The “Total Return” Shell Game

No “Interest Rate Sensitive” Security is an Island…

Just what is this “total return” thing that income portfolio managers like to talk about, and that Wall Street uses as the performance hoop that all investment managers have to jump through? Why is it mostly just smoke and mirrors?

Here’s the formula:

  • Total Income + (or -) Change in Market Value – Expenses = Total Return — and this is supposed to be the ultimate test for any investment portfolio, income or equity.

Applied to Fixed Income Investment Portfolios, it is useless nonsense designed to confuse and to annoy investors.

How many of you remember John Q. Retiree? He was that guy with his chest all puffed up one year, bragging about the 12% “Total Return” on his bond portfolio while he secretly wondered why he only had about 3% in actual spending money.

The next year he’s scratching his head wondering how he’s ever going to make ends meet with a total return that’s quickly approaching zero. Do you think he realizes that his actual spending money may be higher? What’s wrong with this thinking? How would the media compare mutual fund managers without it?

Wall Street doesn’t much care because investor’s have been brainwashed into thinking that income investing and equity investing can be measured with the same ruler. They just can’t, and the “total return” ruler itself would be thrown out with a lot of other investment trash if it were more widely understood.

  • If you want to use a ruler that applies equally well to both classes of investment security, you have to change just one piece of the formula and give the new concept a name that focuses in on what certainly is the most important thing about income investing — the actual spending money.

We’ll identify this new way of looking at things as part of “The Working Capital Model” and the new and improved formulae are:

  • For Fixed Income Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!
  • For Equity Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!

Yes, they are the same! The difference is what the investor elects to do with the spending money after it has become available. So if John Q’s Investment pro had taken profits on the bonds held in year one, he could have sent out some bigger income payments and/or taken advantage of the rise in interest rates that happened in year two.

Better for John Q, sure, but the lowered “total return” number could have gotten him fired. What we’ve done is taken those troublesome paper profits and losses out of the equation entirely. “Unrealized” is “un-relevant” in an investment portfolio that is diversified properly and comprised only of investment grade, income producing securities.

Most of you know who Bill Gross is. He’s the fixed Income equivalent of Warren Buffett, and he just happens to manage the world’s largest “open ended” bond mutual fund. How was he investing his own money during other interest rate cycles?

Well, according to an article by Jonathan Fuerbringer in the Money and Business Section of January 11, 2004 New York Times, he’s removed it from the Total Return Mutual Fund he manages and moved it into: Closed End Municipal Bond Funds where he could “realize” 7.0% tax free.

(Must have read “The Brainwashing of the American Investor”.)

He doesn’t mention the taxable variety of Closed End Fund (CEF), now yielding a point or two more than the tax free variety, but they certainly demand a presence in the income security bucket of tax-qualified portfolios (IRAs, 401k(s), etc.).

Similarly, the article explains, Mr. Gross advises against the use of the non investment grade securities (junk bonds, for example) that many open-end bond fund managers are sneaking into their portfolios.

But true to form, and forgive the blasphemy if you will, Mr. Gross is as “Total Return” Brainwashed as the rest of the Wall Street institutional community — totally. He is still giving lip service validity to speculations in commodity futures, foreign currencies, derivatives, and TIPS (Treasury Inflation Protected Securities).

TIPs may be “safer”, but the yields are far too dismal. Inflation is a measure of total buying power, and the only sure way to beat it is with higher income levels, not lower ones. If TIPS rise to 5%, REITS will yield 12%, and preferred stocks 9%, etc.

No interest rate sensitive security is an Island!

As long as the financial community remains mesmerized with their “total return” statistical shell game, investors will be the losers.

  • Total Return goes down when yields on individual securities go up, and vice versa. This is a good thing.
  • Total Return analysis is used to engineer switching decisions between fixed income and equity investment allocations, simply on the basis of statements such as: “The total return on equities is likely to be greater than that on income securities during this period of rising interest rates.”

You have to both understand and commit to the premise that the primary purpose of income securities is income production. You have to focus on the “Income Received” number on your monthly statement and ignore the others… especially NAV.

If you don’t agree with the next three sentences; if they don’t make complete sense: you need to learn more about Income Investing:

  • Higher interest rates are the income investor’s best friend. They produce higher levels of spending money.
  • Lower interest rates are the income investor’s best friend. They provide the opportunity to add realized capital gains to both the total spending money and total working capital numbers.
  • Changes in the market value of investment grade income securities, Yogi says, are totally and completely irrelevant, 97% of the time.

Wall Street’s Even Dirtier Little Secret

As of Close of Business May 8th, no less than 57 multi-year experienced, Taxable Income, Closed End Funds (CEFs) were paying 7% or more in 401k and IRA eligible income to their shareholders.

31 issues (54%) paid 8% or above, and the average for the Heinz-like group was 8.56%. All of these portfolios are professionally managed by this long list of well respected, long experienced, investment companies… their purpose is dependable income production.

Blackrock, Nuveen, Pimco, Putnam, Invesco, Alliance-Bernstein, MFS, Calamos, Eaton Vance, Deutsche, Pioneer, Western Asset Management, Wells Fargo, Flaherty & Crumrine, 1st Trust, Brookfield, John Hancock, KKR, Babson Capital, Allianz Global, Neuberger-Berman, & Cohen & Steers

The investment portfolios include all forms of Bonds, Preferred Stocks, Mortgages, Senior Loans, etc, domestic and global, high yield and normal…

How difficult could it be to put together a well diversified, retirement income portfolio? If you only knew…

Most of these funds have paid steady, dependable, income for more than fifteen years, even through the financial crisis… several have been around since the ’90s

Yet your financial advisor has probably never mentioned them to you as a viable alternative to low yielding income Mutual Funds or stock market dependant funds and ETFs… she probably isn’t familiar with them either.

The DOL (and other retirement plan “specialists”) have effectively banned these programs from 401k Plans, and it’s likely that you have never heard them advertised or even mentioned in the most popular financial newsletters…

One could conclude that Wall Street (even the CEF providers themselves) would prefer that you didn’t even know that they exist.

Now here’s “the rest of the story”: 

A May 15th data search at cefconnect.com reveals that nearly 90% of all Taxable/Tax Deferred Closed End Funds (CEFs) were selling below their net asset values (NAVs), and of those, 63% were available to all (yes, IRA and 401k investors, too) at discounts above 8%.

Income Mutual Funds (I believe) are never available at discounts from NAV, and how many discounted securities has your advisor suggested to you since 2012 or earlier? ETF prices, I understand, are manipulated by their creators to present within pennies of their NAV.

But tax-deferred/taxable CEFs historically sell at discounts as often as not, and this morning, nearly 62% of them were available to MCIM taxable, IRA, and self-directed 401k account investors at discounts of 7% and higher.

SO, WHY THE WALL STREET COVER-UP? 

And, why aren’t you asking for more information?

Wall Street’s Dirtiest Little Secret

As of Close of Business May 8th, no less than 53 multi-year experienced, Tax Free Income, Closed End Funds (CEFs) were paying 6% or more in federally tax free income to their shareholders.

18 issues (34%) paid 6.4% or above, and the average for the group was 6.35%. All portfolios are professionally managed by this dozen, well respected, long experienced investment companies.

Blackrock, Nuveen, Pimco. Putnam, Invesco, Alliance-Bernstein, MFS, Dreyfus, Eaton Vance, Deutsche, Pioneer, & Delaware Investors.

How difficult could it be to put together a well diversified, retirement income portfolio?

Most of these funds have paid steady, dependable, income for more than fifteen years, even through the financial crisis… several have been around since the ’90s

Yet your financial advisor has never mentioned them to you; you have never heard them advertised or reviewed in the financial press… Wall Street, it seems, would prefer that you didn’t know they exist.

But there’s even more to this story. These readily-available and much-higher-than-you’ve-been-led-to-believe-even-exist tax free yields can be purchased at bold discounts to their Net Asset Value, or NAV in Mutual Fund Terms.

A May 15th data search at cefconnect.com reveals that 85% of all Municipal Bond Closed End Funds (CEFs) were selling below their net asset values (NAVs), and of those, 20% were available to all investors at discounts above 10%.

Mutual Funds (I believe) are never available at discounts from NAV, and how many discounted munis has your advisor suggested to you since 2012 or earlier?

Municipal CEFs regularly sell at discounts, and this morning, nearly 60% were available to MCIM taxable account investors at discounts of 5% or more.

WHY THE WALL STREET COVER-UP?

Why aren’t you asking for more information?

Moving Target

Big international business or small local business – customers are at a premium and always considered a moving target. Know your client, know your customer and know your Canadian financial marketplace.

So what went wrong with the biggest North American big box mall maneuver ever? Target came in like a lion and left like a lamb. This was the biggest, and apparently the best, attempt to dominate an already vibrant retail market in Canada with one fell swoop. Like a powerful army with skilled and experienced generals alongside the most up-to-date equipment and technology. This massive show of force was readied to fight both established Canadian giants, known rivals and opposition forces with less time, money, patience and planning than required.

It’s been less than 2 years; don’t they know most businesses fail in the first two years. It’s unfortunate but we did call them through our sales department at MONEY® to do business. And none was to be found, hard to reach, no call back from Target head office lead them to a self serving, American style of advertising and marketing, and evidently to their demise.

Coming to Canada in a big way you need the support of ‘friendlies’, allies and ground troupes that know, understand and consistently work with Canadian’s as a different breed. Canadian’s love American football, baseball, Elvis, Marilyn Monroe and Mickey Mouse. But not everything made in the U.S. is a sure fire hit in Canada. Even the Excited States of America and other strong foreign brands will be surprised about our harsh land and simple, loyal people. It’s not so easy to be successful in anything, anywhere. There are some basics that we can all learn whether you are a well-branded box mall retailer or a mom and pop location.

Know your local Canadian and they will tell you for free, over coffee, what ever you want to know. It’s always a good idea to get advice. Good local advice and knowledge is usually proven to be wise and helpful to most foreign travellers and businesses. Enough said – there was always good, smart and local advice a bound but it wasn’t asked for nor taken. Heads will roll for this failure and retreat at the bunker and command centre in Minnesota.

How embarrassing! And at what cost to the giant retailer and the Canadian government that would allow such a thing. The next time a politician talks about jobs, jobs, jobs. Ask them how many jobs, if they are low paying, without benefits, part-time and how long will these jobs be around.

 

 
I understand the world is a small place after all, and they always said there would be more of a global economy, but this is indeed a strange story that takes place over 2 years and winds down in another year or so.

It may be studied in accounting and business courses in Canada over the next 10 years. Target moving leaves many Canadian’s out of work and with more questions than answers for now; like why and how could this happen and who really is culpable for this now North American business decision disaster.

The Canadian headquarters in Mississauga, Ontario where 800 mostly
full time American’s and Canadian’s worked is now on a skeleton staff with most of them in contingency roles helping to liquidate and wind down the companies affairs with a road map to exit Canada faster than they came in.

Target Corporation announced Jan. 15 that it was pulling out of Canada, less than two years after opening its first stores. Instead of turning a profit within a year as expected, the company has lost $7-billion.

It was supposed to be the Minneapolis based discount retailer’s first international expansion attempt. Canadian stores were run through
a wholly owned, indirect subsidiary called Target Canada Co. The Canadian subsidiary will be filing for bankruptcy in Canada or commonly known as Chapter 11 in the U.S. Target is to present a motion to the court in early February asking for approval to appoint a joint venture of liquidation companies to sell off the contents of its 133 stores across Canada.

According to the court documents, notices of termination have been sent to the vast majority of 17,600 employees – almost half of who work at Target stores and offices in Ontario. The head office in Mississauga is being operated with a reduced team focused on winding down the business in an orderly fashion. The liquidation is to be completed no later than May 15, 2015 but sales at some stores are expected to be finished as early as the end of March, according to the documents.

A few bargains will exist for consumers and liquidators over the next few months. The usual suspects and giant retailers are ready to celebrate and some of them spinning offers of more part-time and low paying jobs with few benefits and no guarantees.

Leading a company through market cycles

Those of us who work in business or are business owners should be well aware of the economy’s natural bear and bull cycles.

It can be argued that in today’s modern economy, with its built-in fail-safes and government oversight, the large boom and bust periods of previous centuries are a thing of the past.  However, as Brian Domitrovic writes in a wonderful Forbes article and as evidenced by the Great Recession, the modern economic era is still susceptible to market cycles.  That means that it remains pretty important for company leaders and business owners to intelligently plan ahead for when markets pull back and demand weakens.

I work in the offshore oil and gas industry and lead an energy services company that provides experienced engineers and personnel to oil and gas producers.  The oil and gas industry is one industry that in particular experiences boom and bust periods.  In fact, many will argue that with the drop in oil prices experienced over the past several months, the oil and gas industry is currently in a bust-type market.

There is little doubt that the lower oil and gas prices have had its effect on a range of oil and gas producers, particularly when it comes to revenue expectations coming into 2015.

(Tangentially, there’s a reason why I think the current price climate is for the short-term, as I explain in a recent article “Current Slump in Oil Prices a Short-Term Situation, Says WESI’s Blair MacDougall”.)

However, the point is that successful leaders, regardless if we’re speaking about the oil and gas industry or some other market, must financially plan ahead for when economic conditions become more challenging.  It’s an essential part of smart business management.  Companies which survive downturns in the economy can emerge much stronger on the other side.

In my line of work, when a challenging price environment begins, one of the most difficult things to do is parse out the emotions surrounding the change in economic condition versus the reality.  As has been the case in bear markets in the past, there’s a difference between reactionary emotions and what’s really happening in the industry.

For example, after experiencing a number of market cycles over the past twenty years in the oil and gas industry, it’s evident that when most large oil and gas producers begin exploration or production projects, they map these projects out under long-term time tables.  Given these producers’ fairly large financial resources and given the long-term timeline of their projects, a momentary drop in price is a consideration, but not necessarily a condemnation, on a long-term project path.

That’s not to say that mid to smaller oil and gas producers are not affected by a drop in oil and gas prices – of course they are.  But, headlines that exaggerate and make it appear that all or most oil production will stop until prices rise once more are false.

One other thing I like to keep in mind, and again this is specific to my industry but hopefully it can translate to other markets, is the fact that technology has made enormous strides in allowing oil and gas operators to do more for less.  Compared to ten or even five years ago, our ability to discover and successfully drill offshore oil patches for equal or less cost has improved dramatically.  This is evidenced in part with the oversupply currently being seen.

One of the more imaginative offshore drilling technologies that I’ve read about over the past several years is a development called a reservoir robot or resbot for short.  Those who work in the offshore industry know that one of the more difficult and costly things to do is manage an oil reservoir.  What’s even more difficult is accurately measuring reservoir conditions and what may be causing damage to it.

Nano technology has moved into a wide range of industries.  Reservoir robots are Nano-sized robots that can enter the rock pores of a reservoir and measure the reservoir’s conditions.  The technology is being produced by Saudi Aramco and I really look forward to seeing what will happen in the future with these resbots.

Either way, maintaining an eye on technology and how it can positively affect production and budget costs is in my mind essential.

In the end, from my experience, being able to adequately prepare a business for economic downturns comes from a deep understanding of the fundamentals of one’s industry and, moreover, an ability to separate media commentary from what’s really happening on the ground.

How To Be Prepared for Rising Interest Rates

I’ve seen a lot of discussions lately that erroneously conclude: “rising interest rates are something to be feared and prepared for” by buying short duration bonds or by liquidating income purpose securities entirely. Have they all gone mad!

A rising interest rate environment is super good news for investors… up to a point. When we loan money to someone, is it better to get the lowest possible rate for the shortest period of time? Stop looking at income investing with a “grow the market value” perspective. That’s not what it’s all about.

The purpose of income investments is the generation of income, and that goes for all forms of bonds, preferreds, government securities, etc. Control the quality selected, diversify properly, and compound that part of the income that you don’t have to spend. Bond prices are pretty much irrelevant since you spend the income and not the  market value.

Long, long, ago, many bonds were of the “bearer” variety; my father never owned any others. Each month, he went to the bank, clipped his coupons, cashed them in, and left the bank with a broad smile. If interest rates went up, he knew he could go out and buy new bonds to put larger coupon dollars in his pocket.

He had no reason to even consider selling the bonds he held — they were, after all, income purpose securities that had never failed to do their job. Market value never fluctuates (visually) if the securities are kept in the (mental) safe deposit box.

No, this is not at all what I’m suggesting to you as an investment… this is a mindset you need to embrace to become a successful income investor.

Even when your statement shows bond prices at chest-pounding wealth levels, the income generated hasn’t changed. And the profits your statement reports… really just another Wall Street illusion.

The thing dear old Dad thought about least was the market value of his bonds. This was his tax free retirement plan (one way or the other). He bought them for income, and the coupons were always redeemed without question. The only problem with the periodic decreases in market value was the inability to add to existing positions.

Before I move on to the simple solution to this non-problem, a word or two on the only real benefit of lower interest rates — there is none if you don’t already own individual, income producing, securities. If you own interest rate expectation (IRE) sensitive securities in a downward interest rate cycle, you will have the opportunity for what I call “income-bucket-gravy”.

This is the opportunity to sell your income purpose securities at a profit, over and above the income you’ve already banked. Income investors rarely are advised to do this, which is why they lament the thievery of higher rates. They didn’t sell at a premium, and now “actionlessly” watch the profits disappear.

This behavior achieves the lowest possible yields while pushing scared-silly investors into an overpriced market for short duration debt… the ultimate Wall Street “markup” machine, where brokers literally make more than bondholders.

The solution is simple, and has been used successfully for decades. Closed End Funds (scoff, laugh, and say “leverage makes them volatile” all you like) solve all the liquidity and price change problems… in a low cost, much higher income, environment.

Read that again, and again, until you get mad at your advisor.

Answer this question before you throw stones. Is 7% or more on a diversified, transparent, income portfolio, compounded over the past ten years and still growing income, better or worse than the 3.5% or less that most investors have realized in individual securities during the same time period… and then there are the profits that you never realized you could realize so effectively.

Of course CEF market values fell during the financial crisis, but at their peak in November 2012, they had gained nearly 18% per year since 3/9/09…. nearly outperforming the S & P 500. But speaking of “drawdowns”, what do you think the economic activity drawdown of near zero money market rates has been, particularly for “savings account” Baby Boomers.

Did the Fed’s messing around with short term interest rates help or hurt your retired relatives… really, think about it.

Rising interest rates are good for investors; so are falling rates. Fortunately, they routinely move in both directions. They can be traded quickly for exceptional results from “stodgy” income CEF portfolios.

So much for Total Return, short duration, and leverage-phobic thinking.

What if you could buy professionally managed income security portfolios, with 10+ years income-productive track records? What if you could take profits on these portfolios, for a year’s interest in advance, and reinvest in similar portfolios at higher yields? What if you could add to your positions when prices fall, increasing yield and reducing cost basis in one fell swoop?

What if you could prepare for retirement with such a powerful income engine?

Well, you ca do all four. but only if you add both higher and lower interest rates to you list of VBFs.

Can’t attend the next Income investing Webinar? Contact Steve Selengut for a FREE video.

I Want Tax free Income

The LinkedIn discussion considered ROTH vehicles invested in equities and “cash value” Life Insurance as two ways to obtain Tax Free Income… something was missing.

Why not buy tax free muni bonds in the form of Closed End Funds (CEFs)…. more than 6% tax free, in monthly increments, plus the opportunity to take profits (taxable, yes) and compound the income until it is needed. Or spend it right away, for that matter.

The vast majority of Tax Free CEFs continued (raised even) their monthly payouts during the financial crisis, and no payments were missed.

ROTHs have a “lock up” period, and cash value life insurance…. someone please tell me how this provides tax free income and when.

If left in the ROTH vehicle, should one still be buying equities? or investing in income producers?

Experienced, taxable CEFs pay in the 7% to 8% range right now… and seemed to be financial crisis proof in 2008 through 2010.

Growing income portfolios is my business… can’t be done nearly as well with funds and insurance policies. For over 6% tax free income right now, create a diversified portfolio of tax free CEFs.

Yes, market value fluctuates, but with little or no impact on income production. I want tax free income too… and this is how I get it, both personally and for my managed portfolios.

The principles explained in this video webinar are equally applicable to the Tax Free Income building portfolio:

https://www.dropbox.com/s/b4i8b5nnq3hafaq/2015-02-24%2011.30%20Income%20Investing_%20The%206_%20Solution.wmv?dl=0

Please Mr. Obama, Lend Us Your Crystal Ball

The President wants the DOL to fine professionals who make money allowing 401k participants to make “bad” investments.
—————————————————-
So what’s the difference between a “bad” and “good” investment? Right, well in the Will Rogersian world of politicians and regulators, “the good ones only go up in price; the bad ones go down”.

“Don’t gamble; take all your savings and buy some good stocks and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” WR

Plan sponsors and other financial professionals are supposed to know which ones will go in what direction… and NEVER (as Will would admonish) buy a security that is going to go down.

“Where have all the crystal balls gone? Gone to hindsightful regulators, all of them.” PP&M, sort of.

POTUS wants investment advisors to only select the “good ones”, and they are expected to know in advance where the market may be going, in both the short run and the long. And getting paid for their efforts, well that can’t be “good”, especially when the market value goes down.

Remember, “advisors” are mostly salespeople; regulators are mostly cops.

Do any of these guys have a clue about the workings of the stock market? Which is worse: having the foxes (advisors) in charge of the hen house (401k investment (not pension) plans), or having the lunatics (politicians & regulators) running the asylum (stock market expectations)?

Both are bad, unrealistic, and counterproductive. Markets rise and fall in price… the advisory deal is to limit the amount of risk in a portfolio. Risk of loss is always involved, but it can be minimized… regulators just don’t really get it.

Participants need to be educated not coddled; costs are not the most important aspect of retirement investing, net spendable income at retirement is; stock market values will always go up and down… and that’s a good thing.

If 401k participants are expected to be retirement ready, they need to know the importance of growing income and to have investment options that can get the job done.

I’m not sure that can be accomplished in the current 401k space, but the education has been available for a long time… and it can be applied fairly easily in a “self directed” 401k environment.

And that, Mr. President, is all you should be lecturing the investment advisory community about. If a plan participant is too lazy, busy, greedy, or preoccupied to determine “what’s inside” an investment option, it is not the fault of his or her employer.

The education is out there: just read The Brainwashing of the American Investor

… and here are two Self Directed IRA or 401k income investment presentations for you to think about. 

Next Webinar April 8th

To Rollover 401k Plan Assets or Not To… That Is The Question

The major purveyors of 401k products, and those who benefit from using them remind me of politicians… they press the party line, and use their power to demonize the competition.

Their position and deep pockets allow them to get their message out while we who have neither can only shake our heads and whimper about the sacred purpose of retirement income programs.

But, in the simplest of terms, since when has 2% been better than 6% (both after expenses)? The DOL, fiduciaries, and plan sponsors are staring back at me, eyes wide shut.

LinkedIn discussion groups have been talking about the pros and cons of 401k rollovers to private IRA portfolios. Most of the articles, and not by a slim margin, are institutionally biased advertisements for low cost Mutual Funds and ETFs, despite the fact that have absolutely no “preparation for retirement income bones” in their mass marketed bodies.

When the market corrects, the results will be what they have always been for market-value-growth-only programs. This time though, the DOL will fine the Plan Sponsors (i.e., the corporations so bitterly hated by our government), for allowing plan participants to make investment judgment errors with their own money plus the matching contributions…. let hindsight reign in the 401k space!

The 401k “space” as they call it, has become a lucrative product shopping mall, totally out of touch with what should be the long run purpose of these “quasi” retirement programs: it’s the monthly retirement income that pays the bills, Charlie Brown, not the market value.

If a person were a conspiracy theorist, he or she could make a case for institutional/congressional manipulation of interest rates… keeping them near zero so that gurus will continue to predict that stock market “returns” will outpace those of income purpose securities. Hmmm.

None, absolutely none, of the products provided by the top institutional peddlers produce nearly as much after “expense-ratio” income as Closed End Income Funds. These outstanding (and income paying far longer than any income ETF) managed portfolios are never, ever, found in 401k Plans… except the Self Directed, “safe harbor” variety.

Interestingly, all the major 401k product providers, also manage Closed End Fund product lines that generate generous income, even after higher fees. These fees, so important to regulators and politicians, are never paid by the recipients of the much higher income.

CEFS paying 6% to 9% after expenses are commonplace, but not available in 401k plans. Similarly, there are no restrictions on speculation in the equity markets, where similar high quality managed equity portfolios have been available for decades.

The retirement plan (401k) community has gotten so paranoid over goose-stepping DOL auditors and other regulators armed with crystal clear hindsight, that they have completely lost site of “spending money” as the be all and end all purpose of retirement portfolios. They must “outperform” half their brethren, and be dirt cheap to boot.

Yeah, I know that 401k Plans are not retirement portfolios, but neither the regulators, plan sponsors, congressional leaders, POTUSs, fiduciaries, or plan participants seem able or willing to accept that reality… why should they?

Looking inside the multi-billion dollar Vanguard 2020 TDF, we find 60% invested in equities (no less than 7000 individual positions) and income of about 1.5%. Wake up regulators… the “unfairness” is in the “emperor’s new clothes” products provided to the plan sponsors for inclusion in employee product menus.

You the fiduciaries, you the regulators, you the witch hunters, and you the do-gooders need to look at the product providers instead of their victims.

If you insist upon looking at investment plans as retirement programs (ERISA = Employee Retirement Income Act), perhaps you need to mandate that an outside-the-mainstream, “Self Directed”, income program be a major part programs you supervise. Until the focus changes from market value and expense control to after expenses income, these plans cannot provide what is expected of them… retirement readiness.

So in answering the “To rollover the 401k or not to rollover the 401k” question, I would say: “Run like _ _ _ _, just as fast as you can, to get out of that 401k and never ever buy a low income or no income security in the Rollover IRA you move to.

As long as plain vanilla portfolios of high quality equity (IGVSI companies) and Income CEFs yielding an experienced average, net/net 6% or more, are banned from participating in the 401k marketplace by (possibly) illegal monopolistic practices, rollovers to IRAs should be a requirement, not an option.

See how they run: https://www.dropbox.com/s/b4i8b5nnq3hafaq/2015-02-24%2011.30%20Income%20Investing_%20The%206_%20Solution.wmv?dl=0

As long as regulators are blaming generous employers for the investment mistakes of their employees, self-directed, income purpose, 401k plans are a much less scary, “almost a retirement plan”, option.

Dodging the DOL Chainsaw: Small Business Owner Protection

The DOL is Coming!   The DOL is Coming!

As if you weren’t already up to your elbows in rules, regulations, and expenses, the Department of Labor has empowered itself to fine at least half of the Employer/Plan Sponsors it audits… for multiple investment related reasons.

These include, among other things, the cost of the products in your investment menu and the market value performance of those products. As a plan fiduciary (right, you are a plan fiduciary), it’s your job to keep costs below average and performance above average…. and, yes, you are deemed responsible for your employees private investment decisions… no matter how foolish.

Hardly seems fair, does it. You give them money to invest, and you’re too blame when they mess up.

But, true to form within the 401k “space”, no one (other than the plan participants) seems to care about the retirement income benefit that 401k plans should provide to employers and employees alike… not even the DOL, ERISA champions of the interests of employees.

Since roughly half the plans will always be below average, it’s fair to expect that large numbers of plans will be fined….

In fact, 70% of plans audited in 2013 were penalized or forced to make reimbursements. Neither ETF providers nor Mutual Fund promoters share this responsibility with you, and all of this stress is on top of the “top heavy” problems you deal with year, after year, after year…

You may be able to protect yourself from the fines and the “top heavy” audits in one fell swoop by switching your plan to a professionally-managed-by-a-fiduciary, self-directed 401k they call a “Safe Harbor” Plan. In this type of plan, there is no menu of one size fits all products, none of which focus on income purpose investments that support the ultimate benefit of the program.

You see, the goal of the providers is to keep your money in their funds forever, hoping for upward only markets and their ability to convince you that you just can’t do better than 2% income anywhere. That’s the 401k space “end game”, but you can do much better, and considerably safer in a… “Safe Harbor”, managed growth and income program…

In the self directed, private portfolio “space”, you can require the safest equity selections, and growing retirement income, in a flexible asset allocation geared to the age and risk profile of each participating employee. Employees don’t have to participate, but you have to provide an immediately vested matching contribution if they do…. BUT, the top heavy problems disappear, and your contribution levels have no backdated limitations.

Not so long ago, I brought a QDI (Quality, Diversification, and Income) portfolio series to the 401k space. None of the product pushers were even slightly interested in any facet of the program… not even the superior retirement income generation capabilities… the “good ‘ole boys club” just couldn’t be bothered.

With the stock market at the peak of a six year sustained rally, what protections do you have from a correction? In the managed programs I’m describing, equity profits have already been taken, and the income keeps growing… monthly, in most cases. The Target Date Funds 401k providers are in love with are low quality equity, seriously low income time bombs, ready to go… KABOOM!

The Vanguard 2015 Fund, for example, was 50% invested in no less than 5,000 stocks at the end of January 2015; the total portfolio income was just barely 2%. What do you think the 2020 or 2025 portfolio looks like?

Here’s a look at the workings of a professionally managed retirement income program: a high quality, individual security, 30% Equity portfolio, generating three times the Vanguard 2015 TDF income, with a whole lot less risk:

https://www.dropbox.com/s/28ty6z5dkgn5ulu/Retirement%20Income%20Webinar.wmv?dl=0

Hmmmm, Small Business Owners, seems to me that would resolve your fiduciary issues.