MidAmerican Energy Company’s 401K Plan: More Diversification Needed

MidAmerican Energy Company is a domestic operation of MidAmerican Energy Holdings Company, a company of Berkshire Hathaway Inc. (NYSE:BRK-A). As of 3/30/2011, David Sokol was the CEO of the company.

As many Warren Buffett’s Berkshire Hathaway’s subsidiary companies, MidAmerican Energy Company has its own 401K retirement plan: MidAmerican Energy Company Retirement Savings Plan. These plans are different from each other. For example, Berkshire Hathaway Employee Savings and Stock Ownership Plan of General RE and Berkshire Hathaway Profit Sharing Plan for Government Employees Companies are the other two plans for General RE and GEICO employees respectively.

The 401K plan consists of 13 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.

Asset Class Name
LARGE VALUE JHancock Classic Value I
LARGE BLEND Vanguard Total Stock Mkt Idx Inv
Small Growth Morgan Stanley Inst Small Co Gr I
Foreign Large Value Dodge & Cox International Stock
Moderate Allocation Oakmark Equity & Income I
LARGE GROWTH Aston/Montag & Caldwell Growth I
Intermediate-Term Bond PIMCO Total Return Instl
Foreign Large Blend iShares MSCI EAFE Index
LARGE VALUE Russell 1000 Value Index
SMALL BLEND SSgA Small Cap Instl
LARGE GROWTH Russell 1000 Growth Index
Intermediate-Term Bond SSgA Bond Market Instl

The following table shows what major asset classes are covered and what are missing:

Asset Class Number of funds
Balanced Fund 1
Fixed Income 3
Commodity 0
Foreign Equity 2
Emerging Market Equity 0
US Equity 7
Total 13

Like many other company sponsored retirement 401K plans, this plan falls into what we called U.S centric 3-asset class category: it provides coverage to only the three major asset classes. For the US equities class, it provides large growth, large value and large blend style coverage as well as one Small Cap growth fund. On the fixed income side, in addition to the most popular PIMCO Total Return Fund (PTTRX), it provides a low cost SSGA Bond index fund.

In the following, we use two typical asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA) to study how the plan participants can do.

Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.

Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.

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 3 asset . 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 Mar 30, 2011)

Performance table (as of Mar 30, 2011)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
MidAmerican Energy Company Retirement Savings Plan Tactical Asset Allocation Moderate 8% 67% 8% 85% 9% 82%
MidAmerican Energy Company Retirement Savings Plan Strategic Asset Allocation Moderate 12% 96% 7% 47% 7% 44%
Three Core Asset ETF Benchmark Tactical Asset Allocation Moderate -1% -12% 3% 23% 4% 33%
Three Core Asset ETF Benchmark Strategic Asset Allocation Moderate 13% 86% 3% 16% 4% 17%

From the data above, this plan beats the three asset benchmark by virtue of the US asset class choices, indicating good funds covering US stocks, foreign developed country stocks and fixed income.

However, missing coverage on REITs and emerging market stocks, two of the major asset classes for a diversified portfolio contruction, does reduce the diversification effect. Furthermore, the somewhat incomplete offering of various styles in US stocks (for example, small cap value and all mid cap stock styles are missing) would further reduce opportunities to take advantage of varous economic cycles. For example, the following table compares the performance between two tactical asset allocation portfolios, one contructed using funds in MidAmerican Energy Company Retirement Savings Plan, the other using funds in Berkshire Hathaway Employee Savings and Stock Ownership Plan of General RE, the other subsidiary in Berkshire Hathaway.

Portfolio Performance Comparison

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Berkshire Hathaway Employee Savings and Stock Ownership Plan of General RE Tactical Asset Allocation Moderate 7% 48% 11% 95% 11% 91%
MidAmerican Energy Company Retirement Savings Plan Tactical Asset Allocation Moderate 8% 67% 8% 85% 9% 82%

To summarize, MidAmerican Energy Company Retirement Savings Plan participants can achieve the best investment returns by adopting asset allocation strategies that are tailored to their risk profiles.

MidAmerican Energy Company Retirement Savings Plan would do well by their employees to consider reviewing their existing funds and adding additional asset classes.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Written By The Staff Of MyPlanIQ.com

LTI Systems, Inc. is the operator of MyPlanIQ.com and ValidFi.com. The founders of LTI Systems have extensive technology and business background in computer and semiconductor industries. They have been using the strategies provided by MyPlanIQ for their own personal retirement and taxable investments. The mission of LTI Systems is to make wealth management investment strategies that are used to be only accessible to institutions and high net worth individuals available to private investors with a fraction of flat cost and ease of use. The founders of LTI Systems, investors themselves, take pride in creating such a system and service for investors by taking the perspective from the investor side. They are using the system and the strategies for their own investment and align their interests with their customers.  

MyPlanIQ’s blog provides periodical articles to discuss issues related to retirement plans (401(k), 403(b) and IRAs), deferred compensation plans (457), college savings plans (529), taxable brokerage investment accounts, variable annuities and universal life insurance plans. It also covers investment strategies, specifically strategic and tactical asset allocation and investment products such as ETFs and mutual funds. In addition, it syndicates daily articles that are related to retirement planning, personal finance, investment strategies, annuities, insurance, college savings and market/economic outlooks. It provides a comment and discussion community for readers.

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