Financial Geekery

Seaborn made a thing to make your 401(k) better

June 28, 2019

We hope you like it! 

 

OK, before I read any further: should I care?

 

Maybe. You should care if all of the following are true:

 

  • You have a 401(k), 403(b), or other retirement plan whose investments you have some control over, and/or an HSA

  • You have more than $150,000 in total investable assets (including the accounts above)

  • At least $50,000 of those assets are in IRA's and/or taxable brokerage accounts

  • You believe that investment management can improve returns net of fees.

 

If any of these aren't true, you can go about your business. Move along.

 

Alright, I'm still reading. What's this new thing?

 

So you know how Seaborn can manage investments, using strategies like efficient portfolios of uncorrelated assets, multi-factor tilts, opportunistic rebalancing, tax-loss harvesting, and tax-efficient asset location? Well, we've now added the ability to manage held-away accounts like 401(k)'s, 403(b)'s, and HSA's!

 

And...that's good?

 

Only if you want to improve the returns on your 401(k). And if you're a tech professional like most Seaborn clients, your 401(k) is often the bulk of your investment assets!

 

Well, sure, more growth is better, but how would you do that?

 

Several ways, but the main three are: daily opportunistic rebalancing, tax-efficient asset location, and optimized fund selection. 

 

You've talked about daily opportunistic rebalancing and tax-efficient asset location before, but what's optimized fund selection?

 

It has to do with the sausage-making of retirement plans. A lot of them are a mix of high-fee, inefficient funds and low-cost, efficient index funds. Why? Because the high-fee funds generally have revenue sharing agreements with the retirement plan administrator. This makes employers happy, because it means the retirement plan administrator charges them less; many employers insist on a "revenue-neutral" policy such that the retirement plan must be structured to be at no direct cost to the employer at all!

 

Of course, this means that the employees are stuck indirectly footing the bill. Those fees subtract directly from your returns!

 

With optimized fund selection, Seaborn can use the low-cost funds and ignore the high-cost ones, implementing those asset classes in your other accounts. (Not to mention that many retirement plans don't have access to some key asset classes at all, like real estate and international small-cap value!)

 

Can you give me an example?

 

Sure. Let's say that you've got a 401(k) and an IRA. The 401(k) has an awesome low-cost large-cap index fund (as many do), but its small-cap fund charges 1.2%, and it has no REIT funds. We want all those asset classes in your portfolio, but 1.2% is awfully expensive. With optimized fund selection, we can implement the large-cap part of your portfolio in the 401(k), and implement the small-cap and real estate part in your IRA, thus lowering your overall fees, giving your portfolio the desired exposure to real estate, and overall improving your portfolio's efficiency.

 

So this only works if I have another investment account?

 

Yep. Same thing with tax-efficient asset location. If all your assets are in your retirement plan, we can still do daily opportunistic rebalancing, but honestly, that alone probably isn't worth it, especially given what I said above about 401(k)'s not having access to key asset classes. Wait until you leave your employer, and then we can talk about whether it makes sense to roll your old retirement plan into an IRA.

 

Speaking of performance, shouldn't I be hearing some disclaimers right about now?

 

Good call. We wouldn't want to get the regulators upset!

 

Added returns of daily opportunistic rebalancing is based on this research by Daryanani, and tax-efficient asset location is based on research by Daryanani/Cordaro, Blanchett/Kaplan, and Vanguard.

 

They're based on a bunch of assumptions (see the research for details), and your mileage may vary depending on your situation. (Especially with regards to optimized fund selection; it all depends on what funds your 401(k) has!)

 

Added returns will vary (or go negative) from year to year, depending market activity, tax rate, withdrawals, contributions, etc. But you knew that already, I hope.

 

And these estimates are of course based on historical returns, and past performance doesn't guarantee future returns. That said, these strategies are specifically chosen for their robustness, rather than being "secret sauce" that loses value once "everyone knows".

 

I notice you didn't say anything about multi-factor tilts or tax-loss harvesting.

 

Unfortunately, we can only use the funds your plan administrator has authorized, which means we often don't have access to DFA, so we can't implement multi-factor tilts in them. And tax-loss harvesting only works on taxable accounts.

 

OK, so there's potential for added returns there. How much are you charging for those?

 

We treat 401(k)'s like any other investment account, so it's our standard investment management charge: 0.6% for assets under $1MM, 0.4% on assets over that.

 

Can you pull those fees directly from my 401(k)?

 

No. We would either bill it to your taxable brokerage account (if you have one) or directly to you.

 

So...how does this work, exactly? How do you have access to my 401(k)?

 

Through a platform called FeeX. It works like any account aggregator: you securely input your login credentials, and we get access to change the allocation (and only that; we can't touch anything else) in your account. 

 

Once I'm a client (or if I'm a client already), how difficult is this to set up?

 

We send you a link, and you input your login credentials. That's it!

 

I've got more questions...

 

And I've got answers. Send me an e-mail, or schedule a call!

Please reload

Subscribe

RSS Feed

Recent Posts

October 20, 2019

Please reload

Archive

Please reload

Tags

Please reload