_by Kevin L. Coppola
November 9, 2011

In reference to the article posted on the Compass Institute’s website… http://www.compass-institute.com/CINST_Article_BENPRO_11-04-14.htm

I dusted off the article above that we posted earlier this year when things were going relatively “well”.  I was not surprised to find that the American worker’s “confidence” in their ability to retire was actually near an all-time high (at least since these questions have been asked) with one in five American’s believing that they will be able to have a secure retirement. 2010 went along way to erasing the bad tastes of 2008-2009. Well after today’s nearly 400 point drop—solidifying my belief that the new “normal” for the stock market is triple digit swings—I suggest that this confidence level may have dropped a notch or two.

In the referenced article, Ms. Sarsynski highlights the need for continued education which is at the forefront of what Compass Investors advocates. Our company was founded on the charter to provide people the information they need to make better-informed investment decisions. A critical component of that education is establishing a measurable goal, and then understanding what you can do to reach it.

She mentions a “funding gap” which is a politically correct way of saying that people will likely run out of money before they die. And this “gap” is getting larger every year. I suggest that there also exists a “gap” in the education of plan participants regarding what they need to do to reach the goal of NOT running out of money before they die. And that is the lack of information about the 2nd of two knobs that a plan participant can turn to impact their retirement plan—contribution rate and investment return rate. Of these two knobs, the former is hammered on consistently by employers to their plan participants…”Contribute as much as you can.” Don’t misunderstand there is nothing wrong with doing that. Unless, that is, you are ignoring the second, and far more important knob, investment return.  Why? Because if you are simply throwing more funds into a ship that’s sinking, you’re just going to sink the ship faster. Rather, you need to plug the leaks and make sure that the ship is safe and sound and motoring ahead toward retirement. Knob #1, contribution rate, has a linear effect on a participant’s bottom-line—dollar in, dollar out. However, knob #2—investment return—has an exponential effect on the bottom-line—dollar in, five or six, or eight, etc. out. This is a mathematical fact of the law of compounding and something anyone who’s been through high school algebra might recall learning at one point in their lives.

Ms. Sarsynski calls out for plan sponsors (employers) to do what Compass Investors has been telling employers for years—focus on results that matter to the participant, NOT just on those that matter to the Department of Labor. An employer can stuff 95% of their employees into their company’s plan and be labeled a wild success by DOL standards. However, as Ms. Sarsynski correctly points out, when you look under the covers of that plan, you may find 40% of your plan participant unable to actually retire without redefining THEIR success (reducing expenditures, traveling less, working longer, etc).

A successful retirement starts with understanding the goal and then focusing in on both the contribution/saving rate and the investment return, with investment return being the more critical of the two to get right.  At Compass Investors, our Horizon™ Adaptive Asset Allocation service offers plan participants an active strategy which has yielded more than twice that of the best traditional, passive asset allocation saving approach. This difference in investment return will most surely close the “funding gap” for those who follow the more active strategy.

Kevin L. Coppola
kcoppola@compassinvestors.com
President, Compass Investors, LLC

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