How regulations may detract from an advisors true aim: Income Production
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at email@example.com.
April 25, 2017 — 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.
401-k’s Gaining Traction?
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.
No two portfolios identical
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. Visit here.