MidAmerican Energy Company's 401K Plan: More Diversification Needed
03/31/2011 0 comments
MidAmerican Energy Company is a domestic operation of MidAmerican Energy Holdings Company, a company of Berkshire Hathaway Inc. (BRK-A). As of 3/30/2011, David Sokol was the CEO of the company.
As many Warren Buffett's Berkshire Hathaway's subsidiary companies, MidAmerican Energy Company has its own 401K retirement plan: MidAmerican Energy Company Retirement Savings Plan. These plans are different from each other. For example, Berkshire Hathaway Employee Savings and Stock Ownership Plan of General RE and Berkshire Hathaway Profit Sharing Plan for Government Employees Companies are the other two plans for General RE and GEICO employees respectively.
the 401K plan consists of 13 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.
| Asset Class | Name |
|---|---|
| Stable Value |
STABLE VALUE |
| LARGE VALUE | JHancock Classic Value I |
| LARGE BLEND | Vanguard Total Stock Mkt Idx Inv |
| Small Growth | Morgan Stanley Inst Small Co Gr I |
| Foreign Large Value | Dodge & Cox International Stock |
| Moderate Allocation | Oakmark Equity & Income I |
| LARGE GROWTH | Aston/Montag & Caldwell Growth I |
| Intermediate-Term Bond | PIMCO Total Return Instl |
| Foreign Large Blend | iShares MSCI EAFE Index |
| LARGE VALUE | Russell 1000 Value Index |
| SMALL BLEND | SSgA Small Cap Instl |
| LARGE GROWTH | Russell 1000 Growth Index |
| Intermediate-Term Bond | SSgA Bond Market Instl |
The following table shows what major asset classes are covered and what are missing:
| Asset Class | Number of funds |
|---|---|
| REITs | 0 |
| Balanced Fund | 1 |
| Fixed Income | 3 |
| Commodity | 0 |
| Foreign Equity | 2 |
| Emerging Market Equity | 0 |
| US Equity | 7 |
| Total | 13 |
Like many other company sponsored retirement 401K plans, this plan falls into what we called U.S centric 3-asset class category: it provides coverage to only the three major asset classes. For the US equities class, it provides large growth, large value and large blend style coverage as well as one Small Cap growth fund. On the fixed income side, in addition to the most popular PIMCO Total Return Fund (PTTRX), it provides a low cost SSGA Bond index fund.
In the following, we use two typical asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA) to study how the plan participants can do.
Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.
Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.
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 Mar 30, 2011)
Performance table (as of Mar 30, 2011)
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| MidAmerican Energy Company Retirement Savings Plan Tactical Asset Allocation Moderate | 8% | 67% | 8% | 85% | 9% | 82% |
| MidAmerican Energy Company Retirement Savings Plan Strategic Asset Allocation Moderate | 12% | 96% | 7% | 47% | 7% | 44% |
| Three Core Asset ETF Benchmark Tactical Asset Allocation Moderate | -1% | -12% | 3% | 23% | 4% | 33% |
| Three Core Asset ETF Benchmark Strategic Asset Allocation Moderate | 13% | 86% | 3% | 16% | 4% | 17% |
From the data above, this plan beats the three asset benchmark by virtue of the US asset class choices, indicating good funds covering US stocks, foreign developed country stocks and fixed income.
However, missing coverage on REITs and emerging market stocks, two of the major asset classes for a diversified portfolio contruction, does reduce the diversification effect. Furthermore, the somewhat incomplete offering of various styles in US stocks (for example, small cap value and all mid cap stock styles are missing) would further reduce opportunities to take advantage of varous economic cycles. For example, the following table compares the performance between two tactical asset allocation portfolios, one contructed using funds in MidAmerican Energy Company Retirement Savings Plan, the other using funds in Berkshire Hathaway Employee Savings and Stock Ownership Plan of General RE, the other subsidiary in Berkshire Hathaway.
Portfolio Performance Comparison
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Berkshire Hathaway Employee Savings and Stock Ownership Plan of General RE Tactical Asset Allocation Moderate | 7% | 48% | 11% | 95% | 11% | 91% |
| MidAmerican Energy Company Retirement Savings Plan Tactical Asset Allocation Moderate | 8% | 67% | 8% | 85% | 9% | 82% |
To summarize, MidAmerican Energy Company Retirement Savings Plan participants can achieve the best investment returns by adopting asset allocation strategies that are tailored to their risk profiles.
MidAmerican Energy Company Retirement Savings Plan would do well by their employees to consider reviewing their existing funds and adding additional asset classes.
Symbols: BRK-B, SPY, VTI, EFA, VEU, AGG, BND, AOM, CIU, BIV, GWL, PFA, IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV, EFV, PID, DWM, IVV, IYY, IWV, VV, DLN, RSP, SCHX, SHY, SHV, VGSH, PLK, USY, IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG, IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA, IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
Exchange Tickers: (BRK-B), (BRK-A), (BRK.A), (BRK.B) (SPY), (VTI), (EFA), (VEU), (AGG), (BND), (EEM), (VWO), (IYR), (VNQ)
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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