2009 is already over one-fourth over, so I think it’s a good time to check on the ole’ battered portfolio.

Contribution Details
In early 2009, we each made a $5,000 contribution towards our non-deductible IRAs for the 2008 tax year, for a total of $10,000. We have also contributed $12,969 so far into our 401ks through regular salary deferrals and the company match. We haven’t made any after-tax investments in our portfolio yet.

YTD Performance
According to my spreadsheet, the 2009 year-to-date time-weighted performance of our personal portfolio is -15.5% YTD.

For reference, the Vanguard S&P 500 Fund has returned -6% YTD, their FTSE All World Ex-US fund has returned –6.36% YTD, and their Total Bond Index fund is -0.13% YTD as of 12/8/08. The Vanguard Target 2045 Fund has returned -4.70% YTD. Part of the poor relative performance is probably due to the timing of my large lump-sum investments.

Investment Changes
We have used our new contributions to bring us closer to our asset allocation target, with a 85% stocks/15% bonds split.

You can view all my previous portfolio snapshots here.

Even though most people I know are too scared to even look at their 401(k) statements right now, have you ever thought about how well your company’s plan stacks up to other similar companies? The problem is that 401(k) plans lack transparency. What if every company had to publish their company match, fees, revenue sharing (*cough* kickbacks), investment choices, and vesting schedules? That would certainly produce competition and peer pressure to make better plans.

This is what the website Brightscope is trying to change. Just type in your company name and see an overall rating based on the components I listed above, also some other interesting details like average account balance. As they point out, a poorly designed plan could be costing you hundreds of thousands of dollars over time – or put another way the equivalent of an extra decade of work!

According to their site, BrightScope is the only 401k analytics firm that is truly independent and does not accept compensation in the form of revenue sharing from mutual fund companies or plan providers. This should make them objective. Found via Capital Ideas.

A related site is 401khelp.com, which covers less companies but does offer more insights and opinions on the plans it does cover. Not sure how often it is updated, though.

With the market in another funk this week, I was reminded that I had until April 15th to make my IRA contributions for 2008. It could get worse before then, or it might bounce up again, I have no predictive powers either way. I don’t like to be wishy-washy, so we went ahead and each invested $5,000 to a non-deductible IRA today.

Background
A nondeductible IRA is the same as a Traditional IRA, except that your income is too high so you can’t deduct the contribution. If you haven’t maxed out all your other options like a deductible Traditional IRA, Roth IRA, 401(k), or 403(b) plan, you should put your money towards those first. This option is mostly for those with no other better options.

Why?
So if you don’t get the tax deduction, what’s the point? The most appealing is that in 2010, unless the law is changed, you can start rolling over your non-deductible IRA into a Roth IRA with no income restrictions. I am starting to like my chances, since we are only ten months away from 2010 (I plan to convert right away) and I’m sure with the current deficit the government would like to collect all the tax revenue it can now instead of later. If it looks good, I’ll probably make my 2009 contribution in December (after making sure we don’t otherwise qualify) and convert that to a Roth too.

The second reason is that the after-tax returns might be higher if you invested in tax-inefficient products like bonds, commodities, or REITs.

Contribution Limits
The contribution limits are $5,000 for both 2008 and 2009. If you are age 50 or older, you can contribute another $1,000 that year.

What Did I Buy?
My portfolio is getting out of whack right now, so I bought what I need to bring it back into my desired asset allocation. I purchased $3,000 of an REIT fund (VGSIX), $2,000 of a US Small Value fund (VISVX), and $5,000 of an Emerging Market fund (VEIEX). We’re still making regular contributions to our 401ks, which contain our US and International “Total Market” funds.

These days, not too many people are singing the praises of their 401(k) plans. They have been called failures, with many having hidden fees and poor investment choices. But I was reading a Scott Burns article that had an different take on things: 401(k) plans are a miserable failure because most of us make bad choices.

Here the evidence: For the 20-year period from 1988-2007, the S&P 500 had annualized returns of 11.81%, while investment-grade bonds returned 7.56%. But what did the average mutual fund investor return? Only 4.48 percent. That’s worse than super-safe Treasury bills, which managed 4.53% annually!

This data is actually pulled from the “DALBAR study”, which I have seen referenced before. DALBAR is a research firm that provides research for financial professionals about investor behavior. Each year, they publish a report called the Quantitative Analysis of Investor Behavior where it compares the returns from average individual investors to various benchmarks. The news is not encouraging…

For years, mutual fund companies have been marketing their products using the long-term results of a lump-sum investment. The results typically show that the funds’ annualized returns have outpaced their designated benchmarks and inflation, implying that if investors purchase fund shares and hold them for similar time periods, they may achieve similar results.

Reality, however, is quite different from this scenario – and it’s not the fault of the fund companies. In this year’s Quantitative Analysis of Investor Behavior, DALBAR illustrates how investors are often their own worst enemies. By examining actual fund inflows and outflows during the 20-year period ended December 31, 2007, the analysis finds that investors often buy and sell at the worst possible times – and achieve commensurate returns.

As Burns quips, investors as a whole do seem have a great skill for “methodically buying equities when they were up and selling when they were down.” 🙁 This sentence summarizes it best:

Investment return is far more dependent on investor behavior than on fund performance. Mutual fund investors who hold their investments typically earn higher returns over time than those who time the market.

Added: I’m not really trying to bag on 401ks, I’m trying to focus on the fact that tying to time the market has been very destructive for investors. For a related parable, read their story of Quincy and Caroline.

I ran across a BusinessWeek article today about retirement plans in 2008 from top 401(k) provider Fidelity Investments. It stated that although the average retirement account balance fell a whopping 27% to $50,200 last year, people actually contributed slightly more in 2008 than in 2007.

This quote also caught my eye:

Are investors making a lot of changes within their retirement accounts?
Some 60% of plans administered by Fidelity in 2008 utilized a lifecycle fund as a default investment option, that’s up from 38% in 2007. What happens in a time of short-term volatility is that investors in these funds are not switching. Only 1% lifecycle fund investors made a change compared to the overall average to 6.1%.

Makes sense overall. Investors in these types of funds want all-in-one simplicity. However, almost every company these days offer a lifecycle retirement fund. And most 401(k) investors can only invest in the one that happens to be in their plan. Check out this Money magazine example of the possible extremes out there for a mutual fund designed for a worker retiring in 2010:

On the aggressive side, the Oppenheimer Transition 2010 Fund (OTTAX) has 65% in stocks for someone on the verge of retirement, resulting in a 46% loss in 2008. On the conservative end, this AP article has an even better example – The DWS Target 2010 Fund (KRFAX) only has 18.1% in stocks and only had a 3.6% loss in 2008. The rest was in cash and bonds. (Of course, it also had a fat front-end load and is closed to new investors.)

That is some pretty stark contrast. Do you know what is inside your target-date fund? Dig up the ticker symbol, plug it into Morningstar, and scroll down to “asset allocation”.

What about the big boys like Vanguard?
Even the most highly-rated mutual fund companies don’t agree on the asset allocation for each time horizon. See how Vanguard, Fidelity, and T. Rowe Price differ in their target-date retirement funds.

The 2009 inflation-adjusted limits for 401(k) and 403(b) defined-contribution plans are as follows:

• The 401(k) elective deferral limit goes to $16,500, up from $15,500.
• The “catch-up” amount allowed for those age 50 years and up increases to $5,500, up from $5,000.
• The overall annual defined-contribution plan limit goes to $49,000, up from $46,000. This usually comes into play when you have additional employer contributions.
• These numbers apply for both Traditional pre-tax and Roth after-tax contributions.

Maxing out pre-tax 401(k) contributions
$16,500 annually works out to $1375 per month. If you get paid bi-weekly that’s $635 per paycheck. But since this is gross income, if you are using pre-tax contributions (not the Roth 401k option*) your actual reduction in take-home pay will be less.

According to the calculators at PayCheckCity, if you are single with one allowance, earn a gross annual income of $60,000 per year ($5,000/month), and you live in a state with no income taxes, this works out to a reduction in your monthly take-home pay of $1,031. (It would go from $3,804 down to $2,773.)

You can also get to the same number by first finding your 2009 marginal tax rate. Since a such a person would be in the 25% bracket, taking 75% of $1375 is $1,031.

* If I were in the 15% tax bracket or lower, I would go with the Roth option (if available) because historically that is a low rate. Pay the low rates now, so you can avoid paying them later! For higher tax brackets, it depends on some personal variables like how much taxable income you expect to generate when withdrawing for retirement.