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.

401k Drawdown… OMG

“Drawdown” has become the most feared word in the 401k vocabulary, just as “Total Return” has become the most worshipped phrase. OMG, how will plan participants be able to retire if their portfolio market values stop rising!

“Well, yeah,” you might say, “isn’t that what investing is all about. If you’re in the right sectors and the right funds, your drawdown will be minimized.” Well , yeah, that could be a viable drawdown minimization scenario if we had a crystal ball that could identify the “right” vehicles.

We don’t, and a litany of supportive sector correlation statistics just doesn’t change the basic facts of investment life that still are referred to respectfully by some as the “Market Cycle”.

Can you remember how easy portfolio management once was, simply by applying basic “QDI” principles to portfolio content selection and profit taking disciplines? It was a time when navigating an investment portfolio through the unpredictable, cyclical, undulations was indeed, a labor of love and respect for economic fundamentals… with strategies based on cyclical realities.

MPT charlatans, with “Frankensteinian” creativity, have transformed text-book-defined speculation into a passive sector-timing process based on probabilities… games of chance yet to be tested through any form of market correction.

In a program with no promise of income and no concern for fundamentals, is it any wonder market value drawdown is so feared.

Place today’s ETF and Mutual Fund equity content into the three Major Meltdowns of the past 30 years, and it’s likely that you’ll see the very same drawdown numbers… or worse, because of the artificial demand for a finite supply of real securities.

Drawdown happens; corrections are inevitable. The same MPT hocus pocus that, theoretically, is placing 401k dollars in the right sectors is, perversely, exacerbating the problem by blowing up the highest security price balloon ever, even higher.

Keep in mind as well, advisors and fiduciaries all, while we wonder at the brilliance of those who have created this ethereal (surreal), market fantasy land, that it is they (not you and I) that wield the fatal “pin”.

When the bubble bursts, remember these thoughts:

Drawdown minimization is accomplished by: investing only in “investment grade”, high quality, securities (fundamentally speaking); then diversifying among them sensibly within two “purpose delimited” security buckets; and regarding realized “base income” as the primary purpose of the income allocation and the secondary purpose of the equities.

With strict buy, hold, and reasonable profit-taking disciplines governing portfolio operations, drawdown minimization, continual income growth, and rapid recovery is virtually a sure thing… a sure thing that isn’t possible in a 401k environment that has kicked fundamental quality and income growth principles to the curb.

Your (401k) Investment Portfolio: What’s Next

Seven years or so ago, the broad market tracking S & P 500 Index inched past the much higher quality, dividend paying NYSE equity only, Investment Grade Value Stock Index (IGVSI) for the first time in the 21st century. Income Closed End Funds began their Financial Crisis enhanced decline a few months earlier.

Four years ago, the IGVSI had surpassed its 2007 high while the S & P 500 languished significantly lower. Three years ago, both the IGVSI and Closed End Income Funds were ahead of the S & P 500. Two years ago, the index of income CEFS and the IGVSI were above 2007 levels; the S & P 500 was not.
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Twenty seven years or so ago, all of the market averages established new all time highs through the middle of August, went boring for about two months, and then crashed spectacularly in an hysterical, short-lived, free fall. Income securities had been beaten down by rising interest rates for a year or more, but rallied when interest rate cuts were used to help reverse the market tailspin… there were few income CEFs at the time.

Twenty six years or so ago, the high quality stocks + 30% or more income purpose securities asset allocation formula had totally erased the crash, while the S & P struggled about 3 years to regain August ’87 levels.
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Seventeen years or so ago, a stock market correction ended, and the greatest ever “no value-at-all” stock market con game began. NASDAQ equities, and a dozen or so high tech components of the S & P 500, led the lemmings over the dot.com cliff while most high quality equities were discarded irreverently. The NASDAQ remains below turn of the century levels.

There was no interest at all in anything that produced income, tax free or otherwise.

Fourteen years or so ago, while many of the most popular mutual funds went belly-up, IGVSI components and closed end income funds + other income securities again proved to be a viable growth and income formula, as they pushed MCIM (Market Cycle Investment Management) portfolios to new highs while nearly everything else was pummeled.
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Beginning to see a pattern here? What’s in your wallet?

Study this chart of the past seven years (www.sancoservices.com/MCIMvsSP500.xls). Then insert the three major meltdown scenarios (and recoveries) sketched above. All three were different, but the safest path through them was the same.

Today, we have thousands of, MPT-spawned, derivative speculation machines, creating equity valuations that are just plain ludicrous in the face of all that is wrong with the economic environment. There are similarities to both the 1987 “crash” and to the “dot com bubble”… it’s just a matter of time, and too few of you (and your 401ks) are prepared for the inevitable.

It’s time to take your profits and run… run as fast as you possibly can… to a safer and historically proven, long term focused, working capital growth and income production machine.

Just ask the “investment shadow”, or your advisor, to help you find it.