Transcript:
Easan Arulanantham:
How do I manage a 401k?
Tom Vaughan:
Yeah, that’s this is big area, though. So lots of money in 401k is here in Silicon Valley, right? I mean, there’s just no doubt about it. We’ve got these big amounts of income that people make here. Companies match, some of them even match up to 100% of the contribution. I mean, it’s incredible what’s happening. And we’re seeing million and $5 million 401k is all over the place, they have one huge disadvantage maybe to one is that really, they are managed by the individual. And in my opinion, a lot of times, it just gets kind of put aside, you know, and you’ve got the scenario where it’s ignored, or people get nervous too easily, because of all the bad news and not enough identification and the good news, and they ended up getting out and going back and forth. And so here’s the new thing. Now, there’s a new platform form called Pontera, that allows people like us to actually manage a 401k for a client while they’re still working, this was not available before. And it’s a really amazing thing as far as that goes. So this is one of the things that we can take a look at. And there’s a study that was done here that I’ll show you. So this is a study that shows the difference in rate of return between a managed account by somebody a professional versus individual managing their own 401k. On average, the differential is 3.32%, right, which is a lot. And this particular example shows a 45 year old would have 79% more in their 401k By the age of 65. If they average 3.32%, higher after fees. So it’s a huge difference.
Easan Arulanantham:
And, so with a 401k, we kind of get into this status quo, we have this kind of inertia, we set our allocation, and we kind of forget about it, you know, maybe we just set a target date that kind of represents when we’re gonna retire. And then over time, we just keep adding money, money, money to it every like pay period, but really don’t change anything to like fit our needs our risk tolerance, and then we don’t we just let go, we just have it sit in the background. And so that’s where it kind of like someone managing it, or someone taking an active watch of it really helps because maybe your target date is international Sox. And we talked about how international stocks have been underperforming US stocks. And so you’re losing out on that return by having just a target date, that’s kind of just broadly invested.
Tom Vaughan:
And that that’s, that’s one of the key things is to kind of understand what’s in all of those, that’s not that easy, you gotta have the tools to be able to dig in and figure out what’s there and such to so very fascinating. So we can go in and take over somebody’s 401k, do the trades, work with them on their risk tolerance and help them manage that asset. And work within the list of options that are available inside that 401k. But there’s an even more exciting aspect of this is what’s called the self directed brokerage portion of a 401k. Not every 401k offers this, but we’ve run across most of them here that we’ve seen here in Silicon Valley seem to have this option. So that’s really nice. And what that does is it allows you to go out and to basically create any portfolio. So you don’t have to just buy things off of their list. You can use the self directed and buy any stock, any bond, any Exchange Traded Funds, etc. So what I just put up here on the screen is our current 60/40 model, for example. So we have a big chunk of Vanguard Total Stock Market Index, and Vanguard S&P 500. We’ve got a little real estate, Apple, Microsoft semiconductors. And then we’ve got multiple different types of bond pieces in there. And that’s one of the biggest weaknesses I’ve seen inside of 401k is as far as the options to choose from is just right now, bonds aren’t doing that well. And so, you know, being able to use a treasury inflation protection security that’s doing better right now, or maybe some inflation protected high yield bonds, or some standard high yield bonds, those types of things in this environment are doing better so far. And so this is super exciting. We can go in, take over the 401k help the client get set up with the self directed brokerage, and then apply our current model that keep it up, make the changes and you know, be able to kind of manage that aspect of it. That could be phenomenal.
Easan Arulanantham:
Yeah, and the one big issue with 401k is is you only have a limited list of what You can invest in. So I, as a person, maybe I like Apple, but I can’t ever get an Apple in my 401k Unless I think about doing a self directed. So it opens up the window of what investments you can do. And so we talked a lot of funds, or 401k is only have one bond fund more than one US stock fund. And maybe you don’t like that fund, because maybe as exposure to something you don’t want to be exposed to, but you don’t have the option. So you kind of just have to pick it. And so that’s where self directed becomes really advantageous.
Tom Vaughan:
Yeah, I’ll tell you. Another thing that jumps to my mind is that we have a lot of clients that really liked the ESG portfolios, and we have a whole set of them. And so that’s environmental, social, and governance, these are socially responsible investments, I have yet to see any of those available inside of the limited selection of a 401k. If we go out to the self directed brokerage, I can take that entire 401k By all ESG pieces in that portfolio, I have custom design portfolios, that, you know, we can apply to that 401k. And so if that’s something that interests you, really, the only way to do that is through self directed brokerage. And obviously, what we’re doing is bringing in our expertise to help create that model, we look at all of the risk tolerances and the cash flows and how those things work and the spreads on those ETFs and, and everything. And then we help that client kind of identify which one works best for them on a risk basis. And then we stand between them and the fear sometimes that comes up in the marketplace, right? So anyway, that’s, that’s what’s happening. 401k really fascinating area very exciting for us. So anyway, that’s something new that you can take a look at