09/12/2011

We review Southwest Airlines Co 401K Plan.

Southwest Airlines Co. (LUV) operates as a passenger airline that provides scheduled air transportation in the United States. As of December 31, 2009, it operated 537 Boeing 737 aircraft and provided service to 68 cities in 35 states. The company also sells frequent flyer credits and related services to companies participating in its Rapid Rewards frequent flyer program, including car rental agencies, hotels, restaurants, and retail locations. Southwest Airlines Co. was founded in 1967 and is headquartered in Dallas, Texas. The company is one of the best managed airline companies in the U.S.

The plan consists of 11 funds.  They cover 3 major assets: US Equity, Foreign Equity, Fixed Income.

Excluding the 6 target date funds, there are only 5 individual funds for participants to make their own asset allocation.

As of Sep 9, 2011, this plan investment choice is rated as below average based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

Diversification -- Rated as below average (15%)
Fund Quality -- Rated as above average (71%)
Portfolio Building -- Rated as below average (20%)
Overall Rating: below average (34%)

The 5 individual funds are ranked reasonably well. However, lack of diversification coverage has serious impact on how a participant can do in portfolio management and risk management.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 3 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Foreign Equity: EFA or VEU
Fixed Income: AGG or BND

Performance chart (as of Sep 9, 2011)

Performance table (as of Sep 9, 2011)

Currently Commodities, International Bonds and Fixed Income are doing well. Only Fixed Income is available to Southwest Airlines Co 401K Plan participants.

To summarize, diversification and proper risk management are the two major key factors in 401k investing. Southwest Airlines should extend its fund choices to allow plan participants in Southwest Airlines Co 401K Plan  to achieve reasonable investment results using portfolio management and risk management strategies for their 401k investments.

Symbols: LUV, SPX, VTI, VEU, BND, PTTRX, HACAX, CEUFX, VINIX, 401K Investments, Retirement Investing, Portfolio Management, Asset Allocation, Risk Management

Disclaimer: 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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02/27/2011

We have already examined the Morningstar 401K plan. We explained why it is a model of plan creation - providing a manageable number of funds with broad asset class exposure that enables portfolios that can deliver solid returns. We also provided an ETF clone which enabled portfolios that underperformed the original.

Performance chart (as of Feb 25, 2011)

Performance table (as of Feb 25, 2011)

The chart is a little misleading as the ETF Clone has fewer choices until recently because of the newness of the ETF funds. If we look at the table and consider just the five year return figures we can see that the strategic asset allocation returns are similar but there is an additional 3% garnered from the original.

This has prompted further analysis of the funds which we present here.

We tracked returns for all of the funds used in each portfolio over 5, 3 and 1 years. Some of the ETFs are sufficiently new that there wasn't five year data. We then created a score which was the summation of the five year number multiplied by three, the three year number multiplied by 1.5 and the one year number.

Instead of looking at each fund individually, we added the scores in each of the major asset classes together:

This gives us some insight on the different portfolios.

• US equity returns are running neck and neck - indicating that to improve the returns of the ETF portfolio, looking at the US equities should only be undertaken when the other asset classes have been examined
• There is a significant gap in the international equities. The Vanguard Europe Pacific ETF looks like it will help but this is an area for shoring up the ETF portfolio
• The Emerging Market ETF outperforms the original so, while it may be better to improve performance, that is a secondary task
• Real estate runs neck and neck so look at that later
• Commodities, the ETFs are running ahead so, again, we can look at that later
• Fixed income is probably the biggest area where the difference is explained. It is the largest single asset category in terms of funds invested (in most cases) and there is a significant difference between the two. The original plan has two of the leading managed fixed income funds which shows consistently higher performance.

The takeaway is that to look to improve returns from the Clone ETF, focus needs to be applied on international and fixed income asset classes.

As we go through this exercise, this will bring to the fore a elephant in the ETF space - are there times when managed funds do outperform indexed funds - intuitively it would seem so and fixed income in this market seems to suggest itself as a prime example.

We will examine this deeper in an upcoming article

Disclosure:

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

Symbols:DBC,PCRIX,EWX,NEWFX,ODVYX,VWO,JNK,PHIYX,PRRIX,TIP,AGG,PTTRX,GVI,LSBDX,PRWBX,SHY,BSV,VBISX,VEA,VWILX,EFV,TBGVX,REFDX,VNQ,FSLBX,XLF,IWV,OAKMX,SLASX,VIG,VINIX,VTI,CISIX,HACAX,MGK,VUG,RWMFX,VTV,BRWIX,IWP,POAGX,VOT,VASVX,VOE,AOM,VGSTX,OTCFX,VB,PSVIX,VBR,

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06/22/2011