CORPORATE 401K & IRA PLANS NEED MORE FLEXIBILITY! May 15, 2009

BEING STREET SMART

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Sy Harding

CORPORATE 401K & IRA PLANS NEED MORE FLEXIBILITY! May 15, 2009.

Some in the financial media are finally admitting that buy and hold investing doesn’t work, and in particular has performed horribly over the last ten years.

Obviously, the only alternatives to buy and hold are either market-timing, or staying out of the stock market altogether. However, the latter would mean not participating in what has always been the best investment area, better than real estate, bonds, art, collectibles, or what have you.

That leaves market-timing.

But Wall Street and the media still can’t bring themselves to actually use the phrase “market-timing”.  That’s understandable after all the years of trying to cram down investors’ throats the lie that the market can’t be timed, that buy and hold investing is the way to go.

So they are using euphemisms, for instance advising investors to adopt a strategy of “opportunistic investing”,  buying when stocks or sectors are oversold or undervalued, and taking the profits as soon as they become overbought or overvalued, not trying to hold through corrections or pullbacks. Come on guys, it’s known as market-timing. Opportunistic investing?

But at least, although ten years too late, investors are finally being told the truth.

Unfortunately, some are having problems trying to benefit from it.

Mutual funds have long since made it difficult for investors to engage in “opportunistic investing”, imposing minimum holding periods for their funds, ranging from two to six months, and charging a fee (actually a fine), usually 2%, for earlier withdrawals.

Wall Street, always alert to opportunities, has successfully overcome that problem for most investors, with the introduction of exchange-traded-funds, which can be bought and sold as often as necessary, through any discount brokerage firm, and at very low cost. With $550 billion in investor assets already in ETFs and growing rapidly (up 34% in 2008), investors have been catching on.

However, while the problem is solved for those with self-directed portfolios, including self-directed 401K and IRA plans, investors with 401K’s and IRA’s managed by their employers still may have problems getting away from buy and hold investing.

Tax-deferred plans like 401Ks and IRAs were introduced many years ago to help investors invest for their retirements. But as many have discovered, they haven’t performed as expected, especially over the last ten years.

Many are managed by the investor’s employer, or a management firm the company hires to perform that task. And in an effort to hold down their costs and paperwork, corporations usually offer their employees a very narrow choice of holdings, usually only in traditional mutual funds, and allow changes in holdings only once a quarter.

Now that investors have learned the hard way that buy and hold investing doesn’t work, I receive quite a few messages from readers complaining about the situation.

Typical is the reader who wrote me this week saying, “I just took very nice profits from the rally of the last two months, expecting the market to go down and perhaps retest its March low. But the decline could be sudden, taking place in a month or so. Then where will I be? I’ll want to get back in and make some of the profits all over again, but my 401K plan will not let me make another change for three months.”

Another wrote, “Just as much money can be made from market declines as from rallies by investing in ‘inverse’ etf’s, but my employer’s 401K plan doesn’t offer any inverse investment opportunities at all. What can I do about it?”

The answer is, probably not much.

It was a godsend for corporations when tax-deferred retirement accounts like IRA’s and 401Ks came into existence. They allowed companies to get out from under the costs and responsibility of providing fixed-payment pension plans (such as have helped to kill the U.S. auto industry). Rather than having to make sure money is put aside and then managed so it will be available to pay retired workers a fixed income upon retirement, they simply contribute regularly to an employee’s 401K plan, with no responsibility for whether it will be sufficient for the employee’s retirement when the time arrives.

The plans worked fairly well in the 1980s, and very well in the longest-running bull market in history of the 1990s, running into only brief painful periods like the 1987 crash and the 1990 bear market.

But with the arrival of a more normal stock market, where the 100 year experience has been of a bear market coming along on average of every four years, anything that prevents investors from moving their investments around as they see fit can be a serious problem.

It’s an area regulators or Congress need to look into.

If it makes sense to have new regulations to protect home-owners and banks from their own greed and mistakes, then regulations that will allow investors to simply protect themselves rather than being arbitrarily locked in or out of the market when they don’t want to be, should make even more sense.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding the Bear – How To Prosper In the Coming Bear Market. His new book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!