Inherited IRA, Concentrated Employer Stock, and a Costly Proposal
Mei, 53, recently inherited $600,000 and placed it in an inherited IRA. She also has $420,000 in a 401(k) invested in a 2045 target-date fund, and a $90,000 taxable brokerage account, of which $70,000 is her employer's stock with a $20,000 cost basis. She plans to retire at 65, when she will receive a $28,000 annual pension and Social Security estimated at $34,000 at 67. Her current spending is $95,000 per year; she wants the portfolio to supplement $30,000 per year, inflation-adjusted, beginning at 65. Her risk tolerance is moderate; she was uncomfortable with the 2022 decline but did not sell. A bank adviser proposes an 80/20 portfolio with 35% in her employer stock, a 1.85% AUM fee plus 0.55% average fund expenses, and a five-year transition. The inherited IRA must be emptied within 10 years under the current rules. Mei asks whether the proposal is 'aggressive enough' and whether she should keep the employer stock because 'it has done so well.'
1. Assess the proposed 80/20 allocation, the 35% employer-stock concentration, and the fee load against Mei's goals and risk profile. What is the central suitability conflict?
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The proposal is not automatically wrong on equity percentage, but it is wrong on concentration and cost. Mei's funded status is strong: pension $28,000 + Social Security $34,000 + portfolio supplement $30,000 = $92,000 against $95,000 of spending, so the portfolio is not being asked to carry the full retirement. That supports a moderate allocation, not an 80/20 'aggressive enough' allocation. An 80/20 portfolio with 35% in employer stock means 28% of total assets in one company, plus her human capital and possibly pension are already linked to the same employer. That is uncompensated idiosyncratic risk.
The fee load is 2.40% (1.85% AUM + 0.55% funds) on about $1.11 million, or roughly $26,600 per year-almost the entire $30,000 supplement. The central suitability conflict is that the adviser is answering a risk question with more risk, when the real issues are diversification, tax-aware transition, and fee drag. Mei should ask what the portfolio must fund, not whether it is 'aggressive enough.'
2. Propose an asset allocation and asset-location plan, including how to handle the inherited IRA's 10-year distribution rule and the low-basis employer stock.
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I would propose a 60/40 to 65/35 allocation, with the exact mix set by a capital-needs analysis: the $30,000 supplement is modest relative to $1.11 million, so a 4% withdrawal is about $44,000 and is sustainable with a moderate portfolio. Asset location: hold bonds and other ordinary-income assets in the inherited IRA to the extent consistent with the 10-year distribution rule; hold broad equity index funds in the taxable account for qualified dividends and potential step-up; keep the 401(k) in a low-cost target-date or balanced fund unless the fee is high. The inherited IRA must be emptied within 10 years, and if the decedent had begun required minimum distributions, annual distributions may also be required-confirm with the tax adviser. Use those distributions to fill lower tax brackets and fund the bond allocation.
For the $70,000 employer stock with $20,000 basis, set a target of no more than 5–10% of the portfolio and diversify over 12–24 months. Sell high-basis lots first; use appreciated shares for charitable giving through a donor-advised fund if Mei is charitable; avoid a single-day liquidation that creates a 15–20% capital-gains hit plus net investment income tax.
3. How should Mei evaluate the 'keep it because it has done well' argument and the five-year transition? Give a decision rule.
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The 'it has done well' argument is outcome bias and anchoring. Past returns are not evidence that the stock is safer; they are evidence that the position is larger and the risk is more concentrated. The five-year transition is too slow for a 35% single-stock position: it keeps Mei exposed to a permanent 20–30% loss for years while she pays 2.4% in fees.
A better decision rule: set a maximum single-stock limit, say 10% of investable assets, a tax budget of no more than $8,000–$12,000 of additional capital-gains tax per year, and pre-committed review dates. If the position exceeds the limit, sell at least enough each quarter to reach the limit within 18 months, regardless of headlines. Compare the tax cost with the risk reduction-diversifying $50,000 of gain at 23.8% costs about $11,900, which is less than a 20% decline on $70,000. Also request a fee-only or flat-fee proposal and compare all-in costs; the adviser should not be paid more for keeping the concentrated position.