What is the “N54(a) Retirement Account” teased by Ian Wyatt?

by Travis Johnson, Stock Gumshoe | July 19, 2012 2:03 pm

Sniffing out the special "accounts" teased by Wyatt's High Yield Wealth

Ian Wyatt[1] is promoting his High Yield Wealth[2] newsletter by touting a “little-known government loophole” that he thinks could help you collect a lot more income than a 401(k) account … so, naturally, we want to know what it is.

Here’s how he drums up interest:

“How a little-known government loophole called the ‘N54(a) Retirement Account’

“could replace or supplement your 401(k) or IRA account – and completely fund your retirement[3], starting today.

“It lets you collect up to 5 times more income than a 401(k) account – and could pay you $5,000 to $25,000 in extra income every year… starting with as little as $50.

“Below you’ll find out how to set up your own “N54(a) Retirement Account” and start receiving checks immediately… no matter what your age, income or employment status.”

And yes, when newsletter teasers reference accounts like the “N54(a)” account or the “801(k)” account we saw teased a while back, it pretty much means “there is no such thing, we’re making it up.”

Which isn’t to say that it isn’t a real investment or even a reasonable strategy — but it’s not a secret kind of account you’ve never heard of.

So … we know that the “801(k) account” teaser was all about DRIP investing … is the N54(a) the same, or something different?

Looks like it’s different — here are some more clues:

“it’s all made possible by an under-the-radar congressional amendment that works by “increase(ing) the amount and certainty of the return on… investor capital….

“… the mainstream media is finally starting to wake up and take notice. In December 2011, Barron’s ran an article proclaiming:

“A(n) ‘N54(a) Retirement Account’ makes a lot of sense.”

And then he does eventually clarify that an “N54(a)” is NOT like a 401(k) … though this is an excuse for more promotion, too:

“You see, an “N54(a) Retirement Account” is similar to your 401(k) in that it lets you collect regular income payments for retirement…

“But that’s where the similarities STOP.

• Because unlike a 401(k), which requires you to wait until you reach age 59&1/2; to start collecting income…
• With an “N54(a) Retirement Account” you can withdraw funds at any age… starting immediately.

• And while you can’t contribute to a 401(k) unless you’re working…
• You can add money to your “N54(a) Retirement Account” at any time, regardless of your current, or past, employment status – even if you’re already retired.

“These are just a few of the reasons that an “N54(a) Retirement Account” is a far superior way to pay for retirement than a 401(k) account.

“But I haven’t even gotten to the best part…

“What really distinguishes an ‘N54(a) Retirement Account’ from a 401(k) – or any other income investment for that matter – is the size of the income checks.

“These checks typically pay out 3 to 5 times more income than you can get from an ordinary 401(k).”

So we’ve got a pretty classic “apples vs. oranges” comparison going here, no matter what an N54(a) might turn out to be — clearly it’s something that’s income focused, while a 401(k) is just a way to accumulate pre-tax retirement savings. 401(k)s do not “pay out” income at all, at least not until you start withdrawing from them in retirement.

So what is Wyatt teasing?

Well, he doesn’t get into any specific individual versions of these investments that he thinks you should buy, so we can peg a ticker symbol for you … but it’s very clear than an N%$(a) is … a Business Development Company (often abbreviated BDC’s).

Which, along with REITs[4] and MLPs and Trusts, is one of more popular of the high-yielding publicly traded classes of investment (though there are some private, unlisted REITs and BDCs[5], to be sure). Like REITs and MLPs, BDCs pay out pretax income, so the distributions you get are usually subject to regular income tax (unless they’re in a tax-shielded account like a 401(k), ironically enough).

And yes, BDC’s do have an association with the made-up “N54(a)” name — the legislation that enables BDC’s is part of the Investment Company Act of 1940 (though the particular amendments enabling BDCs were passed in 1980), and the particular section regarding a company’s eligibility to become a BDC is, indeed, section 54(a) of that Act.

BDCs are often referred to as publicly traded venture capital or private equity companies — and sometimes, as Wyatt has done in the past, they’re teased as a way for regular “little guy” investors to get on the private equity gravy train. This is the third similar company that Wyatt has aggressively teased over the last year or so, the first was Ares Capital which he touted as the “8.2% Bank Account”[6] in a particularly misleading bit of hype, and the second was Compass Diversified Holdings (CODI)[7] — though CODI is not technically a BDC, it’s a very similar kind of business.

Business Development Companies most often act as financiers, consultants and “private” investors in small and mid-sized companies — companies that are generally too small to get a good deal from the Wall Street Banks or who don’t want to go public, but too big or too in need of restructuring help to just go down to the local bank for all their funding needs. They are generally restricted from using too much leverage[8], and they often lend money to their portfolio companies in exchange for both fairly high interest payments as well as an equity “kicker” of part ownership of the company to goose returns if they’re successful. There are about a half dozen reasonably sized BDC’s that are pretty popular, including Ares as wel as Apollo Investment (AINV)[9] and KCAP Financial (KCAP — used to be called Kohlberg Capital), all of which yield in the neighborhood of 10-12%, and there have also been some big flameouts in this space in recent years, including Allied Capital, which fell long after it became a target of David Einhorn[10] and was eventually bought by Ares, and American Capital (ACAS), which collapsed in the financial crisis but has bounced back nicely this year and includes John Paulson[11] as a major investor (I dont’ think ACAS has restarted its dividend yet, but it is again profitable). There’s a good listing maintained by the Dividend Detective here[12].

These are very much “spread” investments — they borrow as much money as they’re allowed (debt can’t exceed equity), and they lend out or invest that money to earn more than the cost of their borrowing, and they pay out whatever excess they have (“earnings”) to shareholders as dividends[13]. So if borrowing costs go up quickly for them, they can get hurt — particularly if the small companies they lend to fall on hard times and have trouble paying them back, which is what happened to a lot of BDCs in 2008-2009, and why you’ll see that the share prices of just about all BDCs cratered during that time… though a crop of new ones also came into being in 2009 and 2010, in part because that was an easier time to raise money and debt was relatively cheap to lever up.

I don’t currently own any BDCs, but they do tend to be cyclical to the extent that the companies they lend to are cyclical, as many small businesses are — so if the economy is going into a tailspin, owning a portfolio of loans to small companies can be frightening. If we’re recovering, then the nice big yields they pay will certainly attract more investors — and these days, with so many investors desperate for yield, most BDCs have been doing very well, indeed and are not far from their 52-week highs. Though I think all of them are well below their 2007 or 2008 highs, if they’ve been around that long.

There are actually some “almost ETFs” for business development companies[14], too, though they’re actually ETNs, not ETFs — there’s even a leveraged ETN, which means it moves more dramatically and it pays out a higher yield, in the UBS E-TRACS 2x Wells Fargo Business Developmpent Company ETN (BDCL) … the “regular” ETN tracks that same index at a non-leveraged pace and trades at ticker BDCS. I’ve never used either of these, and they’ve only been around for about a year so I’m not sure how well they track this “index” of BDCs — which itself is fairly limited. An ETN, in case you’re not familiar with the jargon, is an Exchange Traded Note — so it’s not a publicly traded mutual fund that just owns the underlying stocks, which is what ETFs are, it’s actually a publicly traded debt instrument that includes a promise from UBS that the dividends and asset value will track that index. There’s not necessarily anything wrong with ETNs as trading vehicles, particularly when there isn’t a corresponding ETF, but do keep in mind that what you would be doing is buying an obligation of UBS, not a basket of shares. And that leveraged 2X one is likely going to be very bumpy.

So … since Wyatt didn’t tease any specific ones this time around I’ll leave it up to you — do you have a favorite BDC that you think offers a nice yield/risk profile? Let us know with a comment below.

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