Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday October 2, 2023. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

How To Fully Utilize Self-Directed IRAs For Retirement Investments

Individual Retirement Accounts (IRAs) represent specialized investment accounts within brokerages. Presently, virtually all major brokerages, such as Fidelity, Schwab, and Vanguard, offer no-fee IRA options. Over the past decade, IRAs have grown significantly more appealing, largely owing to the accessibility of commission-free ultra-low-cost (index) ETFs. In this newsletter, we will delve into the details of harnessing IRAs for retirement investments.

IRA Types

Briefly, there are three major types of IRAs: Traditional IRAs, Roth IRAs, and SEP IRAs that have distinctive features and benefits:

Traditional IRAs: Traditional IRAs are one of the most prevalent retirement savings vehicles. They operate on a tax-deferred basis, allowing individuals to contribute pre-tax income, reducing their current taxable income. This tax advantage can be particularly beneficial during your working years when your income is typically higher. As the funds grow within the account, they remain tax-sheltered until you begin withdrawing them in retirement. At that point, you will pay income taxes on your withdrawals at whatever tax rate you have at that time.  Ideally you would hope to have a lower tax rate than during your earning years (which is not always the case if you have large sum of investment income and IRA withdrawals). Traditional IRAs are well-suited for those who anticipate a lower tax bracket in retirement and wish to take advantage of tax deductions during their working years. Normally, a typical 401k account is rolled over to a traditional IRA. 

Roth IRAs: Roth IRAs, in contrast, focus on tax-free growth. Contributions to a Roth IRA are made with after-tax dollars, meaning there is no immediate tax deduction. However, the major advantage lies in the fact that qualified withdrawals from a Roth IRA, including both contributions and earnings, are entirely tax-free in retirement. This makes Roth IRAs an excellent choice for individuals who anticipate being in a similar or higher tax bracket when they retire, as they can enjoy tax-free income during their golden years. Additionally, Roth IRAs offer flexibility by allowing penalty-free withdrawals of contributions at any time, providing a measure of financial security and versatility. However, stringent restrictions exist regarding the amount and manner in which contributions can be made to a Roth IRA.

SEP IRAs (Simplified Employee Pension IRAs): SEP IRAs are designed primarily for self-employed individuals and small business owners. These accounts enable employers (or so called solo entrepreneur) to make contributions to their own retirement accounts, as well as those of their employees, in a tax-advantaged manner. Contributions to SEP IRAs are typically tax-deductible for employers, making them an attractive option for businesses looking to provide retirement benefits to their staff. SEP IRAs are relatively easy to set up and maintain, with flexible contribution limits that can scale with the business’s financial performance. Compared with a typical 401k account, SEP IRAs offer higher limit of contributions and flexibility of investments in an IRA brokerage account. 

All of these IRAs share one major benefit or feature: they are brokerage accounts that can invest virtually into all of the major ETFs (other than some highly risky leveraged and inverse ETFs), mutual funds and stocks.

Rollover from 401k to IRAs

In Pros and Cons of Rollover from a 401(k) to a Self-Directed IRA, we have detailed some of tor pros and cons of rolling over (moving) your 401k account to an IRA when you leave your job (note: you can’t rollover your 401k account with your current employer when you are still with the employer). We want to emphasize that there are two somewhat obscure benefits for remaining in your old 401k account: 

  • Legal protection: while your 401(k) or other employer-based retirement plan may enjoy federal protection in a lawsuit, it’s important to note that IRA protections are subject to state regulations, potentially leaving your retirement funds vulnerable to being used for covering damages in a lawsuit. 
  • Loan: Another advantage of remaining within a 401(k) plan is the potential ability to secure an emergency loan when necessary (Note, this is subject to your former employer’s approval). In general, IRS doesn’t allow you to take a loan from your IRAs. On the other hand, notice that the maximum loan you can borrow from your 401(k) account is $50,000. 
  • Special investments from a 401(k): aside from some close to new investors mutual funds such as T.Rowe Price Capital Appreciation fund that was closed to new investors in 2017 (but still open to a 401(k) investor if it’s available in that plan), another frequently mentioned advantage of a 401(k) is the potential access to stable value funds, which are insured to ensure higher interest returns while preserving cash value. However, with the availability of  some excellent Treasury bill ETFs, this advantage may no longer hold true. We’ll delve into this topic in more detail later on.

How to fully utilize IRAs for retirement investments

Let’s explore how to leverage the resources within a brokerage IRA to build better investment portfolios for retirement:

Ultra-low cost (index) ETFs or mutual funds

Certain sizable 401(k) plans have the capacity to negotiate remarkably low costs for specific funds, particularly pooled separate accounts or collective investments. In essence, fund management companies like the Capital Group craft such investment vehicles, often mirroring their existing mutual funds but with significantly reduced expenses. Nevertheless, in the present landscape, it’s entirely possible to assemble a portfolio with expenses as low as 0.03% that’s almost impossible to match by any separate account or collective investment instruments in a 401(k) plan:

Ultra low-cost ETFs that cover major stock and bond asset classes:

Ticker Fund Expense Ratio AUM
VTI Vanguard Total Stock Market ETF 0.03% $288.78B
VOO Vanguard S&P 500 ETF 0.03% $286.59B
BND Vanguard Total Bond Market ETF 0.03% $88.98B
AGG iShares Core U.S. Aggregate Bond ETF 0.03% $86.60B
ITOT iShares Core S&P U.S. Total Stock Market ETF 0.03% $42.13B
SCHX Schwab U.S. Large-Cap ETF 0.03% $32.13B
SCHB Schwab U.S. Broad Market ETF 0.03% $22.13B
STIP iShares 0-5 Year TIPS Bond ETF 0.03% $13.09B
SCHO Schwab U.S. Short-Term U.S. Treasury ETF 0.03% $13.06B
SCHR Schwab Intermediate-Term U.S. Treasury ETF 0.03% $7.83B

For example, you can construct a 60% VTI 40% BND balanced portfolio that only pays 0.03% expense. This is actually lower than 0.07% of Vanguard Balanced Index Fund Admiral Shares (VIBAX) or 0.18% of VBINX!

Simply put, there isn’t much cost advantage for 401k plans, compared with IRAs. 

Much more availability of good active ETFs

It used to be that mutual funds from famed investment managers such as Capital Group or Dimensional Fund Advisors (DFA) only provide their mutual funds to certain 401(k) plans, as well as to investment advisor managed accounts (taxable or tax deferred). However, now that these funds start to become available as ETFs (see February 27, 2023: Dimensional Fund Advisors and Capital Group ETFs), investors can only get a lot more good funds from a brokerage in their IRA account. For example, one can utilize CGXU (Capital Group International Focus Equity ETF) and DFAE (DFA Emerging Core Equity Market ETF) in a portfolio in an IRA. In a 401(k) plan, it’s more likely that only Capital Group funds or DFA (Dimensional Fund Advisors) funds are accessible, but typically not both.

Speaking of good active ETFs, in fixed income, in a major brokerage, you can find many excellent actively managed bond funds available. For example, in an IRA in Schwab, you can invest in these funds

Fund Name
PTTAX (PIMCO Total Return A)
DLTNX (DoubleLine Total Return Bond N)
MWTRX (Metropolitan West Total Return Bond M)
WABRX (Western Asset Core Bond R)
TGMNX (TCW Total Return Bond N)
PBDAX (PIMCO Investment Grade Corp Bd A)

This used to be one of the advantages offered by certain 401(k) plans, providing access to exceptional fixed income funds. However, this advantage has largely diminished or disappeared.

Excellent short-term investments

In a 401(k) plan, one often sees the availability of retirement income funds or stable value funds. These funds usually provide higher interests than one usually gets from a fund available in a brokerage account. Stable value funds usually guarantee or preserve their value, thus basically are cash-like. However, as what we have repetitively pointed out in the past, there are so many excellent money market ETFs or mutual funds available in an IRA (see Cash And Money Market ETFs Review). In fact, just for Treasury Cash-like ETFs, the latest yields are: 

Treasury Cash ETFs (returns are as of 9/25/2023):
Symbol (Name) Expense Asset Size  Maximum Drawdown SEC Yield
BIL (SPDR Barclays 1-3 Month T-Bill ETF) 0.14% 29B -0.14% 5.21%
SGOV (iShares 0-3 Month Treasury Bond ETF) 0.03% 10B 0% 5.34%
USFR (WisdomTree Floating Rate Treasury Fund) 0.15% 15B -0.05% 5.38%
TFLO (iShares Treasury Floating Rate Bond ETF) 0.15% 5.8B -0.06% 5.35%
CASH (CASH) N/A   0%  
VMFXX (Vanguard federal money market) 0.15% 238B NA 5.29%
SPAXX (Fidelity Government Money Market) 0.42% 256B NA 4.98%

So one can see that with extremely low expense: 0.03% vs. 0.42% of SPAXX or 0.2%-0.5% a typical money market fund charges, these cash-like ETFs are almost unrivaled. 

Lastly, it’s difficult to resist commenting on the high expense ratio of a money market mutual fund. It’s somewhat astonishing to think that money market funds, such as Vanguard’s VMFXX, charge considerably higher fees than those associated with broad-based stock index funds like VTI or bond index funds like BND. Well, generating a favorable spread from cash remains a significant revenue source for brokerages like Schwab!

Excellent general purpose fixed income investments

As alluded above, one can often access to excellent fixed income mutual funds from an IRA in a major brokerage, It’s also possible to get many similar ETFs. Using these funds, one can construct a good fixed income portfolio. For example, the portfolios mentioned on our Fixed Income Investors page utilize excellent total return bond funds (or ETFs) as candidate funds and employ a tactical strategy. They have consistently outperformed even the best total return fixed income funds such as DoubleLine total return fund or PIMCO Income or PIMCO total return bond funds for more than a decade!

The following funds are available in Schwab and used as candidate funds for the Schwab Total Return Bond portfolio:

Intermediate-Term Bond PBDAX PIMCO Investment Grade Corp Bd A
Intermediate-Term Bond PDBZX Prudential Total Return Bond Z
Multisector Bond PONAX PIMCO Income A
Intermediate-Term Bond DLTNX DoubleLine Total Return Bond N
Intermediate-Term Bond WABRX Western Asset Core Bond R
Intermediate-Term Bond TGMNX TCW Total Return Bond N
Intermediate-Term Bond PTTAX PIMCO Total Return A
Intermediate-Term Bond MWTRX Metropolitan West Total Return Bond M
Multisector Bond LSBRX Loomis Sayles Bond Retail

Constructing sound balanced asset allocation portfolios

In an IRA, investors have the opportunity to build a portfolio using the following approach:

For stocks, they can employ excellent ultra-low-cost stock index ETFs and, with some discretion, consider active stock ETFs offered by Capital Group or Dimensional Fund Advisors (It’s important to note that strictly speaking, DFA funds are still considered index funds, or they can be viewed as enhanced index funds rather than actively managed funds. The only difference is that DFA does not open its indexes to other third party).

For bonds, they can make use of outstanding total return bond mutual funds, managed by managers who have been recipients of the Morningstar Manager of the Year award, or opt for their ETF counterparts. One can create either a standalone fixed-income portfolio or design a blended stock and bond portfolio using a strategy like MyPlanIQ’s asset allocations strategies (such as Asset Allocation Composite (AAC) or Strategic Asset Allocation (SAA). 

In summary, by fully utilizing the resources available through a brokerage in an IRA, including a wide array of ETFs and possibly some mutual funds, individuals can structure a significantly improved investment portfolio compared to a typical 401(k) account.

Market Overview

One of the prominent developments in financial markets is the recent swift ascent of the 10-year Treasury yield:

With short-term interest rates reaching as high as 5.5%, the notable increase in long-term bond rates, currently at 4.5% for 10-year Treasury yields, has led to a substantial rise in borrowing costs for businesses. Many businesses depend on long-term borrowing to fund various activities, including capital expenditures and long-term leases for buildings and machinery, among others. Additionally, consumers are feeling the pressure as well, with 30-year fixed mortgage rates reaching their highest levels since 2000, soaring as high as 8%:

We believe that the simultaneous increase in interest rates at both the short and long ends carries immense significance, and it has the potential to severely decelerate the economy. The key question at this juncture is whether the slowdown occurs too swiftly before the Federal Reserve can pivot and reverse its tightening policy. If the economy experiences a sharp derailment, it could have detrimental effects on equity markets, particularly considering their current highly overvalued levels. 

As always, we claim no crystal ball and we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. For the moment, we believe it’s prudent to be extra cautious. However, how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.


Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?


Latest Articles

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.