The Shell Provident Fund (Shell 401k) is known for being one of the best 401k plans in America. So much so that I know multiple financial firms that can’t stand it because it’s hard to convince retirees to rollover their Provident Fund to an IRA!
On the one hand, that’s a reason our firm operates with an annual flat fee regardless of whether your assets are in a 401k or IRA. Avoiding conflicts of interest is critical to getting sound financial advice.
But on the other hand, why is the Shell Provident Fund so popular? And how can you maximize your wealth as a participant? Let’s discuss.
Shell Provident Fund Overview
The 401k at Shell has several advantages over other 401k plans:
- Incredible access to low-cost funds
- Beyond just having low-cost funds, the funds in the Shell Provident Fund are negotiated to have significantly lower expense ratios than normal. You can access mutual funds in the Provident Fund for a lower price than someone with an IRA or brokerage account can.
- Huge match. If you’ve been with Shell for nine years, you receive 10% of your total compensation as an employer contribution.
- After-tax contributions. I’ve written on this topic before, but this is a huge opportunity.
- Easy execution of the mega-backdoor-Roth. This is similar to the topic above, but plenty of 401k plans allow after-tax contributions but do not help you convert them to Roth each year. This exact idea is mapped out in the Shell Provident Fund Summary Plan Description.
- NUA. Continuing on the tax planning theme, The Shell Provident Fund allows you to elect net unrealized appreciation on your stock shares inside the 401k.
- In short, Shell benefits are about as good as it gets if you’re still working toward financial independence.
Tax Planning with the Shell Provident Fund
The obvious tax opportunity with a 401k is choosing your “elective deferral.” The elective deferral portion ($19,500+$6,500 if over age 50) can be pre-tax or Roth. Beyond the basics of receiving a tax deduction now or enjoying tax-free growth, the Shell 401k has two main opportunities.
- After-tax. Using after-tax contributions to execute a mega backdoor Roth is a great opportunity. Let’s look at a quick example:
- Let’s pretend Jane Smith, age 50, works at Shell and makes $250,000/year.
- If Jane is single or married & her spouse has a similar income, she probably wants to contribute $26,000 pre-tax. If she’s married and her total income is under $350,000, she could choose pre-tax or Roth. This depends on how much is already in her pre-tax savings. Either way, she’ll contribute $26,000.
- Thanks to her experience (20 years with Shell), she’ll receive $25,000 as a company match. Company match always goes to the pre-tax bucket in any 401k per IRS rules.
- She can still contribute another $13,500. Unless Jane is buying a second home soon or has another big expense coming up, this is an excellent opportunity.
- After contributing $13,500 after-tax, she can convert it to her Roth 401k.
- By the way, if Jane does not have any pre-tax IRA accounts (everything is in her 401k), she could also do a backdoor Roth IRA ($7,000) in addition to the after-tax 401k.At the end of the day, you can make a lot of subpar financial decisions and still reach financial independence quickly in the above example. If we add an HSA to the mix, Jane is investing almost $80,000 every year in a very tax-advantaged way.
- NUA. Net unrealized appreciation gives you the ability to take highly appreciated stock, pay income tax on the cost basis now, and move the stock to a nonretirement brokerage account. This is typically done at retirement and usually requires oversight from a professional with significant experience in this area. You can listen to our podcast on the topic!
The Shell Provident Fund has excellent access to plenty of low-cost funds. So it’s not hard to build an excellent evidence-based, low-cost portfolio. Let’s talk through a couple of relevant points on the SPF investment options:
- Target Date/LifePath Funds. Target date funds are generally an excellent idea. If you want to put little to no effort into your portfolio, you will have a globally diversified mix of stock and bonds in a low-cost fund doing all of the maintenance and rebalancing for you.
- Core Fund Options. You can also build your own portfolio (instead of TargetDate/LifePath funds). I am a big fan of this because most TargetDate funds overweight U.S. stocks across the global stock mix. The result is that U.S. large caps (i.e. S&P 500) have an enormous chunk of the portfolio.
- Financial Engines Active Management? As I’ve written before, if I’m going to pay anything for financial advice, it needs to include significant value items like reviewing your tax return, mapping out future tax savings, and coordinating your estate plan & insurance with your investments. So, I lean toward declining this option.
- BrokerageLink. This is a loaded topic. Let me explain.
The great thing about brokeragelink is the freedom to build your portfolio with just about anything–like any Fidelity brokerage account. The bad thing about brokeragelink is the freedom to build your portfolio with just about anything.
As I’ve written elsewhere, I firmly believe the principles we use with our investment process are the best path available to accomplish the goals our clients have. If your goal is to accumulate enough in your portfolio to achieve financial independence–and eventually live off of that portfolio, I can’t think of a better way to invest. Here is a quick rundown of things we believe about investing:
- Compound interest is a force that should guide your decision-making. Focus on owning an excellent portfolio for decades.
- Compound interest 2: You should be FAR more interested in making 7% over 4o years than making 40% in one year.
- You cannot time the market.
- The stock markets are relatively efficient.
- The stock markets are much broader than the S&P 500 (that’s why I’m adding an “s” to markets). Your investments need to have exposure outside of the S&P 500.
- Any expenses in the next five years should likely not be invested in stocks.
- A low-cost portfolio is very likely to beat a high-cost portfolio.
- There are factors in the market that have historically led to better performance–and they’re pretty logical in an efficient market.
- Small companies typically outperform large companies.
- Value companies typically outperform growth companies.
- Profitable companies typically outperform less-profitable companies.
- We slightly tilt our portfolios to have more exposure to these factors. A rough description of this would be “enhanced indexing.”
Back to my point about brokeragelink: It’s a blessing because you can allocate a portfolio to the above principles really well if you have access to everything. But having access to everything makes it tempting to:
- Check your portfolio more often.
- Buy a few individual stocks instead of low-cost ETFs/funds.
- Chase performance.
- Try to time the market.
All of the above typically make you a worse investor. So yes, you might happen to invest a bunch in Amazon in 2002. But you also might invest in a total dud–even in a strong bull market, LOTS of stocks underperform the market as a whole.
For our clients, we can manage their 401k using brokeragelink. So, we can implement our long-term, low-cost portfolio tailored to their best interests. This allows us to manage our clients’ entire household assets in one congruent manner.
But if you’re not using brokeragelink to build a low-cost, globally diversified portfolio tilted toward asset classes with high historical performance, you can do a lot worse than target-date funds. And as I shared above, if you’re utilizing the mega-backdoor Roth with after-tax contributions, you’ll likely reach financial independence quickly.
We are excited to post more Shell content in the coming months. But I’ll cut to the chase: if you spend an entire career at Shell, it’s not uncommon to reach retirement age with a significant nest egg. Your greatest expense in retirement will likely be taxes. Understanding how to navigate the years from age 55-70 will be critical. A well-executed tax plan during these years can have a six or seven-figure impact on your future tax bill.