Calculating a Viable Income Equation

Market Value Growth + Retirement Security-
Unfortunately, it just isn't available in a standard 401k

Image courtesy Andy Maguire

by Steve Selengut

Since the demise of corporate Defined Benefit Plans, most employees have been forced to rely on their own investment acumen to make sense of the product menu choices accompanying an ever growing array of private and public Defined Contribution Plans.

These are savings plans that use hundreds of pooled portfolios of securities and derivatives, many with suggestive and exotic names, to invest and reinvest participant and employer monthly contributions. It is rare that any unbiased advice is available to either Plan Sponsors or Participants, and even professional fiduciaries seem a bit brainwashed when one observes the results of their investment product choices.

Recently, it was proven to me pretty conclusively, that no product specializing in the top tier of S & P dividend paying companies in combination with a diversified collection of individual Closed End Income Funds yielding over 6% (after expenses) will ever gain entry into the "good 'ole big boys club" described as the 401k space.

Quality, Diversification, Income

Quality, meaningful diversification, and income production, the core curriculum of college investment majors for a century or more is now deemed to be an "Alternative Investment". This a term once reserved for the most speculative of (peripheral to real investment securities) speculations… futures, options, indices, shorts, commodities, junk bonds, emerging markets, etc.

The speculative essence of 401k Plan product menu choices, coupled with the utter disinterest in providing meaningful income choices (even toward the end of a TDF "glide path"), just screams for a better way 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 part of the program.

Sure this can be done without the help of a professional manager, but that will you put back into the same stuff of the 401k model… no known quality, no income, and a taste of every available speculation the Wall Street imagination can devise. An ideal self-directed program would provide for professional portfolio management with an ever increasing income "purpose" asset allocation "bucket", based on the age of each participant.

For Example: Self Directed, individually and professionally managed, portfolios for all employees featuring:

• flexible asset allocations (ranging from 60% Equity to 0% Equity)
• annual income growth (in all* investment and interest rate markets)
• annual Working Capital growth (so long as income, gains, & deposits exceed losses)
• one-to-one convertibility to a Rollover IRA
• "ROTH" 401k availability

*Using the 2008-2009 Financial Crisis as the worst case scenario

 This is the kind of program that your clients could create inside their 401k Plan if it were to become the "Self Directed" variety described above… isn't it time that they got the most out of their company's retirement income program? Remember, that 'every investment program becomes a retirement income program eventually.' You need to bring their program to a place where you can say with reasonable assurance: “A stock market downturn will have no significant impact on my retirement income”

Only private "safe haven" type 401k plans, those that are both self directed and managed with the MCIM methodology appear capable of developing annually increasing spendable retirement income. The others just don't seem to care. "Retirement readiness" doesn't just happen. Those who are counting on a forever upward stock market, or the promise of a Target Date Fund need to "get real", and quickly.

Here's the content of the Vanguard 2015 TDF as of January 31, 2015:

• Vanguard Total Stock Market Index Fund ………………..34.9% (3008 different stocks)
• Vanguard Total International Stock Index Fund ……….15.1% (5008 different stocks)
• Vanguard Total Bond Market II Index Fund ……………..32.4%
• Vanguard Total International Bond Index Fund…………10.0%
• Vanguard Short Term Inflation-Protected Index Fund…7.6%
• Equity Total = 50% Income Total = 50% TOTAL PROGRAM YIELD = 2.01%

So, if your Million Dollar Retirement Portfolio is in this TDF, will you be able to survive on $1,675 per month?