Kellogg Old Style 401K -- Good Funds -- Not Enough Diversity

04/22/2011 Share 0 comments

Spring is here and summer isn't far away -- where does the time go? Already this year we have seen uprisings, natural and man made disasters, Tax season has come and gone and the Royal Wedding is everywhere and will soon be gone. How many of our New Year's resolutions are still intact? The tyranny of the urgent may tempt us to delay until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it has becomes a "hair on fire" problem.

The problem is that we can easily be overwhelmed and shut down. The way to solve this is to focus on what works in the long term -- that is what long term investing is all about -- and allow that to filter out what may work in the short term but won't stand the test of time.

We continue to examine different portfolios to see what we can learn and use to further our investment portfolios. Today we look at the retirement plan from the venerable Kellogg company.

Kellogg 401k Plan's 401K plan consists of 9 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.

We contrast this with our Six Core Asset ETF Benchmark's benchmark plan which consists of 6 funds. These funds enable participants to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.

As of Apr 21, 2011, Kellogg 401k Plan investment choice is rated as average and Six Core Asset ETF Benchmark investment choice is rated as average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:

Both plans are simple -- having between six and nine funds. The lack of funds in the benchmark plan will be compensated by its breadth of diversification. We would expect the Kellogg plan to do well when US and international equities are doing well as they have great funds. However, when help is needed from other asset classes -- commodities and real estate for an example, the benchmark plan should win out.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

Performance charts (as of Apr 21, 2011)

Three Month Chart

Over three months, the plans are running neck and neck. The richness of the US equity choices in the Kellogg plan offsets the lack of commodity, real estate and emerging market equities that are shoring up the weakness in international equities.

One Year Chart

Over a year's period, we see that the Kellogg TAA plan is struggling -- all three asset class TAA plans have struggled over the last year as there hasn't been a strong trend. The six asset class benchmark is the leader with strong contributions from many of the asset classes.

Three Year Chart

Once we see the impact of the sharp downturn that caused our current problems, you can see the benefit of a TAA strategy -- moving to cash means that you avoid many of the losses. However, without additional asset classes, the buy and hold strategies can catch up as the economies rebound. Note that the six asset class is still the leader.

Five Year Chart

Over the longer period, it's possible to see where the broader asset class exposure in Real Estate, Emerging markets and commodities can bring more to the table and help improve returns.

Performance table (as of Apr 21, 2011)

Currently Commodities, Emerging Market and Real Estate are doing well. But these asset classes are not available to Kellogg 401k Plan participants. Fortunately, US equities are also doing well and that is what brings reasonably strong returns to the portfolio in the short term.

To summarize, Kellogg 401k Plan plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on US Equity and Foreign Equity funds. With either plan, augmenting a retirement portfolio with emerging market equities and commodities will provide better diversification and likely higher risk adjusted returns. As inflation seems like a near certainty, commodity exposure becomes increasingly important.

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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