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In our previous article, we discussed Hewlett Packard 401K plan. This article continues the series of case studies for various 401K plans for IT companies. It discusses Google's 401K Plan and how portfolios in this plan are positioned in today’s market environment.

Google (NASDAQ: GOOG) is an internet search and advertising company that pioneered in search technology. It dominates search and its related advertising business. It is headquartered in the old SGI building in Mountain View, California. Google is well known for its talented employees and innovation friendly work environment. Google offers generous 401K matches to its employees.

Google's 401K plan consists of 15 funds. These funds enable participants to gain exposure to 4 major assets: U.S. Equity, Foreign Equity, REITs and Fixed Income. The list of minor asset classes covered are

Large Blend: SPY, VTI
Mid-Cap Blend: MDY, IWR
Foreign Large Blend: EFA
Foreign Large Growth: EFG
Real Estate: IYR, ICF, VNQ
Intermediate-Term Bond: AGG, BND
Short Bond: BSV

As of 9/15/2010, this plan investment choice is rated as Above Average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:

Diversification – Rated as average (score: 62%)

Fund Quality – Rated as above average (score: 65%)

Portfolio Building -- Rated as great (score: 92%)

Overall Rating: Above average (score: 75%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA, both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical four asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity (SPY or VTI)
Foreign Equity (EFA or VEU)
Fixed Income (AGG or BND)

Performance chart (as of 9/15/2010)

(Click to enlarge)

Performance table (as of 9/15/2010)

1 Yr AR (%) 1 Yr Sharpe (%) 3 Yr AR (%) 3 Yr Sharpe(%) 5 Yr AR (%) 5 YR Sharpe (%)
Plan SAA 9 83 1 4 4 18
4 SIB SAA 10 72 1 3 5 17
Plan TAA 14 93 11 97 11 101
4 SIB TAA 9 59 7 61 9 80

Currently, asset classes in REITs (Real Estate Investment Trusts) (VNQ, IYR, ICF) and fixed income (AGG, BND) are doing relatively well. These asset classes are available to Google 401k plan participants.

To summarize, Google 401K plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on REITs and fixed income funds.

Disclosure: Long EEM