President Trump to Dave Portnoy: The 401(k) investors who followed my advice are ‘doing phenomenally’

After President Donald Trump took some serious lumps in his contentious interview with Fox News host Chris Wallace earlier this month, it was probably time for a friendlier chat.

Enter David Portnoy, the outspoken founder of Barstool Sports, who came to the White House on Friday armed with the kind of softballs that had the president saying “I like this interview” within about a minute of sitting down. Yes, it didn’t take long for the two to become quite chummy.

Eventually the wide-ranging conversation turned away from Dr. Anthony Fauci and nationwide protests to the stock market. When Portnoy, who made a social-media spectacle of his trading game in the absence of live sports, broached the subject, here’s what Trump had to say:

“You got in at the right time. A lot of people with the 401(k)s are doing phenomenally, but a lot of people sold stock and now they’re saying, ‘I missed it,’ and I said to people, ‘Don’t sell because the foundation is so strong’… But the people that really lost in terms of economic are the people that got out. The people that stayed in… they stayed with me. They’re doing great.”

It’s true that those investors who dumped the tech-heavy Nasdaq Composite

at the lows back in March have missed out on a the market’s resilient 51% rebound. The S&P 500

and Dow Jones Industrial Average

have moved similarly higher since the coronavirus sent investors fleeing the market in a hurry.

As for Fauci, Trump’s sidelined task force member, Portnoy said that he’s not a fan because his “stocks tank” whenever the idea of more lockdowns is suggested.

Trump offered praise for Fauci, but also some hesitation. “He’d like it to see it closed up for a couple of years, but that’s OK because I’m president, I appreciate your opinion, now give me another opinion, someone please,” Trump said. “We’re open and we’re doing well. And I just had a press conference about opening the schools. You’ve got to open the schools.”

We’ll get a gauge of just how much economic damage the pandemic has caused later this week, when the Commerce Department on Thursday releases the second-quarter GDP report.

How ugly will it be? “We’re looking for the worst postwar economic contraction in 62 years,” said Sal Guatieri, senior economist at BMO Capital Markets.

Here’s the full interview (the stock market stuff starts at around the 18:45 mark):

Meanwhile, Portnoy continues to attract attention with his trading antics. Last month, he grabbed plenty of clicks when he ripped Berkshire Hathaway’s

Warren Buffett for unloading airline stocks as the coronavirus epidemic took its initial toll.

“I’m just printing money,” Portnoy said. “Why take profits when every airline goes up 20% every day? Losers take profits. Winners push the chips to the middle. … I should be up a billion dollars.”

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Union 401(K) Plans Need Safer Target Date Funds

The truth is rarely pure and never simple

Oscar Wilde

The main purpose of labor unions is empowering workers through collective bargaining to secure favorable working conditions and employee benefits. That includes a retirement with dignity, which means building a sufficient level of savings in a 401(K) defined contribution retirement plan. Unfortunately, that critical objective is at risk due to the wide use of poorly designed retirement target date fund (TDFs) – products that are the default retirement-savings-plan option for most workers.

Investing in one of the many subpar TDFs on the market needlessly introduces substantial hazards for investors who are approaching retirement or newly retired. The news will likely come as a shock for the average investor, who’s looking for peace of mind in a TDF investment. Instead of assuming unnecessarily high risk, (S)he wants to be protected from investment losses.

Most investors believe they are being protected through their TDF investments. Many even think their TDF is guaranteed to not lose money. The reality, unfortunately, is quite different because many of these products are managed with a higher level of risk than retirees expect and (more importantly) need.

The good news: prudently managed TDFs exist. The bad news: these products are the exception to the rule in this corner of the investment-product marketplace.

The Risk Of Mismanaged TDFs

Most retirees reason that they have saved their money in their 401(K) account and as retirement approaches they should be able to depend on their plans to manage their savings wisely. That starts by avoiding the key risk for new retirees: suffering investment losses at, near or just after retirement – a risk that can bring painful and unexpected reductions in savings, which in turn may lead to a major downgrade of lifestyle in the years ahead.

In other words, poorly designed TDFs threaten to break the promise of a retirement with dignity.

Fiduciaries also want to be protected from poorly managed TDFs, mainly from lawsuits. At the same time, they have an obligation to do what is best for beneficiaries – an obligation that starts by avoiding mistakes.

Plan trustees are charged with protecting all beneficiaries, especially those who are 5-10 years from retirement – a group that’s especially vulnerable to poorly designed TDFs.

A PIMCO survey of pension advisors reports that a loss of 10% or more is considered “excessive” in the accounts of those near retirement. The bad news: most TDFs recently lost more than 10% and they lost far more than 10% in 2008. That’s an appalling record: abject failure in 2 years out of the past 13.

Unfortunately, old habits die hard for most TDF strategies. As discussed below, the typical TDF is expected to lose more than 10% in 3 years out of 20.

Protecting Beneficiaries Near Retirement Is The Top Priority

In “Prudent Target-Date Fund Decisions for Fiduciaries,” published in the July 2015 issue of the International Foundation of Employee Benefit Plans Benefits Magazine, I detail the meaning of “prudence” in TDFs. In a nutshell, there are three priorities for a prudently managed TDF:

* protect older beneficiaries as they near retirement

* diversify the investment portfolio

* maintain low fees

Protecting older beneficiaries approaching retirement is the primary goal because these investors are about to leave the workforce and cannot afford to lose savings that have been accumulated over a lifetime of working.

There are only a few TDFs that meet the prudence standards — standards that union trustees need and want and, perhaps most importantly, that beneficiaries deserve. This elite group of prudent TDFs are safe at the target date with less than 30% of assets at risk.

Risky assets are typically defined as equities (stocks, real estate, alternatives, etc.) plus risky long-term bonds. Losses greater than 10% at the target date are highly unlikely for prudent TDFs.

By contrast, most TDFs hold more than 75% in risky assets at the target date, which means that they are not prudently managed because the risk of large losses (10% decline or deeper) is unacceptably high. The probability of losing more than 10% at the target date in risky TDFs is about 15%; losses greater than 10% are expected to occur in 3 years out of 20 for these poorly designed funds. I estimate a 10% loss to be one standard deviation below the mean, at the 15% probability mark.

These are not good odds for anyone who is about to retire because each of us only get one chance to invest and navigate retirement successfully. There are no do-overs and so the stakes are high.

Failure, in other words, isn’t an option—or at least it doesn’t have to be with a prudently run TDF.

Providers defend high-risk at the target date with the pretense that people have not saved enough, and they are living longer so beneficiaries need to strive for higher returns. The facts are (1) whatever you’ve saved throughout your life has to be “enough” because that’s all there is – risking it as you enter retirement is not a good gamble – and (2) most retirees withdraw assets from their TDF accounts soon after retirement, which makes the longevity argument for these products moot while raising the potential that investors may lock in investment losses.

Lifespans are not the issue — safety is. Retirees who remain in the plan are best served by annuities and guaranteed withdrawal plans rather than high-risk TDFs.

Union trustees succeed by shepherding beneficiaries safely to their retirement date with their accumulated savings intact. Furthermore, the Department of Labor advises fiduciaries to choose their TDF on the basis of demographics. This advice favors prudence since the only demographic that virtually all defaulted participants have in common is lack of financial literacy – they are financially naïve and therefore in need of protection. The Duty of Care fiduciary responsibility is akin to the obligation to protect young children. Accordingly, the best fiduciary protection is beneficiary protection. Everyone wins with prudent decisions, both trustees and beneficiaries.

The Pandemic and Prudence

Prudence is not rewarded with better performance… until it is. In fact, prior to the pandemic, the last time prudence was rewarded was in 2008-09, when prudent TDFs lost less than 10% while imprudent funds suffered losses of 30%-plus. Indeed, the long run suggests that prudence wins by not losing. There will be more market crashes.

After 2008, however, there was a decade when imprudent TDFs performed best – the greater the US stock allocation, the higher the return. But counting on a repeat performance, decade after decade, is probably naïve. The Roaring Twenties set the stage for the Great Depression. As discussed below, it could be that the recent Roaring Twenty-Tens have set the stage for the Next Great Depression. According to a recent Forbes article In the Great Depression it was “stock market crash” followed by “banking crisis.” Here it will be “lockdown” followed by “stock market crash.”

These days there’s an added complication: COVID-19, which threatens our health and wealth, especially for seniors. Its ultimate effects remain to be seen, but the pandemic awoke a prudence concern in March 2020, when the US stock market at one point fell more than 30%. Morningstar reports the steep decline that spilled over to TDFs as follows:

We have had a V-shaped recovery since the market low in late-March, but this V is likely to be the beginning of a string of Ws yet to come. The Great Depression lasted a decade and included ten Ws – recoveries followed by crashes.

Today, the global economy is in shambles. Many believe that central banks can bail the world out with paper by ramping up money printing in the extreme. Yet the consequences of these “Quantitative Easings” (QE) are dire and merely defer the pain… maybe. QE is likely to lead to serious inflation.

Sure, it’s nice to get a check in the mail for doing nothing. But there are no free lunches. When things simply do not feel right, there is usually a good reason.

Plus, there is a wide range of at least ten threats to the securities markets that we address in this video. COVID-19 is just one of many reasons that stock markets will fall sometime in this decade — a decade that will see 78 million American baby boomers passing through the Risk Zone that spans the five years before and after retirement.

The ultimate impact of COVID and other threats to the economy aren’t fully known at this time. But many will continue to lose jobs and businesses and stocks are at risk of suffering from dwindling demand. As shown in the following indicators, the stock market was detached from the economy at the end of July, but this incongruity will likely not last. Wishing for the best doesn’t always work.

There’s never a good time for imprudent risk taking in target date funds, but the current climate is unusually dangerous.


Unions are by their very nature paternalistic, protecting their members. This protection can and should extend to retirement benefits, and into the investments of the most vulnerable, namely, those near retirement in target date funds. There are five ways that TDFs can be safer, smarter and better for union 401(K) plans. Only a few TDFs provide these union benefits.

One of the major benefits/promises of being a union member is a comfortable retirement. Saving and protecting assets are the keys to achieve this goal.

Union trustees encourage savings through education and plan design. Protecting those savings is the critical next step to delivering on the promise. Some members make their own investment decisions and should be smart enough to protect their savings. Others rely on the plan’s trustees to choose a target date fund that protects their lifetime savings.

Everyone wants to be protected. Fortunately, there’s no reason why that protection can’t be offered. The key is using prudently designed and managed TDFs. Union baby boomers will be passing through the investment Risk Zone for the next decade. There has never before been so many seniors at risk at the same time. These dedicated workers cannot afford investment risk at this critical time in their lives.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am the sub-advisor of the SMART Target Date Fund Index, a suite of collective investment funds provided by Hand Benefits & Trust, a BPAS company

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Yikes — The private equity crowd wants your 401(k) money

From the Department of Dangerous Ideas comes the news that your employer may soon offer you the “opportunity” to invest some of your hard-earned money in private equity as well as in the public stock and bond markets.

Opportunity? Er…indeed. More on that in a moment.

But last week the current administration’s Labor Department opened the door to including private equity funds in 401(k) plans as part of diversified funds, such as all-in-one “target date” mutual funds.

The excitement is palpable…at least among people in the private equity business.

“We believe private equity has an important role to play in enhancing potential retirement outcomes and [the June 3] announcement provides necessary clarity to plan sponsors that private equity can be incorporated as an allocation option under ERISA,” Susan Long McAndrews, a partner at private equity firm Pantheon, tells 401(k) Specialist, an industry publication aimed at retirement plan advisers. She explained that this move would give 401(k) participants—ordinary people like you and me, dear reader—access to the allegedly superior investment returns that private equity provides. “In our view, retirees really can’t afford to leave 40 basis points annually on the table over a 35-year investment horizon,” she says. (By that she means an extra 0.4% a year in returns, supposedly the extra benefit of a private-equity fund.). We believe the Department’s action…is an important step to address this and we look forward to working with plan sponsors to offer millions of ordinary working Americans the potential for a more secure retirement.”

And there are some data to support the industry’s claims that it has provided superior investment returns. A conducted by finance professors Berk Sensoy at the Fisher College of Business, Ohio State University, and Steven Kaplan at the Booth School of Business, University of Chicago, concluded that going back to the 1980s private equity overall had done a fifth better per year, on average, than Standard & Poor’s 500 index.

Hmmm. Impressive, right?

Well, maybe.

I asked some financial advisers what they thought about investing 401(k) money in private equity.

“Yikes!” exclaims Lisa Kirchenbauer, founder of Omega Wealth Management in Arlington, Va. Some private equity exposure might be reasonable for an aggressive investor, she says, it had better be small. With private equity, she says, “You don’t really know what you’re investing in.”

Juan Ros, a financial adviser at Forum Financial Management in Thousand Oaks, California, is also skeptical. “I wouldn’t recommend an allocation to private equity in a 401(k) at this time, just as I would not suggest other esoteric investments like cryptocurrency in a 401(k).” Among his concerns: High fees, lack of transparency, and questions about track records. “Since PE is nothing more than stocks, I would prefer participants stick to the public capital markets,” he says.

Meanwhile, the move should raise issues for every investor.

Is this change designed to help you, or others? The administration wants your dollars to boost the economy—especially the smaller companies where private equity typically focuses. Nice. But how you do is secondary.

Meanwhile the private equity industry — a massive campaign donor, by the way— wants your money. The typical private equity manager charges 2% of the fund’s assets as an annual fee, just for showing up, and takes 20% of any profits. Meanwhile 401(k) funds represent a giant pool of $6.2 trillion. Two percent of that is $180 billion in profits a year.

But how likely are you to end up with superior returns in your back pocket if the managers are taking such huge fees?

According to New York University’s Stern School of Business, the average gross, nominal return on the S&P 500

has been about 12% a year since the 1920s. And you can invest in that through an index fund that charges next to nothing in fees.

But to match that net return, a private-equity fund that charges you 2% a year in fees, plus 20% of the profits, has to make about 17% a year in gross profits. In other words it has to be about 40% better than the market during an average year just to break even.

If there are private equity managers out there capable of achieving returns so spectacular, how likely to do you think they are to let 401(k) investors like you and me in on the action? (Or anyone, actually)?

Meanwhile, do private equity investments even “outperform” the overall market anyway?

Nobody really knows. Experts can’t even agree on how to measure private equity performance. The industry is opaque and the investments are illiquid.

Performance measures used by academics include the ‘Internal Rate of Return,’ ‘Multiple of Invested Capital,’ the ‘Long-Nickels Public Market Equivalent,’ the ‘Gredit, Griffiths & Strucke Alpha,’ and the ‘Kaplan & Schoar Public Market Equivalent.” Among others.

Researchers can’t even agree on the right benchmark of stocks with which to compare performance. Sensoy and Kaplan say yes, during the 1980s and 1990s, the industry overall probably beat the S&P 500 large company index. But, they added, it may not have beaten an index of “small cap value stocks,” the type of business in which private equity usually invest.

Even if private equity outperformed in the past, why does that mean it will do so in the future?

Studies agree that private equity’s relative outperformance, if it existed, has fallen sharply this millennium as new money has flooded into the industry. This, of course, should be no surprise to anyone familiar with economics. High returns attract more capital, which competes for deals and drives down returns. In 1995, note Sensoy and Kaplan, just $38 billion was committed to private equity funds. In 2013: $460 billion.

Meanwhile the 1980s and 1990s were an amazing time to be flipping stocks with borrowed money, as private equity companies do. Why? Interest rates collapsed, so the borrowing got cheaper and cheaper. Stock prices went up 13 fold, so you really didn’t have to do much to a company, if anything, to make money. And U.S. companies overall had low levels of debt, so there was plenty of room to leverage them up and pocket the gains.

Today interest rates are already on the floor, and even after accounting for inflation stock prices are ten times higher than in 1980 and corporate debts about four times higher. So instead of buying cheap, unleveraged companies with borrowed money during a time of falling interest rates, you’ll be buying expensive, leveraged companies with borrowed money, at a time when interest rates seem unlikely to fall much further.

Oh, and if private equity vehicles available to the public are so great, why haven’t they been more successful already? An index of the private equity funds currently available to ordinary investors and traded on the London stock exchange is down about 20% in the past year, while the MSCI World index

of global stocks is up about 8% including dividends.

Over the past five years, these funds made a total average return of around 10%. (Not per year, but total).

The MSCI World index of global stocks over the same period: 40%.

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Your 401(k) won’t be enough for retirement

In light of the continuing pandemic, Congress has temporarily changed the rules on hardship withdrawals from your 401(k). It’s easier to take money out penalty-free, up to $100,000, and you can pay it back and avoid the tax hit.

But should you even think about raiding your 401(k) plan? Vanguard, the investment firm founded by the legendary late Jack Bogle, took on this problem in a recent update to clients.

The summary idea is to borrow from your plan rather than withdraw from it during difficult times such as the COVID-19 pandemic.

“The law allows plans that offer loans to adopt a provision to double the amount that participants can borrow to $100,000 or 100% of the vested account balance, whichever is less,” Vanguard said.

“This is available until September 23, 2020. If your plan usually charges a loan origination fee, it will be waived. To be eligible, you must be affected by the coronavirus.”

If you do take money, start small, Vanguard cautions. And definitely plan ahead for how to repay yourself within those three years.

What’s the difference between a 401(k) and a Roth 401(k)?

“Your ability to access money for the short-term needs of today but pay yourself back is important. It means you won’t owe taxes on the money and you also won’t wipe out your hard-earned, long-term retirement funding,” the company said.

All sound advice — if you consider your 401(k) to be your retirement plan. The data on Americans and their savings habits suggest otherwise: For many people it’s a rainy-day fund at best. Many likely will have few qualms about tapping it early.

Fidelity Investments reports that the average 401(k) balance among its participants ages 50 to 59 was $179,100 as of the third quarter of 2018. But the median balance was far less, just $62,700.

For the group 10 years older, ages 60 to 69, the average balance was $198,600 but the median barely budged, rising a measly $300 to $63,000.

Which brings me to a powerful point made not long ago by Bogle himself — 401(k) plans are not really retirement plans. They simply aren’t strict enough.

“At first, the 401(k) was designed to be a thrift plan, an extra, a savings plan. It was never designed to be a retirement plan. You can see it in its very structure,” Bogle said in an interview.

“There’s no requirement to put money in, no requirement to pull it out. It’s too flexible. There ought to be more discipline in it.”

The same thing is true of the IRA, Bogle pointed out. “It’s very flexible, and I think that should be tightened up, too, but particularly the 401(k) and 403(b). They both have a lot of flexibility and, in a lot of cases, too much cost,” he said.

We know what happens when people are required to make contributions to their own retirement. That’s how Social Security works. For all its faults, Social Security is highly disciplined. Everyone who works puts money in and everyone who retires takes money out as income.

Nevertheless, a shocking number of people simply ignore the opportunity to save for retirement in a 401(k) plan — up to 60% of eligible workers, according to one study. While 80% of baby boomers join a plan if offered one, just 52% of millennials participate.

What can you do now to overcome the design flaws Bogle points out?

First, save more. Many financial planners would point to 10% as a minimum savings rate for people trying to retire decades from today. Vanguard data show that the average 401(k) contribution in 2018 was 6.9% of pay. Just one in five 401(k) participants save more than 10% of their salary for retirement.

Second, it’s easy to underestimate the value of keeping investment costs low, as Bogle notes. High-fee funds eat up a giant slice of your long-term gains, as much as a third of your return or more. Low cost is the point of using index funds in retirement plans such as 401(k)s and IRAs.

Borrowing from your plan or worse, withdrawing cash, means your money stops working for you into the future. You miss out on the powerful effect of compounding. But so does failing to contribute enough in the first place. That’s how you end up with a rainy-day fund instead of a real retirement plan.

Starting early, saving enough and managing cost allows you to use time as leverage. At a 10% savings rate over decades even people of moderate means can compound their savings in the stock market and have enough to retire without worry.

Mitch Tuchman brings the low-cost, scientific investment approach used by elite pensions and endowments to everyday retirement investors through his firm Rebalance. The firm manages retirement accounts with portfolios built by its Investment Advisory Board: Burt Malkiel (Princeton professor who wrote “A Random Walk Down Wall Street”), Charles Ellis (past chair of Yale’s Endowment) and Jay Vivian (ran IBM’s retirement funds). Follow Mitch on Twitter @MitchellTuchman.

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I’m 38 with $315,000 saved for retirement, but have $30,000 in debt. Should I lower my 401(k) contributions to get rid of that debt?

Dear Catey,

I currently have about $315,000 in retirement savings and am 38 years old. I have about $30,000 in consumer debt (this is the only debt we carry, no car payment or mortgage) — about $24,000 of which is an unsecured loan that I’m paying about 10% interest on; the rest is on credit cards that are on a 0% promotional period and that I hopefully pay off before the 0% period expires in October 2020.

I’m trying to pay down my debt and continue to save aggressively for retirement…I’ve made minimal improvements over the past couple of years paying down my debt and continue to play the balance transfer game on credit cards to retain 0% interest rates or other low rate options. We also have two small children that add to the list of expenses.

My plan for 2020 is to lower my 401(k) contributions from 15% to 5% and use the additional income to pay down debt. My company contributes 10% no matter what I contribute. What are your thoughts on this?


Dear M.F.,

Your issue is a common one: The average personal debt load (that’s debt excluding mortgages) of people with debt is about $38,000, according to research from Northwestern Mutual. And many of them, like you, are struggling to pay this debt down while also trying to save for retirement. So I asked financial experts: Should you cut retirement contributions to pay down debt?

The answer: “This person has a fairly decent plan: lowering the 401(k) contributions to pay down debt,” says Mitchell Hockenbury, a financial planner at 1440 Financial Partners in Kansas City, Mo. . “He is still contributing 15% (10% employer, 5% employee) toward retirement with a long runway being only 38 years old.”

Frankly, you might even be able to contribute less to retirement if that meant you could pay down debt faster: “Saving money for retirement is incredibly important, but between your savings to date and your company’s 10% contribution (which is amazing — kudos to them), your retirement fund should continue to grow steadily — even if you take a pause from saving altogether and drop your contribution rate down to 0%,” says Amy Ouellette, director of retirement services at Betterment for Business — adding that’s true only “as long as you’re truly ready to be focused on paying down your debt as rapidly as possible.”

Why is paying down debt so beneficial to you? “Getting rid of debt is one of the most profitable things you can do for your bottom line in terms of net improvement,” says Kimberly Foss, founder of Empyrion Wealth Management in Rosedale, Calif. “When you pay off a 10% loan, you are in effect boosting your net worth at a 10% annual rate.”

In general, many financial experts recommend that people with high-interest debt pay that down as quickly as possible, while also putting in at least up to what your company matches in your 401(k).

Of course, it’s essential that you do use the money you are redirecting from your retirement fund to pay down that debt quickly. “If you can’t get a grasp on your monthly spending it may be a temporary fix,” says Hockenbury. “Establish a realistic spending plan and provide yourself some leeway for the unexpected expenses of your two small children. Dedicate yourself to the spending plan and then work the math on the debt reduction plan.”

Also, look for money in other spots too, or ways to bring in any additional income — both of which can help you more quickly pay down debt.

Once that debt is paid off, and you’ve gotten your spending down through budgeting, you’ll likely feel relief: “When you’ve eliminated your debt, you’ll be in an even stronger position to resume higher contributions to your retirement plan—without the drag of making interest payments to a credit card company or other lender. At your age, you’ll still have lots of years to make up the difference for the decreased deposits to your retirement account,” says Foss.

*Letters are edited for clarity and length

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