Bob’s Journal for 8/22

What’s the Yield on Your ‘Cash Sweep’ Account?

At least five major financial services firms have been sued for allegedly taking advantage of their clients by paying low yields on cash sweep accounts. The SEC is investigating the cash sweep policies at two of those firms.

Cash sweep accounts were a major innovation a few decades ago when interest rates were higher. There was a time when cash sat in a brokerage account earning nothing for the client until the client directed it to be invested. But the broker earned interest on the money.

Then, one broker (I think it was Merrill Lynch) decided that on most accounts, it would automatically pay a minimum rate of interest on the cash. Each day, any uninvested cash in an account would be swept into an interest-earning account, and interest would be credited to the client’s account.

Initially, cash sweep accounts had attractive interest rates. Some still do. Vanguard recently paid 4.6%, while Interactive Brokers paid 4.83%.

But most brokers dropped cash sweep yields when the Fed pushed interest rates near zero and haven’t raised the rates much. The firms in the lawsuits had yields of 0.35% to 2.2%. The brokers, of course, earn higher yields on the cash and pocket the difference.

One allegation in the lawsuits is that the brokers had a fiduciary duty to pay higher rates, especially since the brokers were earning higher yields on the money. Another allegation is that the firms didn’t disclose that clients had higher-yielding options.

I remember when yields on cash and short-term investments were high enough that even relatively unsophisticated investors knew the alternatives and took the time to ensure their cash was earning a decent yield with low risk.

Many investors stopped paying attention to cash yields in the years before 2022. Interest rates on short-term vehicles had been so low for so long that it wasn’t worth the effort to move money around to earn what would be literally a couple of extra dollars per month.

Monthly statements and websites make clear how much cash is earning. Investors need to be aware of where their money is and what it earns.

If the lawyers in these suits are successful in squeezing settlements out of the financial firms, the clients and shareholders who paid attention to their finances are the ones who ultimately will pay.

More Retirees Have Debt. Is That Bad?

More and more households led by someone age 55 or older have debt, according to recent research from the Employee Benefits Research Institute (EBRI).

In 1992, 53.8% of older households had debt. But the percentage steadily increased from 1998 through 2019 before dropping from 2019 to 2022, the latest year for which data is available.

In 2022, 66.8% of older households had debt.

Overall, the older the head of the household is, the less likely the household is to have debt.

In 2022, in families in which the head was 55-64, 77.2% had debt. That drops to 64.8% when the head is 65-74 and 53.4% when the head is 75 or older.

But even those numbers have increased from prior years. For example, among households in which the head was 75 or older, 41.3% had debt in 2013 and 53.4% in 2022.

The question is whether this trend is a bad thing. Historically, people were encouraged to eliminate debt prior to retirement or as early in retirement as possible.

But some financial advisors changed that advice in the last couple of decades.

Many homeowners locked in mortgages with low interest rates, plus stocks were in a bull market, punctuated with periodic declines. It could be sensible to stay invested in stocks instead of using the money to pay off a low-interest mortgage.

In addition, EBRI said the average debt level in 2022 was about the same as in 2010. Other measures of household financial security, such as the debt-to-asset ratio and the percentage of income going to debt payments, improved in recent years.

Having debt in retirement isn’t necessarily a bad thing.

A family needs to consider the type of debt (fixed or variable interest rate), alternative uses of the cash, overall debt level and the reliability of income and cash flow.

It also is important to consider the nonfinancial factors. Some people are more comfortable in retirement when they are debt free while others are unconcerned by a manageable level of debt.

The right answer for one household might not be the right answer for its neighbors.

What Will Your Part D Premium Be in 2025?

For the first time since 2006, the Centers for Medicare and Medicaid (CMS) didn’t release next year’s projected premiums and other data for Medicare Part D policies in July.

Instead, the CMS has been reworking the program to keep Part D 2025 premiums from rising substantially, increases that would be announced around election time.

Significant changes were made to Part D in recent laws. Beginning in 2025, out-of-pocket prescription drug spending for Part D policyholders will be limited to $2,000.

But insurers and drug manufacturers will pay most of the cost of that benefit, which means Part D premiums are likely to rise along with deductibles and copayments. Insurers also are likely to decrease coverage of some medications.

Another provision limited annual premium increases to 6%. But that limit covers only base premiums, which are for Part D plans with minimum benefits. CMS did say that in 2025, the base Part D premium will be $36.78, a $2.08, or the maximum 6%, increase from 2024.

Most policyholders buy policies with broader benefits, which aren’t covered by the 6% cap.

Some insurers have indicated that they might withdraw from the market or greatly reduce their Part D presence. Others expect significant premium increases.

Normally before this time of year, CMS has issued data on next year’s Part D policies, such as estimates of the range of premiums, the number of policies a typical beneficiary will be able to choose from and other information. CMS recently said it will release that information in September.

Instead, this July, CMS announced that for 2025, it is turning all of Part D into a “voluntary demonstration project.”

Key components of the project are that premiums can’t increase more than $35 year over year and the government will pay Part D insurers more money per policyholder. The goal of the changes is to “improve stability” for Part D beneficiaries. In other words, to keep premiums from rising too much.

What isn’t clear is whether this is a one-year patch to delay premium increases until 2026 or something else.

Medicare beneficiaries should be prepared for significant changes in Part D policies in the next few years. As insurers adjust to the new rules and CMS changes its policies, there could be a lot of volatility in premiums, copayments, deductibles and the medications covered.

The Data

The Consumer Sentiment Index from the University of Michigan rose to 67.8 in mid-August from 66.4 at the end of July.

Sentiment about current conditions declined, while expectations for the near future improved. Inflationary expectations were unchanged.

The month-end readings for the index declined each month since peaking at 79.4 in March 2024.

Retail sales increased by 1% in July after declining 0.2% in June. The July increase is the highest since January 2023.

Retail sales increased 2.7% from 12 months earlier. They had increased 2% through June.

Excluding gasoline and vehicles, retail sales increased 0.4% in July and 0.8% in June.

The Leading Economic Index from The Conference Board declined to 100.4 in July from 101 in June.

The Conference Board continues to say the index indicates growth in real gross domestic product (GDP) will be 1.0% less for the rest of the year but does not indicate a recession in the next six months.

The Empire State Manufacturing Index improved to negative 4.70 in August from negative 6.60 in July.

The Philadelphia Fed Manufacturing Index tumbled to negative 7.0 in August from positive 13.9 in July, which was a three-month high. August’s number was the first negative reading in 2024.

Industrial production declined 0.6% in July after rising 0.3% in June. Over 12 months, industrial production was down 0.2% through July after being up 1.1% through June.

Manufacturing production declined 0.3% in July after being unchanged in June. Over 12 months, manufacturing production was up 0.1% through July and 0.6% through June.

The Housing Market Index from the National Association of Home Builders (NAHB) fell to 39 in August, the lowest level in 2024, from 41 in July. The index peaked at 51 in April 2024.

About 33% of builders said they reduced prices in the last month to stimulate sales.

Housing starts declined 6.8% in July after rising 1.1% in June. That’s the biggest monthly decline since March. The level of housing starts in July was the lowest since 2020. The decline was due entirely to the single-family home market.

Multifamily home starts increased 11.7% in July, while single-family home starts fell 14.1%.

New unemployment claims fell by 7,000 to 227,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.864 million from 1.871 million.

The Markets

The S&P 500 rose 3.07% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 2.79%. The Russell 2000 increased 2.27%. The All-Country World Index (excluding U.S. stocks) added 2.73%. Emerging market equities advanced 1.92%.

Long-term treasuries gained 1.43% for the week. Investment-grade bonds increased 0.93%. Treasury Inflation-Protected Securities (TIPS) added 0.16%. High-yield bonds gained 0.66%.

In the currency arena, the U.S. dollar declined 0.91%.

Energy-based commodities fell 1.79%. Broader-based commodities gained 0.86%. Gold rose 1.95%.

Bob’s News & Updates

A recent review on amazon.com of my latest book said, “Carlson is a unique national Asset while alive! Get the book, dude!” Look for “Retirement Watch: The Essential Guide to Retiring in the 2020s” (Regnery Capital: 2023) at amazon.com, barnesandnoble.com, booksamillion.com and regnery.com.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.