Investing December 20, 2019

Millennials Favor ETFs in Their SDBAs

They also have a larger portion of their portfolios in cash than other generations, according to Charles Schwab.

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Charles Schwab’s SDBA Report for the third quarter, which reports on trends in self-directed brokerage accounts (SDBAs), shows that Millennials had a larger percentage of their portfolios in exchange-traded funds (ETFs) and cash than other generations.

Nathan Voris, managing director with Schwab Retirement Plan Services, tells PLANSPONSOR that Millennials likely favor ETFs because they “grew up with them. As they become interested in investing, a lot of the research they do leads them to ETFs,” Voris says. “Whereas for those closer to retirement, their initial experience with investments was likely in mutual funds or equities.”

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While the findings show that Millennials have more of their holdings in cash than other generations, Voris says, “There are certain Millennials who are more conservative than they should be.” But, he adds, “They generally have smaller account balances, so there is some interpretation risk here.”

The findings also show that mutual funds remained the largest holding in the accounts of all generations, and Apple was the top equity holding overall. Baby Boomers allocated 39% of their portfolios to mutual funds, while Gen Xers allocated 36% and Millennials, 34%.

Gen X made up 42% of SDBA holders, followed by Baby Boomers (39%) and Millennials (13%).

Millennials allocated 24% of their portfolios to ETFs, while Gen Xers allocated 20%, and Boomers, 17%. Millennials directed 16% of their portfolios to cash, while Gen Xers directed 14%, and Boomers, 12%. Fixed income was the least popular holding for all generations: Boomers (4%), Gen X (1%) and Millennials (0.8%).

The average SDBA balance for all participants was $276,929, up only slightly from $276,547 in the previous quarter. Baby Boomers’ average balance was $394,064, while Gen Xers’ was $213,018, and Millennials’ was $68,756.

Ask the Experts December 20, 2019

Contributing an RMD to a Charity

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning retirement plan administration and regulations.

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“One of our retirees who has been taking his required minimum distributions (RMDs) from his 403(b) account now wants us to send it directly to a charity, because he says he read that the RMD would not be taxable if he did this. I’ve never heard of this—could he possibly be correct? If so, what is the procedure to complete such a transaction?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

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The participant is incorrect, but the Experts can see why he might be confused!

The reason for the confusion is Individual Retirement Accounts (IRAs) have a feature where individuals have the opportunity to contribute their RMDs from those accounts directly to a charity tax-free, depending on how they file their taxes. However, that feature ONLY applies to IRA’s and NOT to 403(b)s or any qualified retirement plan accounts.

Thus, if the participant in question has an IRA account, he can complete such a transaction from that account, but NOT from his 403(b). Of course the participant could roll his 403(b) plan balance to an IRA to address this issue, but keep in mind that the RMD for the current year CANNOT be rolled over, so he must take that distribution from the 403(b) this year, and it will be taxable. Only the remaining balance after the RMD can be rolled over to an IRA.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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