What To Do When Your Employer Cuts Your 401k Matching

The following first appeared on Money & Markets.

It’s rough out there. With much of America still closed due to the COVID-19 pandemic, the unemployment rate is the highest it’s been since the Great Depression. But even many Americans that still have jobs are seeing pay and benefit cuts.

401k matching is often one of the first things on the chopping block, and the 401k matching rules are clear. Unless the matching is part of a union contract, companies have the right to slash or eliminate matching, even mid year. This applies to both traditional 01k plans and the safe harbor 401k plans more popular with small businesses.

Reducing or eliminating the employer matching isn’t particularly popular, but it’s a lot less potentially unpopular than mass firings or pay cuts.

What Are the 401k Matching Rules?

If you work for a large company, matching is almost always completely at the discretion of the employer. They have absolutely no obligation to match. They do, however, have a ton of 401k matching rules concerning nondiscrimination. Essentially, they can’t match for the executives but not for the rank and file workers. They can eliminate matching so long as they do it for everyone.

Smaller businesses often offer safe harbor 401k plans, which avoid the nondiscrimination testing but come with their own set of 401k matching rules.  As a general rule, employers have to offer a dollar for dollar 3% match and a 50% match on the next 2%, or they can offer a flat 3% nonelective contribution irrespective of employee deferrals. (In other words, they “match” you even if you don’t contribute.)

But even here, the employer can suspend matching if the company is operating at a loss, provided they give 30-day notice and follow the “top heavy” requirements that prevent too much of the plans benefits from going to the executives.

What Should You Do If You Employer Quits Matching?

If your employer has eliminated matching for the year, you might be tempted to say screw it and quit contributing to your plan.

Well, if you’re in a financial bind due to the pandemic, that might be your best move. If you’re having a hard time paying your mortgage or putting food on the table, the retirement plan clearly isn’t your top priority.

That said, assuming your finances are stable, you should continue to plow every nickel you can into your 401k plan. In 2020, the contribution limit is $19,500 or $26,000 if you’re over 50. That’s your goal, with or without matching.

I’ll spare you the tired old lecture about how the stock market “always” rises over time. “Always” only holds true if your investment time horizon is 30 years or more. My reasoning here has nothing to do with the stock market.

It comes down to taxes. Every dollar you put into your 401k plan is a dollar the IRS can’t get its grubby hands on.

Let’s say you’re in the 32% tax bracket. You effectively earn a 32% “return” on the tax break alone, even if you leave the cash in your plan’s stable value fund essentially earning nothing. And that cash remains available to invest tax free for the rest of your working life. So, if you’re reluctant to chase the market higher here, that’s fine. You can still get the money into the plan, enjoy the tax break, and then just bide your time until there’s a pullback.

All of this would be true whether your employer matched you generously or didn’t match you at all.

So, if you’re employer had to cut back on your plans matching this year, don’t throw out the baby with the bathwater. It still makes sense to save as much as possible in your 401k plan.

All About the Bitcoin Halving

The following first appeared on Money & Markets.

I don’t normally like to hear the word “halving” associated with one of my investments. If your investment gets halved, you had better hope that there was a stock split. Otherwise, something went terribly wrong.

Of course, “halving” means something very different for Bitcoin and other cryptocurrencies. In case you missed it, Bitcoin just underwent a “halving,” the third in the cryptocurrency’s history, on March 11.

To understand what exactly that means, we need to do a quick refresher on what Bitcoin is and how it works.

Bitcoin runs on a blockchain, the open, distributed ledger that keeps track of every transaction made in the cryptocurrency. Because the ledger is distributed across every computer on the network, it’s nearly impossible to hack.

There is no centralized server in an office building somewhere that can be tampered with. Every transaction in the entire history of Bitcoin is recorded on every computer in the blockchain network and public domain to see. I can’t say it’s impossible to hack. I’m sure there’s some eccentric James Bond-villain hacker out there stroking a Persian cat and laughing maniacally as he hacks my account now.

But let’s just say it’s a lot harder than ripping my credit card number or hacking my checking account.

Nothing is Free

While Bitcoin was born of an idealistic, libertarian experiment, running the network isn’t free. It requires a lot of computational power and electricity usage to maintain the blockchain that supports Bitcoin.

While I’m sure there are some true believers out there that would do it for free, the rest are properly incentivized by being allowed to mine new Bitcoin. (In case you’ve wondered, Bitcoin mining actually does serve a purpose — the mining activity is what runs the payment system.) The algorithm that underpins Bitcoin rewards miners for volunteering their computer resources by giving them freshly mined Bitcoin.

This gets us to halving.

Halving is where the reward for mining gets cut in half. The same amount of processing generates half the number of new Bitcoins.

Why Does the Bitcoin Halving Happen?

We all know why gold and diamonds are valuable. They’re both rare.

Well, so is Bitcoin — by design. The supply of new Bitcoins is controlled by the mining process, and halving slows down the creation process.

By throttling the creation of new Bitcoin, the system avoids inflation.

Bitcoin prices fluctuate wildly due to supply and demand among traders, of course, just like gold, diamonds or any other finite commodity. But it can’t be printed at will by a panicked Fed Chairman.

It’s an Expensive Printing Press

Mining Bitcoin is wildly expensive and uses a ton of energy. A report last year found that Bitcoin mining globally used roughly the same amount of electricity as the entire country of Switzerland. The average cost to mine a Bitcoin was $6,851 before the halving. Now, the cost is around $13,000.

I know it’s folly to try to assign a fundamental value to something as speculative as Bitcoin, but I’m going to do it anyway. If it cost $13,000 to mine a coin, then the price needs to be $13,000 or higher to justify mining. At any price below that, the miner is actually losing money.

If the price of Bitcoin stayed below the cost to mine it for long, there would be no incentive to continue mining. As with any other business endeavor, you can’t operate at a loss forever.

This is where it gets interesting. If miners drop out, the number crunching that supports the blockchain gets easier and less energy intensive. This creates an equilibrium of sorts in which mining costs (what you can think of as the crypto’s “intrinsic value”) stay relatively close to market prices.

We’ll see what the future holds for Bitcoin. While Bitcoin itself has built-in inflation protection, there is nothing to stop inflation in the sheer number of competing cryptocurrencies. I like the concept of the cryptocurrency, but Bitcoin’s lack of monopoly power makes me stop short of betting the farm on it.

Still, it does have first mover advantage over the competitors. And if you’re looking for hedges against dollar devaluation, having a little Bitcoin along with some gold isn’t the worst idea.

Picking the Best Small Business Retirement Plan: SEP IRA vs. 401k

The following first appeared on Money & Markets.

If you’re like most small business owners, your main focus is simply getting business in the door. And with business conditions still extremely difficult in the post-coronavirus world, many small business owners are struggling to keep the lights on.

But if your business is stable and cash flowing, adding a retirement plan should be your next priority. Apart from your own retirement security and protection from lawsuits, having a proper retirement plan can help you to attract and retain better employees. So, today we’re going to consider the best small business retirement plan for your company, whether you’re running a one-man shop or employ dozens.

The Best Small Business Retirement Plan for a Sole Proprietor

We’ll start with the smallest of small businesses, the sole proprietorship (we’ll lump in single-owner LLCs and other entities here as well).

For the one-man shop, your best small business retirement plan options are the Individual 401k (also called a Solo 401k) and the SEP IRA.

If you make more than $285,000 in annual income or business profits, there is no functional difference between the SEP IRA and the Individual 401k. At that income level, you can max out either retirement plan at the full $57,000 allowed in 2020.

But at any income level below $285,000, the individual 401k is going to be the best small business retirement plan by a country mile.

Here’s why. With a SEP IRA, the maximum contribution is 20% of your net profit up to a maximum of $57,000. But let’s say your profit is only $100,000. The maximum you could contribute would be $20,000.

Now, let’s compare that to a solo 401k. In all 401k plans – be they individual or large company plans – you can contribute $19,500 via salary deferral or $26,000 if you’re 50 or older. But you can also contribute the same 20% of the net profit. So, on the same $100,000 net profit, you could contribute a total of $39,500 rather than $20,000.

So, for the one-man shop, there is no reason to ever choose the SEP IRA. The administration and investment options are generally going to be the same for both plans, yet the solo 401k allows for higher contributions for a given income level. For the sole proprietor, the individual 401k is the best small business retirement plan.

And if You Have Employees?

If you have employees, it gets a little more complicated. A proper company 401k plan can cost $5,000 or more to administer every year and comes with a mountain of paperwork. For many, this will still be the best small business retirement plan because employees are comfortable with it, and in some cases the owners can contribute as much as $57,000 per year. But those benefits come at a price in terms of high fixed cost and additional work for your payroll staff.

The SEP IRA is cheaper and easier to administer but it’s generally not ideal when you have employees. To start, there is no salary deferral. You can make employer contributions to your employee accounts, but these have to  be consistent throughout the organization. You can’t sock away 20% for yourself and only 3% for your employees.

The best small business retirement plan for many smaller firms with employees is going to be a third option called the SIMPLE IRA. A SIMPLE IRA “looks like” a 401k in that contributions can be a mixture of employee salary deferral and employer matching. But unlike a 401k plan, there are no real administrative costs.

The only real downside to a SIMPLE IRA is the lower deferral amounts. Employees can dump $13,500 into a SIMPLE IRA each year, which is significantly less than the $19,500 currently allowed for 401k plans. But most employees are unlikely to contribute the full $19,500 in any given year anyway, so that’s going to generally be a moot point for most.

If you’re a small business owner, you’ll obviously need to do a little more research than this. But this should at least get you pointed in the right direction.

Where to Find Yield Today

The following first appeared on Money & Markets.

Having the Fed funds rate back near zero is fantastic if you’re a borrower. It’s not so great if you’re an investor looking for income. T-bills, savings accounts and money market funds all yield essentially zero, and it’s hard to find CDs yielding more than about 1.5%.

It is still possible to generate a respectable income stream on your investments without taking excessive risk. You just have to look a little harder than usual and be willing to look at new pockets of the market you might not have considered before.  So today, we’re going to cover where to find the highest yields.

Not surprisingly, some of these sectors were badly beaten up in March, and all have to be considered a little risky in the post-coronavirus environment. But at current yields, at least you’re being adequately compensated.

Where to Find the Highest Yields

REITS

I’ll start with real estate investment trusts (REITs). I covered REITs back in early April, noting that the sector had been battered and left for dead.

Not all the negativity in the sector was unwarranted, of course. With most of the country on lockdown for the past two months, a lot of commercial tenants have been unable to pay the rent. Some REITs have lowered or suspended their dividends as they assess the damage.

It might be a while before things start to look truly normal again. Restaurants, gyms and entertainment companies in general will be licking their wounds for months. It may be well over a year before their customer levels recover to pre-crisis levels, which means landlords will need to be flexible. So if you’re a REIT investor, you’ll want to focus on the strongest names with the best access to capital.

Back in April, I mentioned Realty Income (O). While the REIT is focused on retail, its exposure to riskier pockets like full-service dining and gyms is tolerably small. At current prices it yields 5.5%, and I’d consider that dividend safe.

Ventas (VTR), which I also mentioned in the article, today yields a whopping 11.3%. Keep in mind that, as a senior living REIT, Ventas was hit particularly hard by Covid 19, and the company may decide to cut its dividend later this year. I don’t consider that especially likely, but I can’t rule it out in this environment.

I also mentioned EPR Properties (EPR) back in April, and I still consider this entertainment-focused REIT to be a nice value play. Unfortunately, they opted to conserve cash by suspending their dividend. So, if you’re buying specifically for yield, you’ll want to wait on that one.

And naturally, if you want to get out of the stock picking game, you could always just buy the index fund and be done with it. The Vanguard Real Estate Index ETF (VNQ) gives you broad exposure and yields an attractive 4.2%.

Business Development Companies

Last week, I recommended business development companies (BDCs), noting that like REITs, this high-yielding sector has really taken its lumps this year. Business development companies make loans and equity investments in small- and medium-sized businesses, making them a lot closer to Main Street than to Wall Street.

As with REITs, some BDCs have gotten hit particularly hard by the stay-at-home orders. But there are still some real gems out there if you’re willing to roll up your sleeves and look under the hood.

Ares Capital Corp (ARCC) and Main Street Capital (MAIN) were two solid BDCs I mentioned last week. I’d mention again that these two income machines currently offer yields of 12.2% and 9.0%, respectively.

Pipelines

Finally, I’d add pipeline stocks to the list. Anything even tangentially related to energy got utterly annihilated in March. Between the drop in demand from virus lockdowns and the surge in supply due to Saudi Arabia’s price war with Russia, crude oil prices tanked, taking energy stocks with them.

But here’s the thing: Many pipeline companies focus on natural gas far more than crude oil, and their business model depends on volume, not price. There was never any reason for fee-based, natural gas transporters to get roughed up like they did.

Today, you can snap up shares of Kinder Morgan (KMI) at a 7.1% yield and shares of Enterprise Products Partners (EPD) at a whopping 10.3% yield. Note that Enterprise Products is an MLP and has the cumbersome tax reporting that comes with that distinction.

All of these stocks have proven to be volatile this year. But it seems like the worst is behind them. And if you’re looking where to find the highest yields these days, this definitely points you in the right direction.

How I Invest My Own Money

The following first appeared on Money & Markets.

Last week, I wrote that the 60/40 portfolio is dead.

So, it’s only fair to ask: If I believe that the bedrock of American retirement is toast … how do I invest my money?

Before I jump into it, I have to throw out the usual caveats. Just because I invest a certain way doesn’t mean that you should. I’m 42 and have two kids to feed (and a third on the way). You may be in a very different stage of life and have a very different set of circumstances. But that said, I’ll share how I invest my money.

With that out of the way, let’s jump into it.

How I Invest My Money
The first plank might surprise you a little. Even though I believe the 60/40 portfolio to be dead for the foreseeable future, I still have a little less than 15% of my portfolio invested in something along the lines of a 60/40 portfolio. It’s a 401(k) account, and my only options are stock and bond mutual funds. It’s the best I can do with the options at my disposal.

Still, it’s worth it. The tax savings and matching more than compensate for less-than-perfect investment choices. So, my first $19,500 in savings each year goes into the 401(k).

No exceptions.

Moving on, if you’ve read my work for any length of time, you know I’m an “income guy.” A lot of my investment recommendations tend to revolve around income strategies.

So, it should come as no surprise that another 25% of my portfolio is investing in long-term dividend stocks, REITs, pipelines and other income-focused plays. I’m still a long time away from retirement, so most of these stocks are set to automatically reinvest the dividends each quarter.

Following the income theme, the largest chunk of my portfolio is invested in put-writing strategies. About 40% of the total is invested in strategies that primarily sell put options.

You’ve probably heard that the vast majority of options expire worthless. Well, that’s true. So, if you know they’re likely to expire worthless anyway … why not sell them?

If done correctly, selling out-of-the-money put options can be a conservative income strategy. You collect premium each month much like an insurance company. Once in a while, as with insurance companies, disaster strikes and you have to pay out. But if you manage your risk appropriately, those occasional disasters won’t bury you. And as with real insurance companies, put option sellers can buy “reinsurance” by buying even deeper out of the money put options to cap any losses.

Following again on the income theme, I have a little over 7% of my money invested in real estate (outside of my personal home) and roughly 5% in precious metals.

And finally, the remainder of my portfolio is invested in a hodgepodge of other strategies, some of which are a little experimental. I think it’s important for every investor to allow some chunk of their portfolio to be used on more speculative plays. You might not hit a home run on all of them, but on a few you just might.

Plus, indulging your more speculative side keeps investing fun and engaging.

So that’s it. That’s my current portfolio and how I invest my own money. I don’t expect (nor would I advise) that you copy it. But I hope it shows you that there really is life beyond the traditional 60/40 portfolio!

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser based in Dallas, Texas.