you, it just means that you don’t find out too late all the time that some decision has been made that’s going to have a harmful impact on the needs of your savings goals.
Talli Sperry: Yes. You’re really an advocate for us, which is so appreciated.
Bryan Lewis: And I think it’s important, too—this is where you need to have a plan. You need to be able to have a strategy in place, know what you’re saving for, have a diversified portfolio. There’s a lot of uncertainty out there, which is going to drive some of the market volatility, and you can be emotional, you can react to that. And that’s where, when I’m having conversations with clients, we can talk about how this may impact you and, oftentimes, it actually may not be impacting you. It’s more noise within the market.
Sometimes there’s a little uncertainty that feeds into this, which I think people tend to react to. But, sometimes it’s okay to stick with the original plan.
Talli Sperry: I think that’s a huge benefit of the Personal Advisor Services that you’re a part of, because it gives that behavioral coaching, which is sometimes the thing we need the most to sort through that noise Jerry was talking about and just help us really understand where to focus. That’s essential.
Bryan Lewis: Right.
Talli Sperry: We’re going to go to another presubmitted question. This one’s from Elizabeth in Bethesda, Maryland, who’s asking Jerry, “What sort of interaction or information exchange do government legislators have with the private sector financial firms?”
We haven’t gone to this space yet, Jerry, so I’m curious for your thoughts.
Jerry Golden: Sure. I think that depends. You asked specifically about legislators, so we’re thinking, in terms of Washington, we’re thinking of Congress. Different members of Congress will engage differently and view these issues differently. Maybe look at it this way. Picture a member of Congress, for example, that might have gained fame within their district initially by being a war hero. Maybe they’re totally capable in some particular career path, but it’s not financial services or asset management or investments or mutual funds or things like that. They might be otherwise wonderfully accomplished in other spaces, but they come to Washington. They have a relatively small team, all typically committed to getting things right. I will tell you, despite what you see on TV or read in the papers, while there are bad examples, there are also wonderful examples in Washington today, from our experience, that are having the pile of papers at their desk, sleeves rolled up, trying to understand the implications of the issues they’re working on.
Picture being one of these people who ends up being in these roles. Your commitment is there, but you may not have incredible natural background at day one on the hearing you have to give voice at the next day on 401(k) plan policy, or the vote you have to take the following day on capital gains dividends treatment, or some other important issue that relates to investments.
What we try to make sure we do is when they look beyond their four walls to find who they can trust, who they can count on with a certain level of credibility, that a firm like ours can be in a spot they can trust, they’ll call, they’ll contact.
Your question spoke to financial firms broadly, and I don’t have as good of a vantage point of what those other firms experience. I can tell you anecdotally that we often find from members we’ve worked with before, because they know we will offer up all we know about an issue, we’ll try to steer them to why we’ve reached one conclusion, but we’re going to try to make sure they’re gifted with all the facts and that they know what they’re heading into from a policymaking standpoint—that keeps them coming back to us as a resource. And that’s something we value.
Talli Sperry: Yes, the research your team provides and does and just so openly shares is a huge benefit not only to Vanguard and to our investors, but I think broadly to the industry. And it’s beautiful that we’re becoming known for that more and more.
Bryan, we’ve got a live question for you. Please keep them coming. This is from RS, who is asking, “Now that tax rates are lower, is it more advantageous to do a Roth conversion?”
Bryan Lewis: I certainly think it opens a window of opportunity to look into this strategy. For those investors that may not understand what a Roth conversion is, the idea is that you have a traditional IRA, let’s say it’s worth $100,000, you’ve deducted all your contributions you’ve put into it. Let’s say you wanted to convert $50,000 over to a Roth IRA. It’s basically shifting it from this pre-tax account over to an after-tax account. It’s going to be taxed as ordinary income. With investors being at a lower tax bracket, in most cases, it could present an opportunity look into possibly the idea of Roth conversions.
Talli Sperry: And, Bryan, can I just pause you for a second. Can you speak to what’s the core benefit to doing that for an investor?
Bryan Lewis: Yes. I think it presents an opportunity. I think advisors and clients, when we talk through diversification, we talk about stocks, bonds, cash, being diversified globally, but it also presents opportunities to diversify across accounts that have different tax treatments.
When you work with clients, you tend to see more pre-tax accounts. When you look at large retirement plans, it presents an opportunity, a little bit more flexibility as well, in retirement. Let’s say you’re spending from your portfolio, and you want to be able to manage your tax situation a little bit better, having the flexibility to maybe draw from a nonretirement account, which may get capital gains tax treatment. You may have a pre-tax IRA, and if you have your Roth IRA, it just allows you to be a little bit more flexible, particularly those when you’re spending from the portfolio.
But I think of investors, maybe why they would not want to consider it. Let’s say you’re working, you plan to retire in a few years, and then your income drops. You may be in a lower tax bracket in the future. You may actually want to wait on Roth conversions. But there was a big change with the recent tax reform that’s worth noting. Under the previous tax laws, you were able to actually undo this Roth conversion. It’s called recharacterization of a Roth conversion.
So essentially, let’s say in my example, you have $100,000 in a pre-tax IRA. You want to move $50,000 over to the Roth IRA—you pay ordinary income tax on that $50,000. Let’s say when you go to file your taxes, you’re not comfortable with the tax liability, or let’s say that $50,000 actually lost money—it’s now worth $10,000. You’re going to be paying tax on that full $50,000. You had the flexibility to actually recharacterize that Roth conversion under previous law.
If you look at current law that went into effect, the recharacterization aspect of a conversion has been permanently removed. This presents an opportunity when I’m working with clients to make sure this is right for them. Look at their strategy. Make sure it makes sense, make sure they’re comfortable paying the tax. It’s really a one-way street. When you look at the idea of moving this over to a Roth IRA, it’s something you can no longer undo.
Talli Sperry: Yes. I think this is interesting. That’s a great example of how work in Washington and things happening in Washington impact the individual investor. Thanks for sharing that.
Jerry, we’ve got another live question for you. And this one is from Paul Bullock, who is asking, “What are the key Congressional committee groups that Vanguard interacts with?” Really interesting question.
Jerry Golden: It is a good question, Paul. I’d say sometimes that varies because every now and then there is an issue you weren’t expecting would be what you’d be focused on, the committee would be focused on, because of where it arrives for one reason or another. But the three committees in the House on which we’re most focused is the House Ways and Means Committee, which handles all tax policy; the House Financial Services Committee, which explains itself, and that’s why financial services matters; and the House Committee on Education and the Workforce, which handles all ERISA matters, retirement plan savings items, things of that nature. Their corollary committees in the Senate are for tax issues, the Senate Committee on Finance; for financial services, they call it the Senate Banking Committee; and for those ERISA retirement plan savings issues, it’s called the HELP Committee or the Health, Education, Labor, and Pensions Committee.
Those tend to be the six where we’ll spend most of our time, but there are always items throughout the year where we need to engage with other committees because of the uniqueness of the leadership of that committee or the issue at hand.
Talli Sperry: Interesting. Constantly shifting and moving work, isn’t it?
Jerry Golden: It sure is.
Talli Sperry: All right. We’re going to go back to some of our presubmitted questions. Again, keep submitting them live. We love to hear from you. Bryce from Medford, Massachusetts, is asking, “What types of information do you provide to lawmakers that they find most valuable?”
Jerry, it looks like this one is for you.
Jerry Golden: I think the information we provide generally, if you picture where Vanguard likes to be, and that’s focused on the data, that’s focused on what the research tells us, what the analysis tells us, that’s the kind of information we’ll tend to provide. Depending on the issue, we will arrive at white papers or substantive research that’s awfully deep.
Other times, they really want to understand succinctly what the top-line priorities are on an issue they’re working that has an impact on investors or on capital markets. It depends. I think we want to make sure it’s substantive, it’s accurate, it’s reliable. Vanguard has a deep bench, as you can imagine, of experts, policy experts, wonks in the back rooms who are hammering this out and debating these issues and trying to make sure we’re giving the best possible voice we can.
Talli Sperry: That’s great. I think that brick and mortar you referred to a little bit earlier, that’s generating a lot of questions. I think your beautiful D.C. background is making a number of people ask, “How many people are in the Washington office, and what do they do?”
Jerry Golden: There are five of us in the Washington office. As you can imagine, I like to think of it as a horizontal enterprise. It’s not a top-down organization because we all need to be engaged regularly. Communication is key to make sure we’re getting policymaking right for Vanguard, but each of the five people has some role or some impact on advocacy work; certainly, on research and the internal communications work that goes into making sure we’re getting our policy positions right. But it’s a collaborative team, a small team, and the kind of folks focused with that fire in their belly each day. I feel good about the impact they’re getting to have for investors.
Talli Sperry: Yes. I always love interacting with your office because the passion is evident, which is supercool.
Jerry Golden: Sure is.
Talli Sperry: We’re going to go back to some presubmitted questions. Bryan, this one is for you. We talked a little bit about tax reform legislation earlier. And Ernest from Rock Hill, South Carolina, is asking, “Given recent tax reform, what’s the best way to draw for retirement funds in a tax-efficient way?”
You got to this a little bit, but could you elaborate on a fuller spectrum?
Bryan Lewis: Sure. Vanguard’s general approach has been that investors who are spending from their portfolio should look at using their nonretirement assets first, where you use your dividends, your capital gains. Instead of reinvesting those, you pay those out in the form of cash. If that’s not adequate for your cash needs, you can begin looking at your nonretirement account and focusing in on assets you’ve held for at least one year and one day, if not longer, to get the long-term capital gains tax treatment.
When you look at other opportunities, and this is a comment I made earlier about just having more options that you can choose from in retirement, let’s look at the pre-tax component of this, which is a traditional IRA. At age 70½, you have your required minimum distribution you are forced to take out. You could change your strategy a bit and use the required distribution because you need to take that out. If you need to spend from the portfolio, you can look at using nonretirement assets.
This is where, as you prepare for retirement, even for those that are in retirement, you can look at this idea of a Roth IRA. I think the lower tax bracket presents opportunities to look into this. Particularly those that are in retirement, possibly you anticipate the tax rates going back higher to what they were before and using this as a window of opportunity to reevaluate if Roth IRAs are an important part, which I believe they are because if you’re an investor who’s spending from the portfolio and you’re on the cusp of going into a higher tax bracket, that’s when you can use your Roth IRA, which could potentially come out tax-free. And being able to manage your tax situation that much better in retirement allows you more flexibility and something your tax advisor can work with you on as well. The idea is to have some options in retirement, and this is when we are having conversations with clients—they’re things you should start thinking about now as well as in the future.
Talli Sperry: Yes, I think you’re helping me realize that thinking ahead gives you a lot more control and a lot more ability to apply the good things that are out there and for opportunities for your portfolio.
Bryan Lewis: Exactly. If you even look at these lower tax brackets, to my point earlier, Vanguard’s general approach is to start with your nonretirement account first. If you’re in a lower bracket and you’re spending from the portfolio, it does present opportunities to change that a bit and start using your pre-tax IRA to manage your taxes, knowing, or at least potentially knowing, your taxes are going to go up in the future.
Talli Sperry: That’s great. I’d like to move us to a topic we haven’t yet discussed, and this one is coming from Paul in West Chester, Pennsylvania, so just down the road here for Bryan and I. He’s asking, “Please separate facts from rumor regarding cuts and other changes to Social Security.”
Jerry, I’m going to start with you on this one.
Jerry Golden: Sure. It’s a great question. Vanguard supports keeping Social Security safe and secure for generations to come. I think part of the concern that drives the debate is current projections anticipate by 2035 there will only be enough in the retirement program trust fund sufficient to pay about 75% of scheduled benefits. I think members of Congress, when you engage with them on this issue to learn their thinking, universally recognize that maintaining perfect status quo with Social Security won’t be the long-term solution—there will be something on the funding or reform end at some point to address it, whether that has to do with a long-term raising of the retirement age for some segment of the population for the future, or means-testing the payment, or a variety of different things they have contemplated.
From our perspective here on the ground, if you talk about separating fact from fiction, I don’t think we are looking at something that is a near-term change. There are several reasons why I say that. I’ll mention a couple on the political front to highlight. One is Speaker of the House Paul Ryan from Wisconsin has been one of the most steadfast champions of Social Security reform and has announced his retirement at the end of this year. We already knew, for a variety of reasons, it wasn’t likely to happen within the calendar this year, but that loses one of the major advocates for focusing on nearer-term entitlement reform, including Social Security reform.
President Trump, among the ways he’s not a typical Republican president, is that from the beginning, even throughout the Republican presidential primaries, said that he is taking off the table reforms to Social Security and other entitlements. Not that elected officials can’t change their minds or evolve, but there’s no indication of that yet at this point. Historically, Democrats have been very, very cautious about entering into the fray on major Social Security reforms. When you consider that in this current environment, most estimate that at some level after Election Day we will have more Democrats, not fewer, in the halls of Congress, it just makes me think we are not looking at a near-term Social Security change.
I would highlight on the policy side that when you are getting closer to big changes, you tend to see a lot more conversation, a lot more requests for information, a lot more hearings on Capitol Hill or public forum discussions with regulators and the administration. That’s not what you’re seeing right now on Social Security reform. To the extent that it’s helpful, I think there’s a recognition that changes need to be made at some level. I would say you could keep an eye out on adjustments, like changing the cost-of-living adjustment to Social Security over time so it adheres to change CPI or consumer price index, which would typically mean slower growth in the benefits. I mention that because that’s something a lot of Republicans in Congress have advocated, and it is something President Obama had once advocated.
I’d also mention that when you look at Social Security as a whole, it’s actually the Social Security Disability Insurance program that’s probably in the most dire near-term need for addressing. You might see a possibility of that being addressed first before you see some of the bigger changes being addressed.
Talli Sperry: It’s helpful to understand some of the underlying things that are influencing as well as the trends you see in volume and how that can give us insight. Thanks for sharing that.
Bryan, did you want to add?
Bryan Lewis: Yes, and I will say this is a common misconception I hear with clients. The one decision you have to make is when to claim Social Security, but oftentimes clients have the perception that Social Security is going bankrupt and when that takes place, they’re not going to receive any Social Security benefits.
To Jerry’s point, it’s mainly a pay-as-you-go program. What I’m paying out of my paycheck into Social Security is essentially going out to current beneficiaries of Social Security. I don’t think this is a surprise to anyone that we have an aging population here in the U.S. There are more beneficiaries from Social Security versus the worker ratio, which is why, to Jerry’s point, in the mid-2030s the trust fund itself is scheduled to be exhausted.
This is where I think you have to be smart with starting to save as early as you can, but I think a common misconception is that they’re no longer going to pay out any benefit whatsoever. I think there’ll be a cut across the board, to Jerry’s point, but, again, I think this is an important thing you need to be able to plan for, save as much as possible to have flexibility for creating retirement income.
Talli Sperry: I think that’s a helpful clarification, Bryan. I do want to get to a question around retirement. This one’s wonderful because it’s from Debbie in Grand Rapids, Michigan, who says, “I’m planning to retire early in two years at 55.” First of all, congratulations, Debbie. That’s super exciting. You’ve saved well, clearly.
We’d like to ask you, Bryan, what types of things should Debbie pay close attention to right now?
Bryan Lewis: I’m sure we could probably spend the full hour on this, but for investors who are retiring before Medicare eligibility, you have to plan ahead, particularly on the health care side. So, what’s the plan? Are you going to be continuing a former employer plan you have access to? Are you going to be buying private coverage, which can be significantly more expensive? Being able to have a plan and a strategy, particularly on the health care front, could present an opportunity to look at HSAs or health savings accounts. If you have access to a high-deductible health plan at work, it could present an opportunity to start saving money in the HSA and allow you to take tax redistributions in retirement to help pay for some of these expenses.
The other piece is around Social Security. We were just talking about this, where you need to be able to have a plan when you’re going to claim Social Security. If it’s age 62 or full retirement age or even age 70, how are you going to be able to bridge that gap? This is where it’s incredibly important to make sure you’ve saved enough, obviously, and look at alternative options. As you step into retirement, there are things you need to be looking at aside from your typical asset allocation. But ensuring you have enough cash on hand for approximately one to two years, probably two years at the most, to cover any unexpected expense that comes up. You need cash for your living expenses. You also need cash for a new roof unexpectedly, a new car, or a health care emergency. Again, it allows you more flexibility to draw from these assets.
As you look ahead, we’re all living longer. If you’re retiring, in this case, in your mid-50s, you have to be able to prepare for that potential longevity risk, and what are you doing to allow that portfolio to last 30 or even 40 years, and coming up with a plan to be able to achieve that.
There are a number of risks, and we’ve been talking about the political front. When you think of policy or tax reform in the future, how have you planned to cover your bases? You look at my idea of having taxable accounts, pre-tax accounts, a Roth component to the portfolio, again, allows you more flexibility to handle those types of risks in retirement.
Talli Sperry: That’s helpful, Bryan. And since we’re on the concept of taxes, Jerry, I’ve got a question for you. This is from our presubmitted questions, and this is Craig from Boise, Idaho, my home state, who’s asking, “With the growing national debt, do you see Roth returns being taxed in the future?”
Jerry Golden: It’s an interesting question. To the extent you’re asking about whether good-faith planning will be punished because you thought you were paying tax upon contribution, so you could avoid it while it grows and then upon distribution, and are they then going to come back and tax you again. I can say I have never once in any policymaker meeting ever witnessed that being discussed. That’s not to say that Roth tax treatment changes aren’t an ongoing discussion, because they certainly are. I think Bryan very ably walked through the Roth conversion issue we saw on the tax reform front last year.
We also saw a broad variety of Roth-related tax reform proposals, including this concept when Congress and the Trump administration were trying to achieve tax reform that would fundamentally lower both corporate and individual rates. They were also trying to find a way to offset some of the budget-dollar losses that would come from those decreases in rates. One of the considerations that had been made and debated quite a bit within Congress had been this idea of saying instead of allowing retirement savings, whether in an IRA or in a 401(k) or other defined contribution plan, to either have traditional tax treatment where you are not taxed upon contribution, but you are taxed upon distribution, or the opposite.
With Roth tax treatment, they would mandate Roth tax treatment. And the benefit from a federal government point of view to that mandate for future savings—this isn’t looking backward, this is looking forward—would say that the federal government now gets all this revenue—they’d otherwise have to wait for—right away. When they are making these determinations for tax policy, they only have to look at a ten-year budget window. Getting all those budget dollars up front would’ve cured a lot of headaches if you’re just looking at math and you’re not concerned about making sure you’ve been careful about behavioral economic consequences.
Vanguard was urging caution and care and thoughtfulness in those discussions. It’s ultimately not the direction that tax reform went. I mention it only to let you know conversations about Roth are real, they’re vibrant, they’re consistent. You see them all the time. We’re part of them all the time. What I have not seen, what I typically only hear when engaging with clients, and I haven’t been hearing when engaging with Congress or the White House, is are they going to come after tax treatment that has been traditional tax treatment for retirement savings and later on—or excuse me, tax treatment that has received Roth tax treatment—and later on tax again? That’s not a conversation I’ve witnessed.
Talli Sperry: Great. Jerry, we’ve covered a lot tonight. Can you tell me what haven’t we asked that you feel is important for our viewers to understand or even consider?
Jerry Golden: What a great question. Just to say this, sometimes what we find in our small Washington team and our small Washington office is that the headline story in the newspaper each day isn’t always the active conversation what’s happening here. The headline story comes out because they’ve finally acted on something that’s been in process for years and years and years and has been quietly being debated and engaged upon for many years.
When you think of the investment equation, I agree, Bryan’s mentioned the corporate tax changes were permanent. The individual tax changes because of the reconciliation procedure they used to get it passed will expire in 2025. Typically, when we’ve seen that happen before, there are attempts to address the fact that it would otherwise expire. We’ll see what happens, especially if there’s a changing dynamic in Congress.
I do think there’s a lot of movement right now in retirement savings. Maybe that’s an item we didn’t get to that I’ll give you 30 seconds on: the idea of enhancing current retirement savings opportunities and expanding the opportunity for more Americans to save through an employer-sponsored retirement savings plan.
There was a hearing in Congress yesterday on the ability of creating what they call open multiple employer plans, or open MEPs, which gives small businesses the opportunity to pool together to have retirement savings plan opportunities they might not otherwise be providing for their employees at a lower cost than they might otherwise be able to bargain for.
These are the kinds of things Congress, I think, is trying to get ahead of. When you look at the gig economy, when you look at sole proprietorships, they’re the kinds of folks who say, “Right now all that’s available to me is an IRA with a $5,500 limit instead of an $18,500 limit I’d get through a 401(k). How can I bridge that gap?” I do think there’s a lot of ongoing bipartisan attention to that concern.
Talli Sperry: Great, that’s helpful. Thanks for the 30-second high-level view there.
Bryan, same question for you, what haven’t we asked?
Bryan Lewis: Yes, I think we’ve covered a lot today. I think when you look at some of the other factors that are important to be mindful of is Roth conversions and how is that, for example, going to impact you potentially if you’re close to or in Medicare, how is that going to impact your Medicare premiums? You think of alternative minimum taxes, a lot of things you have to be mindful of, which consulting with the financial advisor as well as your tax advisor is certainly something you need to be mindful of.
But there are other pieces to tax reform when you get into estate planning with the new exemption amounts. I think of the impact with 529 savings plans, how that could be useful to some investors using that for elementary school costs. Again, there are other considerations to tax reform, but my point to investors is, again, this is a great opportunity to reevaluate your investment plan. If you need any help, call Vanguard. We’re willing and able to help.
Talli Sperry: Yes. I think my takeaway from tonight is I need to pay a lot more attention to the work that both of you do because understanding the intersection is essential for us as investors. Thank you for sharing so much tonight.
We’ve covered a lot of important material about Vanguard’s role in Washington, D.C. And we want to thank you, our audience, for being with us and sharing your insights and expertise, as well as you, Jerry and Bryan.
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