RE: Junk bond funds (corporate bonds) in your 401K.
Yes that is exactly the point, but other than the income i get from these assets i try to use a rule based system to buy them when they are cheap generally.
I want the cash flow. I actually use a model in my 401K where i look at the ratio between other workers putting money in my 401K and myself. I got the idea from George S Clason's book "The Richest Man in Babylon". It has been very interesting to watch that ratio rise. By the time I need the 401K, it should be very well developed as an income generating machine.
Also as you recognized i like the fact that even when it dips in value I get paid all the same.
401K's tend to hold Mutual funds which have a peculiar mechanism of paying distributions and dropping the NAV at the same time so that you appear to be no better off the next day. However the price tends to go back to where it was and next time there is a payout i have more units. Its the compounding that I watch. Its confusing because the financial industry says payout or no payout the net affect is the same, but I struggle with that. Certainly if you model it, it looks as they say but one comparison I have used in my own argument with Fidelity who changed our S&P500 fund into one that did not pay a distribution but pooled the money. The fact is is that it does exactly track the price only trend of SPY. But the holders of SPY are getting a 2% dividend. So where is my money :) I don't like the pool idea. There is no transparency and I have plenty of ideas of what to do with the funds so I like them to pay me rather.
Since your 401(k) is with Fidelity, does it allow you to open a BrokerageLink account? That's Fidelity's brand name for optional self-directed brokerage accounts within workplace plans that they run, but not all of the plans they run allow BrokerageLink accounts. I'm just asking because it seems to me that with your level of technical knowhow and the systems you've set up, you might prosper more with the (relative) freedom of a BrokerageLink account than having to be at the mercy of a limited menu of mutual funds, the contents of which can be changed without your consent.
By the way, is that S&P 500 fund using the dividends to issue you additional shares of the fund? The tax code requires mutual funds to pass all net income to fund-holders, so if the fund isn't just sending you the dividends, then they must be "giving" them to you in some other way, and the only other way I can think of is for them to use the dividends to issue you additional shares of their fund, like a DRIP. I'm with you; I too would rather have the discretion to reinvest my dividends as I see fit!
Fidelity has the Brokerage window but my company doesnt allow it. I tried :). I petition the company administrators every now and then. They dont answer! :) Brightscope.com helped me find who they were. Otherwise they don't show up.
As for distributions, ordinarily you are right but the financial administrators like Fidelity were allowed to create "pooled" funds. The benifit for the consumer being that it was a lower cost version of its public twin. For instance they have an equivalent to Contrafund, but its a dark twin and doesn't make distributions. Seems like I am losing but that's the hand that is dealt.
Sheesh! This is yet another example of why I say that if you're a disciplined trader/investor working with a reliable trading/investing system, most workplace retirement plans will make you feel like an advanced swimmer being told you have to use the baby pool!
Have you spoken to any of your fellow plan participants about this? If there's more than one of you who'd like access to Fidelity's BrokerageLink feature, which is available in 401(k) plans at several other companies that use Fidelity as their record-keeper, you might get more traction. Even if it's just you, I would try finding an ally in HR. Oftentimes, the head of HR is instrumental in a company's decision-making process regarding its 401(k). If the user agreement for BrokerageLink requires you to agree that your employer has no liability for any poor choices you make with your money inside the brokerage account (and I can't imagine it wouldn't), then that would be a boon for your employer, because it would lighten their burden as a fiduciary of the money held inside the 401(k). (I'm told that's the primary motivation for employers to allow their employees to open a brokerage account inside the company's 401(k)). If you can convince someone in HR that this move would reduce the company's liability while also making the employees happy, they might be motivated to escalate it up to someone with enough influence to make it happen.
Northrop Grumman is one prominent example of a company that uses Fidelity as the recordkeeper for its 401(k) and allows plan participants to open a BrokerageLink account.
Ha ha yes I even used the fiduciary card on them to see if i could at least make them nervous. Unfortunately in this case that piece of legislation was set aside, so they can go back to ignoring me. Good idea on finding and ally in HR.
There is a piece of me that thinks they are not wrong and that even I could do damage to myself. I cant ignore my 401K because it is my largest most concentrated asset and it has to perform. In this case subject to a bunch of rules and restrictions. Motor racing could be faster, but its the rules that make it fun :) and somewhat safe. :)
Hi @whitesj40. I thought you might find the following article of interest: https://www.thewealthadvisor.com/article/fidelity-sued-over-management-employees-401k-plan.
I think we are wearing out this reply mechanism! I cant even find the comments now :). The article was great and very ironic. However I will say that I am the benefactor of the type of trust funds they are eluding to. They are cheaper for sure but very opaque. Trade off..
True, but you come across as someone who has the knowledge and discipline to impose rules on yourself that give you more flexibility while still keeping you from royally screwing yourself. (Of course, that's just my impression. You know yourself better than I do.)
By the way, are you contributing to your 401(k) on the pretax side, the Roth side, or a combination of both? I ask because whenever I hear someone say that their highest concentration of long-term funds is in a 401(k), it worries me because of the RMD hell that awaits them later in life. But Roth contributions to that 401(k) can mitigate the effects of the RMD dynamic.
ROTH only. I changed to 100% ROTH a few years back as soon as I realized it had become an option. I also only contribute the amount required to maximize the company match. There are better tax protected investment structures than a 401. You eluded to one in fact the Universal Life policy. I use that with a strategy called infinite banking and it has been a real winner.
Smart moves, @whitesj40! Making just Roth contributions, contributing just enough to max out the company match, and utilizing other tax-free strategies. By the way, what type of universal life do you have? Fixed, indexed, or variable? My understanding of Infinite Banking (as a specific system) is that it calls for the use of participating whole-life policies (whole-life policies from a mutual insurance company that pays dividends to policy-holders) rather than any type of universal life. Or are you just using "infinite banking" to refer to the general concept of using permanent life insurance to build tax-free wealth and a source of funds to borrow money from under much more favorable terms than other types of loan?
Indexed Universal life. Not whole life. Infinite banking can be structured either way but it grows faster earlier on using Universal life. Later it becomes more expensive but by then its big enough to carry the increased expenses and still grow strongly.