401(k) participant market risk and longevity risk

[mz27514]

Looking for feedback for the following scenario:

“Predictive equity analytics” addresses equity market risk and returns using graphical reports that warn beforehand of market downturn as well as enable capture of gains. “Essentially the quantitative predictive equity analytic capability found in investment banks and financial intermediaries is made available directly to 401(k) participants in a user-friendly manner."

Would 401(k) participants be better off directly managing their accumulated wealth within their accounts if given the proper predictive equity analytic tools and training or would they be better off using the menu of funding vehicles?

 

[DHK]

They'd probably be better off with lifetime income annuities... which are now allowed to be held in a 401(k) plan because of the SECURE Act.

The 401(k) would not be better by giving participants MORE control OR by more "fiduciary regulation" of these plans.

The inventor of the 401(k) says he created a ‘monster’

 

[scagnt83]

Looking for feedback for the following scenario:

“Predictive equity analytics” addresses equity market risk and returns using graphical reports that warn beforehand of market downturn as well as enable capture of gains. “Essentially the quantitative predictive equity analytic capability found in investment banks and financial intermediaries is made available directly to 401(k) participants in a user-friendly manner."

Would 401(k) participants be better off directly managing their accumulated wealth within their accounts if given the proper predictive equity analytic tools and training or would they be better off using the menu of funding vehicles?

That is one heck of a hypothetical. One that throws Fiduciary Regulations and oversight right out the window. Meaning, legally it cant happen.

 

[mz27514]

The goal is to accumulate wealth (capture gains), avoid drawdowns, provide maximal control (liquidity) in the most cost-effective manner over a lifetime.

"predictive equity analytics" is new and more information is available upon performing an internet search. Hypothetical is now reality.

An investor can provide the services to themselves (made possible through predictive equity analytics), employ a third party to provide the services in a fiduciary role or provided in a non-fiduciary role or purchase an annuity insurance product. The third party or insurer may or may not employ predictive equity analytics.

Optimally, if the investor or plan participant can independently monitor performance of third party using predictive equity analytics then current fiduciary regulations are sufficient and " it is not the case - thrown out." It is the introduction of monitoring capability (made possible using predictive equity analytics) that enables concurrence of investor and third-party advisor over time. More fiduciary regulations are not needed.

It is a manner of investor (plan participant) preference to employ predictive equity analytics in monitoring role or to extend to active trade role at any point in time.

Traditionally, attainment of the above goals took the form of an annuity for payout with accumulation period utilizing mutual funds, target date funds and ETFs etc.

With large banks and financial intermediaries offering 0 transaction fees and no minimum balance, "the situation has changed and merits review."

The fact that 401(k) fund balances suffered severe drawdowns in 2008, 2018 and 2020 supports more control to participants is warranted.

Consider the situation where a 401(k) offers a standard set of mutual and ETF funds with a brokerage capability to customize portfolios to participants.

The ability to select stocks at optimal price and time is the missing link that is
provided by predictive equity analytics.

With predictive equity analytics participants have ability to change funds and contribution levels on an informed basis independent of third-party fund managers to capture gains and avoid drawdowns. By selecting stocks forecast to appreciate, participants can realize gains greater than fund managers. Now view outside 401(k), employees can invest in stocks expected to increase using after tax dollars outside of 401(k).

401(k) annuitization rates are based on forward projection of interest rates by duration which in our current environment are "low and will remain low." Forecast of future equity market returns (after transaction costs and tax) is greater than forecast of future interest rates.

There are two requirements for successful equity investment:

1) 0 or low trade transaction cost

2) equity research (uses past info, ) or better predictive equity analytics (predicts short term future) - which serve for stock selection, timing and price.

If an insurer can satisfy the above criteria as an annuity product, terrific - should be easy product to sell ( above average returns , generous crediting formula, low cost additional riders for say LTC etc.) and agents lining up to sell it ( generous commission structure ). The annuity election sacrifices a good deal of control, may not be cost-effective over-all horizons and forgoes significant further wealth accumulation due to premium payments.

If a third-party advisor in fiduciary role or non-fiduciary role can provide the same services, we would see higher returns exceeding competitors which would attract more business.

If an investor can attain these goals using an alternative such as predictive equity analytics which satisfies all above the above criteria, this is certainly the optimal solution provided the individual takes an active role which means scanning the market for return opportunities and avoid drawdowns daily or at least a minimum of 2 - times per week.

Financial economics informs us that where multiple channels are introduced that compete to attain the same goal or set of goals then the investor or plan participant is made better off through a menu of choices with associated costs.