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Shell Muscles its way to good 401K returns but may confuse participants

|Includes:AGG, AOA, AOK, AOM, AOR, BIV, BND, CCXE, CIU, DBU, DWM, EEM, EFA, EFG, EFV, GII, GWL, HYG, ICF, IDHQ, IGE, IUSV, IVE, IXJ, IXP, IYH, IYM, IYR, JKF, JNK, LTL, Morningstar, Inc. (MORN), MTK, PBE, PHB, PID, PTF, PUI, PWV, PYZ, ROM, RPV, RTM, RYH, RYT, RYU, SCHV, SCZ, SPY, UPW, UYM, VAW, VEU, VHT, VNQ, VTI, VTV, VWO, XBI, XLB, XME

Of late, we have been reviewing the 401K retirement offerings made available by the biggest and richest oil companies. We have noted that most of them provide only three asset classes and not enough funds.

We also looked at the Morningstar plan as an effective way of building a plan with a reasonable number of funds and still deliver good returns.

In this article, we report on their Royal Dutch Shell Tier III 401K plan. This may only be part of the retirement provisions the company provides but it is an interesting and unusual variant.

Note that MyPlanIQ has no relationship with any company to set up a retirement plan, we are reviewing the plan based on publicly available information.

The Shell plan muscles in with 303 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
 

The list of minor asset classes covered:
Bank Loan:
Communications: IXP, PTE, DGG, LTL
Conservative Allocation: AOK
Consumer Discretionary: RXI, VCR
Consumer Staples: KXI, VDC, PSL, DPN, RHS
Convertibles: CWB
Diversified Emerging Mkts: EEM, GMM, PXH, DEM, SCHE
Diversified Pacific/asia: EPP, VPL, GMF, PAF
Emerging Markets Bond: PCY
Equity Energy: ITE, IXC, IPW, DBE, RYE, DKA
Equity Precious Metals: DBP
Europe Stock: IEV, VGK, PEF, DEB
Financial: IYF, VFH, IPF, PFI, DRF, RYF
Foreign Large Blend: EFA, VEU, GWL, PFA
Foreign Large Growth: EFG
Foreign Large Value: EFV, PID, DWM
Foreign Small/mid Growth: IFSM, VSS, SCHC
Foreign Small/mid Value: SCZ
Global Real Estate: IFGL, RWX
Health: IYH, IXJ, VHT, XBI, PBE, DBR, RYH
High Yield Bond: HYG, JNK, PHB
Industrials: IYJ, EXI, VIS
Inflation-protected Bond: TIP
Intermediate Government: IEI, VGIT, ITE
Intermediate-term Bond: AGG, CIU, BIV, BND
Japan Stock: EWJ, JPP, PJO, DXJ
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Latin America Stock: ILF, GML
Long Government: TLT, TLH, IEF, EDV, VGLT, TLO, PLW
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Mid-cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
Mid-cap Value: IJJ, IWS, JKI, VOE, EMV, PWP, RFV, UVU
Miscellaneous Sector:
Moderate Allocation: AOM
Multisector Bond: AGG, GBF, BND, LAG
Natural Resources: IYM, IGE, VAW, XLB, XME, PYZ, DBN, RTM, UYM
Pacific/asia Ex-japan Stk: EPP, AAXJ, GMF, PAF, DND
Real Estate: IYR, ICF, VNQ
Retirement Income:
Short Government: SHY, SHV, VGSH, PLK, USY
Short-term Bond: CSJ, BSV, VCSH
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
Small Value: IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT
Target Date 2000-2010: TZD
Target Date 2011-2015: TZE
Target Date 2016-2020: TZG
Target Date 2021-2025: TZI
Target Date 2026-2030: TZL
Target Date 2031-2035: TZO
Target Date 2036-2040: TZV
Target Date 2041-2045:
Target Date 2050+:
Technology: MTK, PTF, DBT, RYT, ROM
Ultrashort Bond: BIL
Utilities: GII, PUI, DBU, RYU, UPW
World Allocation: AOR, AOA
World Bond: IGOV, BWX, WIP
World Stock: IOO, VT
 

This is an extraordinary number of funds and we will compare the number of funds and the results with the Morningstar plan.

Asset Class Shell Morningstar
Balanced Fund 28 1
REITs 3 1
Fixed Income 43 6
Commodity 0 1
Sector Fund 40 1
Foreign Equity 31 2
Emerging Market Equity 8 2
US Equity 143 11
Other 7 1
Total 303 26

 

As of Jan 20, 2011, 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 .

We can further compare the rating of this plan with the Morningstar counterpart.

Attribute Shell Morningstar
Diversification Great (98%) Great (96%)
Fund Quality Average (37%) Average (72%)
Portfolio Building Great (88%) Great (96%)
Overall Rating Above Average (76%) Above Average (89%)


What we note is that the Shell plan wins in diversification by having excellent coverage of the five main asset classes and some of the sub-classes which contribute to better returns. Morningstar is close behind with one more major asset class but less coverage of the secondary styles.

Morningstar funds are higher quality making it easier to select a strong portfolio which makes it easier to build a portfolio and hence Morningstar comes out on top in the ratings.

Note that the MPIQ app searches through all of the funds in a plan and so more is better -- but this is not so for those doing this manually and so the overall rating reflects the fact that not everybody may take advantage of new technology such as this.

We first compare simulated historical results with our benchmark. The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 5 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
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND
Performance chart (as of Jan 20, 2011)

Performance table (as of Jan 20, 2011)

Currently Commodities, US Equity and Real Estate are doing well. Real Estate and US Equity available to Royal Dutch Shell Tier III 401K participants.

The plan beats out the SIB based on its rich alternatives although it loses out to the SIB in buy and hold indicating that index ETFs are very effective with their low cost. In any case, the results are good.

If we now compare the results with the Morningstar plan:

Performance chart (as of Jan 20, 2011)

Performance table (as of Jan 20, 2011)


We see that in the five year time horizon, the performance of the plans are nearly identical -- note that the Sharpe index is higher for the Morningstar plan.

To summarize, Royal Dutch Shell Tier III 401K participants can achieve good results if they have the tools or patience to sift through the vast number of alternatives.

This is the first time we have said this but we think that Shell would benefit their participants if they reduced the number of funds and focused on boosting the quality of the funds. Adding commodities would be a nice to have as well.

This nicely contrasts the brute force and elegant approach to retirement fund planning.

 



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: MORN, SPY, VTI, EFA, VEU, EEM, VWO, IYR, VNQ, ICF, AGG, BND, HYG, JNK, PHB, AOM, AOK, CIU, BIV, AOR, AOA, GII, PUI, DBU, RYU, UPW, IYH, IXJ, VHT, XBI, PBE, RYH, EFG, IXP, PTE, LTL, IYM, IGE, VAW, XLB, XME, PYZ, CCXE, RTM, UYM, MTK, PTF, RYT, ROM, GWL, IDHQ, IVE, IUSV, JKF, VTV, PWV, RPV, SCHV, SCZ, EFV, PID, DWM, IY