Lessons From the Investment Options Selection of Savvy Investment Companies’ 401(k) Plans

Sep 24, 2024 | 401K, Feature, Investing, Investment Portfolios, Investments, Newsletter

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 Tuesday, October 1, 2024. 

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.

Lessons From the Investment Options Selection of Savvy Investment Companies’ 401(k) Plans

At MyPlanIQ, our focus has always been to understand and learn from great investors. With one of the most comprehensive datasets on companies’ 401(k) plans, we believe we can gain valuable insights by examining the 401(k) plans of a select group of savvy financial companies, primarily investment firms. From their investment option selections, individual retirement investors can learn which types of funds and assets to consider for constructing a long-term retirement portfolio.

Savvy Investment Companies

We selected the 401(k) plans of these companies because they are known for delivering strong investment services. The rationale is that if they excel in providing these services to their clients, it is likely that they have also made solid investment option selections in their own retirement plans.

The list:

  • Bridgewater Associates: Bridgewater, led by Ray Dalio, is one of the largest hedge funds in the world, renowned for its risk parity strategy and macroeconomic-based investments.
  • Value Line: Value Line, one of the oldest investment advisory firms, is well-known for its stock and ETF analysis services and also offers model portfolios for investors for many years.
  • AQR Capital: AQR is one of the largest hedge fund operators, renowned for its momentum and value-based investment funds. It also offers excellent multi-strategy funds.
  • Coatue: Coatue is known as a prominent hedge fund specializing in stock investments, particularly in the technology sector.
  • Citadel: Citadel is renowned for its market-making services and benefits from first-hand market insights.
  • Two Sigma: Two Sigma is regarded as one of the top quantitative hedge funds.
  • Edelman Financial Engines: Financial Engines is well-known among plan participants for providing investment services to many individual 401(k) accounts.
  • Ameriprise Financial: Unlike the firms mentioned above, Ameriprise is a financial planning and advisory firm. It will be interesting to see how they manage their 401(k) investments.
  • Betterment: Betterment is one of the two most well-known robo-advisors, with the other being Wealthfront.
  • Raymond James: For reference, we also examine a hybrid financial firm that offers brokerage, financial planning, and investment services.
  • Bank of America: Finally, Bank of America (BOA) is a major financial firm that offers a wide range of services, including banking, brokerage, financial planning, hedge funds, and investment services.

Investment options

Each of these companies offers a variety of investment options in their 401(k) plans. We encourage readers to click on the links provided with each company name to view the funds included in their plans. Below, we summarize some key findings for each plan:

  • Bridgewater Associates:
    • all low-cost Vanguard index funds that include a commodity fund, Real Estate, and TIPs, in addition to a Goldman Sachs emerging market debt fund. So the funds cover five major asset classes: US stocks, developed market stocks, Real Estate (REITs), commodities, and bonds. It’s however interesting to see that it doesn’t have funds for emerging market stock exposure as Bridgewater is known for its international financial market expertise. 
  • Value Line:
    • The investment options include known MFS funds and American Funds. It also has a few Allspring funds. Further, it has Invesco Gold fund and covers Real Estate. Noticeably, its bond funds include two famous total return bond funds: PIMCO Total Return and Loomis Total Return. It again includes TIPs. Active funds include the famous Blackrock Global Allocation fund. It also provides a list of index funds. 
  • AQR Capital:
    • AQR investment options include its famous AQR Risk Parity and AQR Diversifying Strategy (QDSIX). AQR Diversifying Strategy fund has a managed volatility exposure. Other than that, it provides all low-cost Vanguard index funds. 
  • Coatue:
    • It’s interesting to see that its investment options are somewhat non-systematic: in addition to some Vanguard index funds, it’s stuffed with various active funds. Furthermore, it has a few Great Gray Trust Company CITs (Collective Investment Trusts). Grate Gray is essentially the Wilmington Trust’s CITs rebranded. However, Wilmington Trust’s funds are ranked low in Morningstar’s fund ranking, with an average 10-year Morningstar Rating of 2.2 stars. 
  • Citadel:
    • The investment options seem to be well crafted with mainly Fidelity funds with a few of American Funds and a good MFS Value fund. It also includes the famous First Eagle global fund.  The bond funds include the Loomis Sayles total return bond fund. 
  • Two Sigma:
    • The investment options are similar to other 401(k) plans’: they include funds from Fidelity and T. Rowe Price.
  • Edelman Financial Engines:
    • The investment options go for all index funds from DFA and Vanguard. It doesn’t cover REITs though. 
  • Ameriprise Financial:
    • The investment options include many index funds plus a good Victory small Cap Value  fund and Boston Partners Large Cap Value Equity CIT (Class D). 
  • Betterment:
    • The investment options are all low-cost ETFs. 
  • Wealthfront:
    • All Vanguard funds
  • Raymond James:
    • The investment options include some American Funds and Vanguard index funds. It also has a good T. Rowe Price bluechip growth fund. It has no REITs coverage. 
  • Bank of America:
    • The investment options include comprehensive Vanguard index funds. It also includes Blackrock global allocation fund. Noticeably, it provides WESTERN ASSET CORE BOND, PIMCO TOTAL RETURN,  and VANGUARD INFLATION PROTECTED SECURITIES FUND INSTITUTIONAL SHARES. It also features two famous Vanguard solid conservative funds: VANGUARD WELLESLEY INCOME FUND INVESTOR SHARES and VANGUARD WELLINGTON FUND INVESTOR SHARES. 
  • Deutsche Bank:
    • The investment options include State Street (SS) index funds, PIMCO Total Return, PRIMECAP, T. Row Price Global Growth, MFS Value, Dodge & Cox International, Real Estate. 
  • Goldman Sachs:
    • The investment options include Vanguard, Blackrock Index funds, SSGA Hedged International Developed Equity Index Fund!, Dodge & Cox International. Emerging Markets and Real Estate No Commodities. Western Asset Core Plus.

What we learn

We summarize the key lessons learned from examining the investment options offered by these companies:

  1. Core investments should include low-cost index funds: Virtually all of the plans mentioned above feature low-cost Vanguard or DFA index funds in the core asset classes, including U.S. stocks, developed market stocks, and bonds.
  2. They can be supplemented with high-quality funds from American Funds, Fidelity, and T. Rowe Price.
  3.  In fixed-income or bond allocations, these plans typically feature a selection of high-quality bond funds similar to those used in MyPlanIQ’s total return bond fund portfolios. Commonly included are funds such as PIMCO Total Return, Loomis Sayles Total Return, and Western Asset Core Bond. Additionally, in response to recent inflation concerns, many plans now include TIPS (Treasury Inflation-Protected Securities).

The above again confirms MyPlanIQ’s long-held thesis:

From the investment selections, we can often identify several excellent funds. Many plans offer global allocation funds, including options such as the BlackRock Global Allocation Fund (MALOX) or the First Eagle Global Allocation Fund (SGIIX). Below are their return comparisons:

Global allocation funds comparison (as of 9/10/2024):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR 20Yr AR Since 5/12/2004 AR
MALOX (BlackRock Gbl Alloc I) 14.5% -0.0% 6.6% 5.0% 6.0% 6.2% 6.4%
SGIIX (FIRST EAGLE GLOBAL FUND CLASS I) 17.4% 6.1% 9.0% 7.0% 8.5% 8.6% 8.8%
DGSIX ( GLOBAL ALLOCATION 60/40 PORTFOLIO – INSTITUTIONAL CLASS) 14.2% 3.2% 7.8% 6.2% 7.4% 6.7% 6.8%

Detailed link >>>

Unfortunately, the BlackRock Global Allocation Fund (MALOX) has underperformed compared to the DFA index fund (DGSIX). However, the First Eagle Global Allocation Fund (SGIIX) has shown consistent outperformance by a significant margin!

We also see many plans offer MFS mutual funds. MFS stands for Massachusetts Financial Services Company and it was originally founded in 1924 and it’s known to pioneer in mutual fund industry. In particular, let’s look at MFS Value Fund that’s offered in Citadel and Value Line 401(k) plans:

MFS Return vs Vanguard Value Index Fund (as of 9/10/2024):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR 20Yr AR Since 7/31/2000 AR
MEIIX (MFS VALUE FUND I) 20.1% 5.9% 10.0% 9.3% 11.2% 9.1% 8.2%
VIVAX (VANGUARD VALUE INDEX FUND INVESTOR SHARES) 20.6% 8.2% 11.4% 9.9% 11.8% 8.9% 7.6%

Detailed link >>

We observe that the MFS Value Fund has outperformed the index fund over the past 20 years and since 2000, with a slightly lower maximum drawdown. However, the index fund has consistently outperformed the MFS fund over the past 1, 3, 5, and 15 years. Generally, this sector poses a challenge for active funds to outperform, though it is not entirely impossible (as noted in our previous newsletter The Best Stock Funds In The Long-Term, for instance).

Market Overview

The Federal Reserve somewhat surprised markets by cutting its benchmark interest rate by 0.5% last week, sending a signal that it has entered an interest rate cut phase and is shifting towards looser monetary policy. Stocks have since rebounded, with the S&P 500 reaching yet another all-time high, as investors appear to believe that the reduction in borrowing costs will stimulate an economy that is expected to be experiencing a soft landing – a relatively gentle decline, compared with a harder landing where growth decelerates rapidly.

Notwithstanding this development, we want to emphasize that stock valuations remain at one of the highest levels in history. The S&P 500’s recent all-time high is particularly noteworthy, as it reflects the significant gains made by investors over the past few years. It is therefore essential for investors to exercise vigilance regarding risk and adopt a more active approach to risk management in their portfolios.

As always, we claim no crystal ball and we call for staying the course which is guided by 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. If 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. Also, 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.

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

Disclaimer:
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.