Marotta Retirement Plans Add Managed Unitized Trust Options

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The retirement plans we offer have always included low cost mutual funds as well as model portfolios using those low cost mutual funds. Each of these model portfolios are designed with a specific mix of stocks and bonds. The portfolios range from 100% stocks for younger clients to portfolios which gradually add bonds into the mix for participants who are about to take withdrawals in retirement. We believe that these funds and the portfolios built from them have lower costs than the typical fee-laden retirement plan offerings from many other financial companies. As a result of the lower costs, we think they will also have a better return.

While these mutual funds and the model portfolios are still part of our retirement plans, we have added a set of unitized trust portfolios designed and managed by us which can also be used by participants. We believe that these new portfolios have some advantages over the model portfolios built from mutual funds.

How a Unitized Trust Works

A Unitized Trust uses the same technology as a mutual fund, by pooling assets and assigning shares to investors. The unitized trust technology translates the value of multiple assets in the fund account into a single daily unit value. This unit value is shown to a participant as a single investment with a corresponding net asset value. Whenever a participant adds to or withdrawals from the fund they receive or redeem units according to the current net asset value. A unitized trust allows Registered Investment Advisors like us to offer our own unique portfolio strategy to the retirement plans we offer.

This technology has several advantages over the excellent mutual fund strategy we have always offered.

Investment Options Include Unitized Exchange Traded Funds

While our model portfolios are constructed of excellent low-cost mutual funds, the unitized trust can include exchange traded funds as well as mutual funds. Mutual funds are designed to give participants a fraction of a share when a small amount of money is deposited. Since exchange traded funds must be purchased one share at a time, it would be difficult to maintain a complex asset allocation with a small amount of money using exchange traded funds. By adding the unit ownership of the assets in the trust, small amounts of money can be added and the portfolio can aggregate all of the funds and maintain an appropriate asset allocation. The ability to include exchange traded funds accounts for many of the advantages of the unitized trust.

Freedom Investing

We have been writing about the benefits of Freedom Investing for over 15 years. Investing in developed countries with the most freedom may boost portfolio returns significantly. While we have identified low cost country specific exchange traded funds, we have not been able to find comparable mutual funds. By offering unitized trust portfolios, we are now able to bring a country specific investing approach to our retirement portfolio offering.

Because the unitized trust approach is a pooled account, we are able to more easily include not simply the countries ranked as “free” but more countries from the top of the “mostly free” category. In total the countries currently included in various weights include: Hong Kong, Singapore, Australia, New Zealand, Switzerland, Canada, Ireland, Germany, Netherlands, Norway, Finland, Denmark, Austria, the United Kingdom, and Chile.

Three criteria are used to set the allocation to each country: rank in the Index of Economic Freedom, capitalization of investable markets, and forward P/E ratio compared to historical averages.

Countries are weighted according to their score in the Index of Economic Freedom. Only countries in the “free” or “mostly free” categories are considered. A small size adjustment is made based on cap weight of the country in the FTSE All-World stock index. For example, New Zealand is very free, but only comprises about 0.08% of the world’s stock market. The United Kingdom on the other hand is only in the “mostly free” category, but it comprises 6.24% of the world’s stock market. Size is used to slightly adjust the allocation according to the freedom score. The current result allocates 1.58% of the stock portfolio to New Zealand and 1.45% to the United Kingdom. Size has adjusted the allocation to New Zealand down and the United Kingdom up.

Factor Investing

It is well known that certain factors such as size and value result in a higher mean return. The steps involved in crafting an asset allocation involve identifying those non-correlated categories which will perform better and best contribute to the portfolio as a whole. In our mutual fund portfolios, we crafted an asset allocation which tilts small and value and uses Dimensional funds with a factor investing philosophy. In our unitized trust, we are able to use exchange traded funds which allow us to implement strategic factor investing in Canada, Germany, the United Kingdom and even in the United States.

Monthly Dynamic Tilt Based on Forward P/E Ratios

A common measurement given on financial sites for a stock, index or fund is the price-to-earnings ratio, or P/E ratio. The P/E ratio is the market price per share divided by the annual earnings per share. For example, if a stock is trading at $15 per share and the company has earnings of $1 per share, the stock would have a P/E ratio of 15. If you bought a share for $15, during the next 15 years you would get your money back in earnings and still own the share of stock. There are many different measurements of a stock’s P/E ratio, all based on the definition of E or earnings. The most common is the trailing twelve months (ttm), but it is also the least useful because the previous year’s earnings are often small right before a stock rebounds. Due to this, we use the P/E ratio based on forecasted earnings estimates which is called the forward P/E ratio.

Studies have suggested that when stocks have a low forward P/E ratio they have a higher expected mean return. And conversely when they have a high forward P/E ratio they have a lower expected mean return. We have used the forward P/E ratio to tilt between value and growth and between large and small in our managed portfolios. More recently we have expanded a dynamic tilt based on forward P/E ratios across all of our stock allocations. Although we have used this dynamic tilt in our managed portfolios, it has not been available in the static mutual fund allocations of our model portfolios.

Now, because we set the allocations of our unitized trust accounts, we are changing the mix of investments in the portfolios each month based on the forward P/E ratios of each underlying component. We change the percentages of each component and then rebalance the portfolio. One adjustment to this allocation rebalances the unitized trust for all participants. We believe that adjusting allocations based on forward P/E ratios will increase the return over time.

It should be said that we do not consider this market timing. Forward P/E ratios tend to change slowly and be over or under valued for a few years at a time. In fact market timing usually results in under performance as investors chase returns. A dynamic tilt based on forward P/E ratios tends to do the opposite of chasing returns. If a stock has gone up, rebalancing would suggest trimming it back to its target asset allocation. If it has gone up and increased the forward P/E ratio, a dynamic tilt would suggest setting the target asset allocation slightly lower and selling even more of it. And if a stock has gone down, rebalancing would suggest buying more to bring it back to its target asset allocation. If it has gone down and decreased the forward P/E ratio, a dynamic tilt would suggest setting the target asset allocation slightly higher and buying even more of it.

Ability to Adjust Allocations and Change Funds Quickly

When we want to change one of the mutual funds used in our model portfolios there is a process we must go through. Notice needs to be sent to plan sponsors who in turn need to notify plan participants of the change and give them 30 days within which they can decide to make any changes. While we do adjust allocations and replace funds as needed, the process is neither simple nor quick.

The unitized trust mechanic delegates strategic adjustment of the holdings to the managers of the trust. We are allowed to adjust the allocation as frequently as we see fit and add or remove holdings in a quick and simple process, allowing us to easily make monthly adjustments.

Low Fees

The expansion of investment choices results in the ability to pick exchange traded funds with a lower expense ratio than the already low-cost mutual funds selected. In only a few cases are funds with slightly higher expense ratios selected. And in those cases (mostly country specific investing) we believe that the slightly higher expense ratio is more than compensated by a higher expected mean return. There is a small expense of 0.035% charged to run the fund. Including that charge, the all stock unitized trust currently has an expense ratio of 0.24% (as compared to 0.25% for the 100% stock mutual fund portfolio). And the bond portion of the unitized trust currently has an expense ratio of 0.09% (as compared to 0.16% for the 100% bond mutual fund portfolio).

Slightly lowering already low fees may not seem like a great accomplishment. But being able to lower total fees while investing part of the portfolio in slightly higher cost country specific exchange traded funds and being able to use exchange traded funds with strategic factors and add a monthly dynamic tilt is a significant accomplishment.

We expect the mix of the unitized trust to perform significantly better. But it is also good that it will not cost more to participants. The stock side is roughly the same. And the bond portion has lowered the expense ratio by 0.07%.

No Additional Advisor Fees

It probably should be said that we do not make any additional money if participants select the unitized trust option instead of the mutual fund model portfolios. There is a small 0.035% fee from the custodian, but there is no additional fee from us to manage the portfolios. In fact, in order to set up the unitized trusts, we paid a one time setup fee of $5,000 and pay a monthly charge of $250. We alone pay these costs. None of these costs have been charged to the retirement plans nor the participants. We think this will pay for itself in better investment returns for participants. These are the same investment choices we use in our firm’s retirement plan as well.

Investment Options

We have named the Unitized Trusts after the percentage that each has in stocks with the remainder in bonds. We also offer this loose suggestion of which allocation might be appropriate to what age:

  • Marotta 100% Stock Portfolio (age ≤25)
  • Marotta 95% Stock Portfolio (age 26-30)
  • Marotta 90% Stock Portfolio (age 31-36)
  • Marotta 85% Stock Portfolio (age 37-47)
  • Marotta 80% Stock Portfolio (age 48-60)
  • Marotta 75% Stock Portfolio (age 61-65)
  • Marotta 70% Stock Portfolio (age 66-77)
  • Marotta 0% Stock Portfolio

The Marotta 0% Stock Portfolio can be used to blend any bond allocation that participants desire. While we don’t recommend it, if a participant wants a 50/50 stock and bond portfolio, they can also take advantage of our management by allocating 50% of their retirement account to the Marotta 100% Stock Portfolio and another 50% to the Marotta 0% Stock Portfolio.

Our retirement plan also allows participants to set different allocations based on the type of the retirement funds. While participants may make their contributions after-tax Roth contributions, the employer match will always be pre-tax. The strategy of investing these different accounts differently is called asset location. Asset location can significantly boost after tax returns.

For clients who are new to Roth contributions we recommend setting their new Roth contributions to the Marotta 100% Stock Porfolio and the remainder of their traditional retirement portfolio to the Marotta age appropriate stock portfolio. For example, a 40 year old would set their allocation:

  • For Roth: Marotta 100% Stock Portfolio
  • For Traditional: Marotta 85% Stock Portfolio

As the Roth account grows in size you can adjust the traditional account to be more conservative to compensate.


In September 2017, we added the unitized trust option to our own retirement plan, piloting the process to a new retirement plan. We are now in the process of implementing the same enhancement throughout our existing retirement plan clients.

Marotta Retirement Plan

The addition of an age-appropriate unitized trust option for our retirement plans is just the latest enhancement. We first designed our “dream” retirement plan when a client who was a small business owner asked us to review the 401(k) plan proposals that he was being offered. They were all terrible and laden with fees. On further analysis, we concluded that most retirement plan proposal were similarly terrible and laden with fees. So we designed our own.

Now, we offer retirement plans not just to our client business owners but to any organization that wants professional management from a fee-only fiduciary like us. If your organization would like a proposal either for a new plan or to replace your existing one, please just give us a call. You and your plan participants deserve a fiduciary standard of care for your retirement plan assets.

Photo by Marcus Wallis on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.