Submitted by The Investment Shadow
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The Self Directed “Retirement Ready” 401k
Yes, the "Retirement Ready" 401k exists. Unfortunately, it isn't available in the standard, institutional strength, product menu. Face it employers, the primary "income beneficiaries" of your 401k program are the advisors, fiduciaries, and TPAs that design the investment product menu for your plan participants... but it isn't a greedy conspiracy, and this is not a criticism of the delivery system.
What you get from your professionals is worth paying for, and the charges contained in the financial products they recommend are NOT the problem. Misguided regulations force nearly all 401 professionals to focus on expense ratios and market values instead of income production. "Retirement Readiness" just isn't happening in this environment.
Since the demise of Defined Benefit Plans, employees have been forced to make their own investment decisions without unbiased advice and education. They must choose among dozens of products, none of which have a "growing stream of retirement income" as an investment objective. The employers' dilemma, is that these "shoot from the hip" programs are being regulated under ERISA rules designed to protect Employee Retirement Income... apples supervising oranges.
Because the 401k "space" is being regulated as if it were the Pension "space" of old. Only "self-directed" 401k plans (and IRAs) have a chance of providing a growing source of dependable retirement income. Recently, I was "head slapped" into realizing that no product specializing in top tier, dividend paying, equities and diversified Closed End Income Funds (yielding over 6%) was ever gaining traction in the “good ‘ole boys 401k space.
A focus on income after expenses instead of growing market values would surely result in catastrophic DOL fines for both poor performance and excessive expense. The regulators have thrown out the Quality and Income components that were once two of the four foundation principles of portfolio investment management.
In the Modern Portfolio Theory world, there is no place for quality, income or profit-taking, and the "new" diversification rules are based on future prediction mathematics. The speculative essence of 401k Plan product menu choices, coupled with the utter disinterest in providing meaningful income (even toward the end of a TDF “glide path”), just screams for a better way for employers to get, 401k-like, tax deferral and wealth accumulation benefits.
For smaller employers, a 401k “safe harbor”, self-directed, program is an attractive alternative with none of the Wall Street program investment choice drawbacks…. AND no “top heavy” or annual recalculation aggravation. Yes, there must be a “match” for employee contributions, and immediate vesting, but a maximum contribution with total matching is a major plus.
Sure this can be done without professional management, but you will remain in the very same product selection super store … no known quality, no income, and a taste of every available speculation the Wall Street imagination can devise.
An ideal self-directed retirement program would provide an increasing income purpose asset allocation “bucket”, based on the age of each employee. No two portfolios would be identical, and employees would be able to interact with their program manager if they chose to. Portfolios would be directly convertible into private IRAs at retirement... and retirement readiness would, at least, be possible. Here are some basics:
- A flexible asset allocation ranging from 60% Equity to 0% Equity, with income produced by every security.
- Annual income growth in virtually all stock market and interest rate environments
- Annual Working Capital growth in virtually all stock market and interest rate environments
- One-to-one security convertibility at no expense into a Rollover IRA
- “ROTH” 401k availability with the same prospects
This is the kind of program you could create for your 401k Plan if it were “Self Directed”... isn't it time that you provided your employees with an actual "retirement income focused" benefit program?
Every investment program becomes a retirement income program eventually; the investment challenge is to create a program that allows you and your employees to say with reasonable confidence:
“A stock market downturn will have no significant impact on my retirement income”
Only "self directed" 401ks and IRAs, managed using the MCIM methodology, appear capable of developing annually increasing spendable retirement income. The others don’t use the essential "Working Capital Model".
“Retirement readiness” doesn't just happen; there’s no button you can push. Today's 401ks depend upon a forever upward stock market, and Target Date Fund "glide path" magic to get the job done... just NOT going to happen.
Here’s the recent (11/05/15) content of the Vanguard 2015 TDF:
Vanguard Total Stock Market Index Fund ………………..29.3% (3909 different stocks) (yield = 1.8%)
Vanguard Total International Stock Index Fund ……….19.4% (6118 different stocks) (yield = 0%)
Vanguard Total Bond Market II Index Fund ……………..30.0% (yield = 2.1%)
Vanguard Total International Bond Index Fund…………12.8% (yield 0.9%)
Vanguard Short Term Inflation-Protected Index Fund…8.5% (yield = 0.7%)
Equity Total = 49% Income Total = 51% TOTAL PROGRAM YIELD = 2.1% (if you do the math, it's just 1.33% the new math!)
So, if your Million Dollar Retirement Portfolio is in this TDF, you (actually) will need to survive on $1,110 per month?
Have a private look at the workings of a professionally managed retirement income program; a high quality, individual security, 30% Equity portfolio, generating a million dollar prorated, $5,480 per month:
Retirement Ready Income Programs
2971 Maritime Forest Drive
Johns Island, SC 29455
Phone (800) 245-0494 • Fax (843) 243-8509
Contact Steve directly for additional information: 800-245-0494
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|Please read this disclaimer:|
Steve Selengut is registered as an investment adviser representative. His assessments and opinions are purely his own. None of the information presented here should be construed as an endorsement of any business entity; the information is only intended to be educational and thought provoking.
Risk Management: Income, 401k, and IRA Programs
Take a tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:
In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.
At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.
The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only Investment Grade Value Stocks, it becomes a very powerful risk regulator over the life of the portfolio.
Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,
Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.
Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side... while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.
To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.
Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.
Total income is 6.5% of capital and more than covers the RMD.
Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds.
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|Please read this disclaimer:|
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.