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Classification of DBP for Asset Allocation

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  • Classification of DBP for Asset Allocation

    My group has a Defined Benefit Plan that allows us to contribute an extra $30k/yr of pre-tax money. As with most of these plans, I have no control over how the money is invested, and it appears to be a fairly conservative mix of mutual funds, bond funds, and some cash. We are guaranteed to make anywhere from 0-6% annually.

    With that information, how would you classify this money with respect to your stock/bond asset allocation? 50/50? 100% bonds? Something in between?

  • #2
    Originally posted by BillyBob MD View Post
    it appears to be a fairly conservative mix of mutual funds, bond funds, and some cash. We are guaranteed to make anywhere from 0-6% annually.

    With that information, how would you classify this money with respect to your stock/bond asset allocation? 50/50? 100% bonds? Something in between?
    Funds holding what specifically? Oil & gas fields? Large cap growth stocks? (Sorry if I come off as mean spirited, I'm really trying to ask honestly.)

    I'd say 50-100& equities, remaining percentage of bonds, in terms of expected performance.

    Curious about the "guarantee"... the holdings will never lose money?
    $1 saved = >$1 earned. ✓

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    • #3
      Bonds

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      • #4
        Originally posted by Cubicle View Post
        Curious about the "guarantee"... the holdings will never lose money?
        defined benefit plans have a rate written into the plan usually 3 or 4%, and if the plan portfolio underperforms the prescribed rate, the employer basically has to contribute more money, to make up the difference. The assets are always pooled, and understandably typically invested conservatively

        liken the situation to these big pensions you hear about that are woefully under funded. Their poorly managed investments did terrible, and / or they had some unrealistic rate written into the plan

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        • #5
          Probably need to go with bonds returning long-term in the middle of that spread (3%). I.e. just tracking inflation and net 2% when you eventually pay taxes.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            I’ve struggled with how to classify our DBP for AA as well. Currently I’m just using the plans funds (Vanguard Wellesley- 2/3bonds; 1/3 stock). Problem with this AA classification is that my personal return has lagged the actual Wellesley return as the plan documents guarantee a fixed 5% return. This of course is further confounded by my risk of needing to ”shore up” the account during periods of underperformance.

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            • #7
              Originally posted by jacoavlu View Post
              if the plan portfolio underperforms the prescribed rate, the employer basically has to contribute more money, to make up the difference
              I kinda wish I could do this with all my investment accounts so I can kick in more money during low yield years.
              ________________________

              Given that, I would say bonds as opposed to equities I stated earlier, given their guarantee & cap.

              $1 saved = >$1 earned. ✓

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              • #8
                It’s interesting to see how others do their Cash Balnce DNPs.

                our groups has a ~2-3% target return . We are exclusively in high grade corporate bonds and a vanguard short term bond index...so obviously I can put it in my asset allocation as bonds.

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                • #9
                  Originally posted by BillyBob MD View Post
                  My group has a Defined Benefit Plan that allows us to contribute an extra $30k/yr of pre-tax money. As with most of these plans, I have no control over how the money is invested, and it appears to be a fairly conservative mix of mutual funds, bond funds, and some cash. We are guaranteed to make anywhere from 0-6% annually.

                  With that information, how would you classify this money with respect to your stock/bond asset allocation? 50/50? 100% bonds? Something in between?
                  You don't have to guess, ask for the actual portfolio listing from the investment manager. There is a chance it is constantly shifting (if it is, fire the investment manager on the spot). But if it is relatively steady (it should be buy and hold), that's the answer right there. Calculate stock/bond/cash ratio and include this with your other investments. So if your CB portfolio is say 70% bonds and 20% stocks and 10% cash, calculate $ amounts and add these to your current portfolio allocations. There are some CB plans with 'actual rate of return' design, in which case your mix can be quite aggressive (not good). But at least you will know this.

                  Another thing to consider, a DB plan for a group (unless you are a W2 employee) should allow customized contribution amounts, rather than fixed amounts. I see this type of 'lazy' design all the time. Your contribution should be as high as your age/W2 allows you to contribute.
                  Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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                  • #10
                    I wish they allowed us to contribute more, but currently the minimum is $2500, the max is $30k, and there are a few options in between. I went through the portfolio listing and it appears that it is:

                    stocks 36%
                    bonds 48%
                    REIT 5%
                    cash 11%

                    Thats reasonably conservative, right? I don’t currently have cash or REIT in my personal AA, so I need to figure out how to include those. The fund will never give me more than 6.5%, or less than 0%. I guess in a really good year they hang on to the excess in order to make up the difference in the negative years, smoothing out the ride, so to speak. I probably should consider it 1/3 stocks, 2/3 bonds, but part of me is tempted to consider it all bonds due to the smaller returns and smoothing that occurs.

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                    • #11
                      Originally posted by BillyBob MD View Post
                      I wish they allowed us to contribute more, but currently the minimum is $2500, the max is $30k, and there are a few options in between. I went through the portfolio listing and it appears that it is:

                      stocks 36%
                      bonds 48%
                      REIT 5%
                      cash 11%

                      Thats reasonably conservative, right? I don’t currently have cash or REIT in my personal AA, so I need to figure out how to include those. The fund will never give me more than 6.5%, or less than 0%. I guess in a really good year they hang on to the excess in order to make up the difference in the negative years, smoothing out the ride, so to speak. I probably should consider it 1/3 stocks, 2/3 bonds, but part of me is tempted to consider it all bonds due to the smaller returns and smoothing that occurs.
                      Either you have lots of NHCEs, or this is just a terrible design. I'd have to see what's going on before we know for sure. It does sound like you have actual rate of return design (which is usually not good with NHCEs). But if you don't have NHCEs, there is no reason to do this type of design. It is just cutting corners and not giving you the maximum allowed contribution (as if they want to make the plan last longer, but this is done for their benefit, not yours).

                      For a CB plan I wouldn't call this conservative given how quickly these types of plans are terminated due to various reasons. This is not a DB plan that runs for 30+ years, but a plan that can be terminated for any reason (and that usually runs for 10 years once all partners put in maximum contributions). This design sounds like they are trying to stretch out the fun, but it is just wrong (you are simply giving more fees to the company that set this plan up, and possibly AUM fees/revenue sharing for advisors). For one thing, if any bonds have High Yield and/or corporate, they can be just as risky as stocks. If you have too much return, you can't contribute as much as you want, and if the return is too low or negative, you need to put in more for the NHCEs (if you have any). Regardless, Cash is its own asset class, REITs can be added to stocks (REITS are mid-cap Value, if using 9 box style chart), bonds are bonds however you need to classify them as well (especially identify High Yield). Stocks can be split into domestic/international, small/large, value/blend/growth, etc. One thing to watch out for is constant trading and shifting of the allocations, as that would also alter the ratio (ideally it shouldn't change much, but that's one thing to check).
                      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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