Should I Contribute to the Retirement Plan at Work? (Part 5)

Up to now, we’ve focused on why you might want to put some of your paycheck into your 401(k) or other workplace retirement plan. Now, let’s turn to the question of what you should select inside the plan.

In Part 2, I mentioned that some workplace plans allow you to set up a self-directed brokerage account within the plan. I also warned against going that route without a dependable trading/investing system, whether it be (a) a system you developed yourself, (b) a professional who advises you on what to buy and sell and when, or (c) a professional who manages the money for you. Well, this might be a hard pill to swallow, but even if you stick with the plan’s core menu of investment choices, you still need a dependable system for managing your investment selections. And that’s not something you can expect the plan to provide for you.

Let’s suppose that when you first enroll in your workplace plan and you have to select the funds your money will be invested in, you just go with the default setting. A great many people do this, because they don’t feel confident in their ability to choose on their own and they don’t know where to turn for guidance. Well, that default selection will typically be what’s called a target date fund or lifecycle fund. This is a fund that starts off invested mostly if not entirely in stocks, but over time, as the fund’s target date gets closer, it gradually shifts money from stocks over to bonds. The basic idea behind this is as follows: the target date represents the date you’ll retire, and by gradually shifting from stocks to bonds, you get to enjoy the potential for higher returns on your money in your younger years (when you can afford to take on more risk, because you have more time to recover from drops in the fund’s value), and then as you get closer and closer to retirement, your money is placed in a safer position (because bonds generate cash flow and don’t fluctuate in price as wildly as stocks do). Sounds good on paper, doesn’t it? Unfortunately, the reality has fallen fall short of that vision. Before I can explain why, I need to provide an additional piece of info: the target date is usually a year ending in either 0 or 5 (2020, 2025, etc.). Why is this fact significant? Well, when the stock market crashed in September of 2008, the 2010 target date funds were less than 2 years out from their target date. Given that fact, you’d expect them to have been well-insulated from the crash. But were they? To cite a couple of examples: from the top of the market in late 2007 to the bottom of the crash in early 2009, the T Rowe Price 2010 target date fund (ticker symbol: TRRAX) went down by around 36%, while the American Funds 2010 target date fund (ticker symbol: AAATX) went down by around 38%! (You can verify these figures by plugging in the respective ticker symbols on Morningstar.) And both T Rowe Price and American Funds are among the cream of the crop of the mutual fund industry! Granted, neither of these drops in value were as bad as what the stock market as a whole experienced over that time frame, but still: after a fall of 36%, you need to earn 56.25% just to break even! And to earn that much in less than two years? Even if the fund were to invest entirely in stocks, which would be a flagrant violation of the mandate for a target date fund so close to its target date, it would still be a long shot. (As a matter of fact, it took both TRRAX and AAATX a little over three years to break even.) Now, imagine that you were planning to retire in 2010 and all your money in your workplace retirement plan was invested in one of those 2010 target date funds. (Some of you reading this might not have to imagine.) How would you feel about this situation?

The good news is that there’s a low-cost alternative to leaving your money in a target date fund, or choosing other funds in the plan without knowing what you’re doing. A company by the name of Howard Capital Management offers a pair of services geared towards participants of workplace retirement plans: the 401k Optimizer and the TSP Optimizer. (Note that the former works for 403(b) and 457(b) plans as well as 401(k) plans.) Here’s how these services work. You sign up online and create a profile so that they can personalize their recommendations to you. You should also submit a current list of investment choices in your plan. (If they’ve provided advice on your employer's plan to other clients before you, they’ll already have a copy of the plan’s menu of investment choices, but there’s always a possibility of their copy being outdated, so I recommend you be proactive by sending in a copy you know is up-to-date and then forwarding any future updates.) Once they have the list of investment choices available to you, they’ll analyze those choices and notify you by email when their recommendations for you are ready. It’s then up to you to implement those recommendations in your account, but they make it very easy. Then, every quarter going forward, they’ll reanalye the investment choices in your plan to see if their recommendations need any tweaking. But if anything changes at your end, like if you decide you want to grow your account more aggressively or there've been changes to the plan’s menu, just submit the relevant info and they’ll update their recommendations for you.

(Photo by Johannes Plenio from Pexels)

Another situation in which Howard will send you an updated set of recommendations is in response to a signal from the HCM-BuyLine, which is their proprietary gauge of the level of danger present in the stock market. When the Buyline signals that the market may be headed for serious trouble, the updated recommendations will be designed to position you defensively, and then when it signals that “the coast is clear”, the updated recommendations will go back to "normal" (in line with your profile). I don’t know of any other service that provides this level of sophisticated advice to help you get the most out of your workplace plan. Some of you may be thinking, “That sounds like market timing, which ends up making you less money than just rolling with the stock market's punches.” Well, in my experience, when people criticize “market timing”, they mean “trying to buy stocks right when they’re at their cheapest and then sell them right when they’re at their most expensive”. I’ve never heard of anyone being able to pull that off that consistently (and it’s certainly not something I try to do myself). But that’s not what the Buyline is about. he Buyline is about trying to get out of the stock market when a dangerous downtrend has been confirmed and is still in its early stages, and then get back in when a new uptrend has been confirmed and is still in its early stages. The idea is to miss as much of the downtrend as possible (to preserve money and help you not to freak out) while also missing as little of the subsequent uptrend as possible. If you think that’s a pointless exercise, click here. What you’ll see is a demonstration of the Buyline’s track record. It shows a chart comparing the results you would've gotten by holding SPY (an exchange-traded fund, or ETF) from the end of 1996 up to the present, versus the results you would've gotten by holding the same fund over the same time frame except for those periods when the Buyline signalled for you not to be in the fund. (Those aren’t backtested signals; they’re actual historical signals triggered by the Buyline over the course of that period.) As you can see, following the Buyline would’ve saved you money by minimizing your exposure to the two worst stock market crashes since the 1930s: the crash of 2000-02 and the crash of 2008-09. And it’s not as if the Buyline gets spooked easily, telling you to bail every time the stock market has a down day. For example, as of this writing (September 24, 2018), the last time the Buyline signalled to take a defensive position was on January 17, 2016, and even then, it didn’t signal to exit the stock market completely. Which is a good thing, because as early as March 6, 2016, the Buyline confirmed that we were in a new uptrend and gave the “all clear” signal. Going forward, there’s no way of telling how steep the next stock market crash will be, but the Buyline can boost your confidence in your ability to weather the storm. I should point out that SPY is the ticker symbol (the symbol you use to tell your online broker to buy or sell something on your behalf) for a fund that’s designed to mimic the S&P 500 index (a group of stocks that’s widely used as a gauge of the overall U.S. stock market). However, on that same webpage, you can plug in the ticker symbol for any ETF, mutual fund, or individual stock available in the U.S. to see how the Buyline could’ve helped you with it in the past. Now, if you’re still not convinced of the Buyline’s value, then guess what? You’re free to ignore it! At the end of the day, all Howard can do is advise you; It’s up to you whether or not to follow their advice. And how much does that advice cost? Try $79 a year!

Note: If you have a variable annuity or variable universal life insurance, the 401k Optimizer can help you manage your investments there as well.

Links to other parts:
Part 1
Part 2
Part 3
Part 4