New 401k Approach Focuses on Income Production and Correction Preparation

401(k) Savings Plans are great opportunities to build wealth, but they are not guaranteed pension programs and there are pitfalls. What if you are forced to retire at the bottom of a market cycle, or at a time of historically low interest rates?

Qualified or not as an investor, you have to make your own 401(k) investment decisions. Eventually, you will have to either (a) create your own income portfolio or (b) enter a contract where 95% (+ or -) of your assets, plus interest, is returned to you monthly... and the whole "nut" is gone when you are.

Most 401(k) plans are product based, and the products are designed to grow in value with varying degrees of risk. As you get closer to retirement, you may (and should) choose lower risk investment products. The idea is appealing, but it has little if any focus on developing spending money. Lower risk doesn't mean higher income... and big market values don't pay the bills nearly as well as a growing stream of income.

Would it surprise you to learn that the "Target 2015" Fund of a very popular, low cost, provider is 52% invested in stocks and 48% invested in an income portfolio yielding less than 2%. The holdings are posted on line... 

What if you could, from the get-go, invest your monthly contributions in a medium that is designed to be less risky than average while it focuses on growing the income produced by the portfolio throughout your total investment "Life Cycle"?

What would be inside such a program that makes it different from the collection of well meaning "passive" ETF derivatives and open end Mutual Funds that you can choose from right now?

The following two "technical" paragraphs are mainly for investment professionals:

ETFs have become more and more popular as it has become more and more clear that mutual fund managers rarely match the performance of their "index" benchmarks. Without even explaining why (of course they know why), Wall Street went out and commissioned the development of a high tech, high hindsight, and high science theory that eliminates the need for managers completely. MPT, or Modern Portfolio Theory, takes "The Emperor's New Clothes" to levels never before imagined.

With correlations, standard deviations, Alphas, Betas, and Crapas, they can predict the future, smooth the curves of the market cycle, and bring peace to the Middle East... and all at a lower cost than the poorly managed mutual funds. Yet they (the Wall Street product vendors) continue to sell the same funds, employ the same managers, and well, ROTF-LOL*.

Professionals should also note that Wall Street (secretly) solved the "managed by the Mob" nature of Mutual Funds years ago, and without the doctoral level mathematics. Simply put, MPT was not developed by experienced investors... or for them.

Mutual Fund managers can't beat the averages because the managers must do what unit holders tell them to do. They can't buy low and sell high, and they must buy high and sell low --- not what you would call a winning (or index beating) combination. What do you think will happen to ETF prices when there is a correction? Are they any different, even without a manager? Inertia is inertia.

Since there are more indices and mutual funds than there are securities inside, will they fall faster or slower than a market index in a correction? We're going to get an answer real soon. In the meantime, it is my "academic" opinion that a sanely managed, properly diversified, growth & income, two asset class only, high quality, income paying security based, managed portfolio will beat the averages every time when looked at under a "market cycle" microscope.

What if your 401k could "hire" an independent manager to choose equities from a universe of Investment Grade Value Stocks and a handful of well known foreign multinationals. Less than 400 issues meet the exacting price, income, dividend, and profitability standards... you would be familiar with most of the companies.

In bubbly markets, select REITs and MLPs could be used for greater equity income, diversification, and downside protection.

Every security in the portfolio, growth or income purposed, would pay investors for the use of their money. In the income portion of the portfolio, managed individual security income ETFs are used almost exclusively (because the DOL would find CEFs too expensive) . Base income is compounded through the use of "cost based" asset allocation. 

Plan Sponsors could obtain statements showing the content and asset allocation of the portfolio, pretty much on demand.

These "On Target" MCIM portfolios are unique in several ways: Annual "base income" growth is assured through "cost based asset allocation". Every dollar earned and every dollar deposited is invested based on the total cost of the securities and cash in the portfolio... not on their market value.

This process puts the focus on growing retirement income in much the same way as the "old and ancient" pension programs did --- before they became MPT speculation depositories.

In addition to the investment grade, dividend paying nature of the equities, and the income growth technique, these portfolios can hold cash uninvested when limited equity bargains are available... they are correction ready at market highs.

And finally, these "old fashioned", quality and income focused programs can be duplicated (security by security) when the participant leaves the plan, generating the same income as the fund itself in a privately managed rollover portfolio.

Actually, the "roll out" portfolios would have higher yields because income CEFs would again be eligible.

MCIM portfolios have been available in personal portfolios, and small business 401(k) plans, for decades; they are now available for all trusteed retirement/savings plans..