Gold 401K

Gold Roth Ira Ing
Gold Roth Ira Ing

ETF’s are increasingly popular but have had little exposure in 401K plans. However, their low expense ratios are very appealing as is their liquidity or lack of restrictions. The final measure of success of a plan is the risk adjusted return. In order for this to be achieved, the plan must have good funds in a variety of asset classes. In a previous article we established the benefit of having four or more (six is desirable) asset classes represented.

Sharebuilder from ING Direct offers 401(k) plans for any office size from one person shops to growing business with 250 or more employees. They offer five model portfolios from Stable to Aggressive. In this instance, the balanced portfolio was selected.

The balanced portfolio as of July 2010 comprises:

US Equity 52%

International Equity 3%

Bonds 45%

Compare this with a five asset class portfolio. With a moderate rating (bonds 40%), this is similar to the balanced moderate model portfolio. There are two strategies that will be compared: Strategic Asset Allocation (SAA) which is buy and hold the portfolio with only occasional rebalancing. Tactical Asset Allocation (TAA) which dynamically alters the asset allocation depending on market conditions.

SAA portfolio

US Equity 15.00%

International 15.00%

Emerging Market 15.00%

Real Estate 15.00%

Bonds 40.00%

The TAA portfolio changes with market conditions and as of July 2010 comprises

US Equity 0%

International Equity 0%

Emerging Market 0%

Real Estate 29.00%

Bonds 71.00%

The Tactical Asset Allocation strategy is heavily weighted towards bonds as a reflection of the current volatility in the market. The asset class weightings change on a monthly basis depending on the price momentum of each of the asset classes.

The five year historical annualized returns for each strategy were:

Balanced 3.36. %

SAA 5%

TAA 10%

Each of the portfolios exhibit different returns performance. It should be noted, however, that 401K plans are long term in nature and so the 5 year AR is a reasonable timeframe over which to evaluate the portfolios.

Takeaways

• 401K plans based on ETF’s are available and provide a low cost and effective retirement alternative

• Increasingly ETF’s play a central role in retirement plans. You should push your benefits department to increase the number of ETF’s in your plan.

• Having five asset classes delivers better results

• While there is continued volatility in the market, a dynamic portfolio clearly improves returns

• Retirement is for the long haul and so it’s important to build the right portfolio based on the longer term returns.

Simon Napper is President and Founder of MyPlanIQ.

MyPlanIQ the only provider of advanced investment strategies totally customized to personal risk profile and plan funds.

This allows retirement plan participants (IRA, 401K etc.) to automatically build and manage portfolios that professional wealth managers use — but for free or at a fraction of the cost. The result will be improved returns and lower risk.

Simon was an early user of the system during its development and uses it for his retirement accounts.