With a Schwab Personal Choice Retirement Account® (PCRA) employees can take control of their company-sponsored 401(k) retirement savings. This article objectively describes how a Schwab PCRA will equip a typical tenured employee to manage their employer-sponsored 401(k) account in their own unique best interests.
This is particularly relevant for employees who are +50, approaching retirement and have a pension (lump sum and/or annuity), a social security income, and are able to adjust their individual risk profile by planning/managing their cash distributions.
A Schwab PCRA offers: a wider portfolio of investments; the Schwab trading platform and tools; self directed or managed investment strategies; resulting in personalized 401(k) portfolio's that can achieve Benchmark ETF performance of 10.1% and BPM ETF performance of 19.6%, without excessive additional risk.
Consider a $6,000.00 401(k) deduction, with 6% employer match, $12,000.00 total, invested in a traditional 401(k) account for all of 2016.
According to DALBAR, an employee could receive a range of returns depending how they managed their fund: Managed Equity Funds: 11.96%: $13,435.20: to: Self Directed Fixed Income: 1.23%: $12,147.60. Without considering Schwab PCRA capabilities, like:
i) Employee response to short term market conditions
ii) Portfolio diversification extending traditional 401(k) plans
iii) Access to emerging/diverse funds introduced by Schwab PCRA
iv) Considering risks, assets, and goals for the individual employee
Few employees pay attention to this difference. For any investment that grows from $6,000.00 into $13,435.20 or $12,147.60 in one year is all mega impressive. Until they examine what the difference means over the 30 years they have worked. And more importantly, they examine what this could mean over the 14 years remaining to retirement.
Investment: General: 401(k) savings and employer matching contributions must be invested in order to keep pace with inflation. General wisdom is to invest them in target date funds where the initial ETF growth is circa 9.9% p/a. The investments become increasingly conservative as time progresses with exposure switched progressively towards capital-preservation assets, such as government- and index-linked bonds.
The problem is that this general approach of risk mitigation and reduced returns does not apply to all retirees. Especially employees with long term service and pension/retirement benefits package. As offered by employers like Southern California Edison, most infrastructure utilities, and others who reward long term employee service.
Schwab PCRA: Description: A Schwab PCRA is a self-directed brokerage account (SDBA) that resides within an employer-sponsored retirement plan. In addition to the choices typically offered by retirement plans, a Schwab PCRA allows the employee invest in a wider range of investments, and/or retain a certified professional advisor (CPA) to manage their account for them.
Schwab PCRA: Advantages: DALBAR's Quantitative Analysis of Investor Behavior (QAIB) concludes that individual investor returns for equity funds are 3.98% compared to 9.9% for managed equity funds. Resulting from, "investor decisions to buy, sell and switch into and out of mutual funds over both short and long-term time frames." Fortunately most employees allocate their early year 401(k) monies to target date funds and are not tempted to switch in and out of investments.
A Schwab PCRA equips an employee to become an individual investor. Left to their own devices many employees, particularly in their later years, will make the short term emotional mistakes DALBAR reports. But it is not a high performance car's fault if the driver exceeds the speed limit. It is the drivers poor driving. In the same way, the flexibility introduced by a Schwab PCRA must be "driven" by a knowledgeable employee/investor. But if this is correctly done, and the individual employee risks are analyzed, a managed fund can return 9.9% (ETF average) and include the 19.6% (BPM ETF) listed earlier, through to retirement.
Schwab PCRA: Example: Bill is a 53 year old man: Bill has worked at a respected utility for 30 years. Bill has contributed the maximum amount, and earned the maximum company match, for his 401(k) account each year. e.g. $4,000.00 tax deferred. $4,000.00 company match.
Bill's 401(k) fund value after 30 years will be between:
i) @ 3.8% (self directed national average) $433,979.73
iii) @ 8.4% (9.9% ETF less 1.5% individual investor error) $975,514.58
NB: There is a potential difference in 401(k) fund value, after 30 years, of $433,979.73 vs. $975,514.58. This results from Bill's 401(k) account management, in particular any selling/buying/switching activities would probably decrease his return.
Bill wants to retire in 14 years at age 67 and has the following questions: i) Should he move his money into a money market account until global politics stabilize? ii) Should he leave his monies in the 2030 Target Date fund? iii) Should he open a Schwab PCRA self-directed brokerage account? iv) How will he manage such a Schwab PCRA account?
Here is why a Schwab PCRA might be the most important financial decision Bill will ever make.
- Assume Bill allocated his 401(k) to a "2030 Target Date" fund, left it alone, and the Present Value (PV) is $975,514.58.
- Assume Bill contributes $6,000 p/a; earns $6,000 company match p/a; (PMT) $12,000.00 p/a for 14 years.
Bill's 401(k) fund value at age 67 can be calculated as:
i) Future Value (FV) @ 1.2% (Self directed Money Market/CD) for 14 years = $1,334,572.08
i) Future Value (FV) @ 3.8% (Self directed average) for 14 years = $1,860,873.89
iii) Future Value (FV) @ 5.02% (Self directed bond portfolio) for 14 years = $2,172,118.18
iv) Future Value (FV) @ 7.4% (2030 Target Date fund) for 14 years = $2,928,692.59
v) Future Value (FV) @ 9.9% (Managed Schwab PCRA ETF) for 14 years = $3,990,908.84
vi) Future Value (FV) @ 19.6% (Managed Schwab PCRA BPM) for 14 years = $12,297,290.76
Note: To check calculations: Time Value of Money Calculator by Mark A. Lane, Ph.D.
It has taken Bill 30 years of diligent savings to grow into a "near" millionaire. It is natural for Bill to fear a stock market collapse and to believe that it would be prudent to move his 401(k) monies into bonds or a money market.
This is when Bill's 45 year 401(k) investment matures. His risk/return calculations can not be based on short term emotions!
The decision of Money Market/CD (i) vs. Managed Schwab PCRA BPM (vi) calculates to a 14 year difference of $10,962,718.68
Schwab PCRA: Strategy: There are many factors Bill must consider. The financial results of Bill's existing 401(k) plan allocation choices are listed as Future Value (FV) i) through iv) above.
Adding a Schwab PCRA allows Bill to include the following extra factors in his strategy.
- Diversification across thousands of new investments depending on the retirement plan
- Access to emerging markets and small company developed international.
- Access to additional ETF's and mutual funds
- Evaluating personal goals, personal risk, and personal finances
Employees like Bill have contributed to a pension (cash balance payout or annuity) and typically qualify for social security benefits. It is generally accepted that stock market risk gets mitigated by length of investment time. A professional adviser can recalculate Bill's stock market risk/exposure when he retires in 14 years, to include his pension benefits and his monthly social security payments.
Bill would be foolish to lose millions by following any general model of short term risk mitigation when his personal situation does not have this risk, and he can safely invest in a longer term managed portfolio.
No one wants to risk running out of money after they retire.
But getting professional advice on managing risk and any related investment strategy can mean millions in extra growth!
Schwab PCRA: Employer Participation: The employer or retirement plan provider must offer PCRA as part of a retirement plan in order for an employee to open a Schwab PCRA account. The employer will determine if the retirement plan's investment selection for PCRA includes only mutual funds or most available investments. The employee decides how much money to transfer from the regular 401(k) retirement plan into the PCRA. The employee may self direct investments into any type of investment allowed by the retirement plan.
Schwab PCRA: Account strategy: A Schwab PCRA allows an employee to manage their 401(k) retirement savings in the same way that they can manage a (SDBA) Self Directed Brokerage Account. Including; stock trading; bond trading; mutual funds; ETF's and managed by a 3rd party adviser.
A Schwab PCRA significantly empowers employees to personally manage their 401(k) savings. But with this broad additional empowerment comes the need for education, appropriate skills and accountability. We urge employees to get the right advice and skills to grow their monies without inappropriate risks.
Schwab PCRA: Risk: Actual risk, which dictates a fund's performance, is an analytical calculation that varies from individual to individual and their specific financial circumstances. Perceived risk, that affects how we invest, is a combination of fact and emotional perception. Investimg based on perceived risk will almost always result in poor investment decisions.
A Schwab PCRA can be managed in the same way as the employer 401(k) fund. In which case it will carry the same level of risk. Access to a global investment portfolio and additional investment options can actually increase returns and reduce risk. Adding a professional advisor, who takes personal situations into account, will almost always result in a significantly higher return at an equivalent actual risk.
Schwab PCRA: Fees: Schwab does not charge a fee for PCRA. The retirement plan provider may charge an account maintenance fee. Regular transaction fees and commissions apply.
A certified financial planner will typically charge professional fees based on the services they provide. These services include investment advice, managed funds, retirement planning, tax planning, income planning and estate planning.
Schwab PCRA: Get more information: If your company plan offers a PCRA as part of your retirement plan, you can open your PCRA online. Contact your employer’s benefits department to request PCRA enrollment materials.
Editorial: Southern California Edison leads the energy sector as the largest utility to offer a Schwab PCRA in their their employer-sponsored 401(k) benefits packages. The plan places few restrictions on the Schwab portfolio, including over 8,000 mutual funds, individual stocks from all major exchanges, bonds, fixed income and other money market funds.
In practice Southern California Edison, unlike others who have implemented restricted Schwab portfolios, have equipped each employee to be their own fund manager. In addition they have recognized that many employees would like to have access to these advanced investment options, but do not have the skills and experience to use them responsibly. Employees are allowed to hire a professional driver/instructor for their new high powered investment racer ...
This is a breakthrough. Unlike so many, who fear that empowering their employees will allow them to hurt themselves. And in doing so hurt all employees. Southern California Edison have equipped their employees with every investment tool in the bag.
Employees are well advised to seek expert help. But thanks to ubiquitous Internet technology; and a step away from "nanny" employer care attitudes, employees gain access to the tools that until recently have been limited to the very rich.
Finally, middle America, and the 1,000's of people who work so hard every day, and do this loyally for decades, can also grow their retirement savings at real industry returns! This is how technology, innovation and trust can make America Great again.
This is how America escape's the social security dependency trap that is killing our economy.