Original article: http://www.plansponsor.com/DC_Plan_Sponsors_Should_Focus_More_on_Deferral_Rates.aspx


Kevin Coppola

The July 2012 study published by the Putman Institute concludes that getting plan participants to increase their contributions to their retirement plan is the “most important thing they can do” to help their participants grow their retirement plan.
Well, not so fast! The Putnam Study—an unintended and indirect condemnation of traditional asset allocation—considered four factors when coming to this conclusion. Unfortunately for plan participants depending on their employers to use this information to help them reach Retirement Income Security, the research ignored the most important factor of all! Read on…

After careful review and study of the report findings I can report that the study firmly supports FOUR of the conclusions that the 
Compass Institute made over a decade ago!

Traditional asset allocation is insufficient. The study highlighted that no matter what you do to a traditional asset allocation strategy, the participant can only make a real difference in their final plan balance by increasing their CONTRIBUTION amount. NOTE: The study did NOT consider the impact of improving investment return.

The asset allocation mix of stocks to bonds has minimal impact on the long-term results. As we know and can see by looking at the best and worst Target Date Funds (TDF) over time, the selection of the YEAR of your retirement—and therefore your asset allocation mix—has less to do with final plan balance than what the MARKET is doing in the year you retire. Furthermore, the definition of “best” and “worse” varies over time depending on market conditions. 

The value of good fund selection is minimal. The study determined the impact on final portfolio value if an investment committee were able to apply 20/20 foresight to the selection of plan fund options and included only those funds that outperformed 75% of their corresponding asset class. The resulting improvement was minimal. The Compass Institute concluded that what is most important is not the FUNDS in a plan, but rather the asset class MIXTURE that you have available to you.  The Putnam study validated this by showing minimal gains even when 20/20 foresight was available.

Account rebalancing. The study concluded that more frequent rebalancing did lead to “slightly greater” results which confirms the second premise of Adaptive Asset Allocation™ that you must reallocate more often. However, they were still rebalancing into a FIXED asset mix, therefore leading to the only “slightly” better results.

The study takes a “base” case and applies various portfolio strategies against it. The “base” case assumed a contribution rate of 
4.5% (3% plan participant contribution, 1.5% company match) and grew to $136,400. Their “best” case scenario was obtained by increasing overall contributions by 244% to 11% (8% contribution, 3% company match) growing the portfolio to $334,00. So, as we already knew it would since contributions are a linear function, the 244% increase in contributions led to a 244% increase in final plan balance. 

Since it was not provided in the report, I calculated 
the average annual return on their portfolio for the scenarios they provided. I ran their assumptions through our calculator (i.e., a 28-year old, saving for 29 years, making $25,000 with a 3% annual increase, contributing 8% of their salary, with a company match of 3%, worth $334,000). Their “best”-case portfolio calculates to a 6.4% average annual return. Note that this is a reasonable, yet somewhat on the high side seeing as the range between the best and worst Fidelity TDF fund over the last 15 years is between 5.6% and 6.5%. 

However, keeping the “base” case contributions FIXED at 4.5%, but instead 
increasing the average annual return by the same amount (244% from 6.4% to 15.6%), the portfolio would have grown to $1,519,903, or a 1,110% increase in the customer’s plan value at retirement. 

Let's look back at our example person again. With the 3% annual raise (and/or inflation) assumption the person would be making $57,000 when they wanted to retire. To be able to replace 100% of that amount and guarantee they would never run out of money (a 5%
guaranteed investment payout is assumed) the person would need to have amassed a plan balance of $1,144,000. Maintaining the contribution rate, this can be accomplished with a 14.5% investment return. The difference between what they have (6.4%) and what they need (14.5%) is what the Compass Institute calls the Investment Return Gap.

 No permutation of a traditional asset allocation strategy has as great an impact on closing the Investment Return Gap as increasing contributions. However, the study ignored the impact of increased investment return, whose impact dwarfs that of increasing contributions.

Knowing these things, the Compass Institute concluded that you have to do something other than traditional asset allocation and maxing out contributions to impact final plan balance enough to reach Retirement Income Security.
Plan participants who want the best possible tools for having a financially secure retirement should ask their employers for help in closing the Investment Return Gap which can be found, Adaptive Asset Allocation™.  To see how you are doing on your own path the Retirement Income Security and to see how large YOUR investment return gap is, download our Retirement Goal Calculator.

Kevin L. Coppola

President, Compass Investors, LLC
By Kevin L. Coppola

Article source:

In the article by Adam Butler and Mike Philbrick, entitled “
Adaptive Asset Allocation: A True Revolution In Portfolio Management,” published this week in Advisor Perspectives (as well as several other industry publications) the authors go through extensive financial calisthenics to justify their conclusion that financial managers who embrace Adaptive Asset Allocation “will increasingly dominate traditional managers; those who fail to adapt will, inevitably, face extinction.”

Understanding and sensing this potential extinction of my own personal portfolio 20 years ago is what started me on the path toward identifying an alternative to Modern Portfolio Theory (MPT)—aka, “pie-chart” investing—which would prove to yield substantially better results for the amount of risk taken.

Back in 2002, the
Compass Institute defined Adaptive Asset Allocation as having of TWO major distinctions from MPT. First, it reviews and modifies an investment mix more frequently, and second, it determines how to adjust a portfolio based on current market realities rather than on an arbitrary ratio of stocks to bonds determined by an investor’s answers to a “risk tolerance” profile. 

The article elegantly identifies the impact of these same two distinctions on portfolio value and risk as well as highlights the significant “flaw” of traditional investing strategies that the Institute also identified more than a decade ago.

Rebalance Frequency. The authors’ studies were based on a monthly rebalancing. The
Horizon™ Adaptive Asset Allocation approach employs a 5 week rebalance cycle, having concluded after a 5-year extensive research study conducted by the Compass Institute that a 4-6 week rebalancing frequency was optimal.

Rebalance Input. The authors offer a simple, yet effective, formula of investing in the top 50% of their balanced portfolio of stock and bond alternatives based on metrics gathered during the 6 months leading up to each rebalance date. The Horizon™ approach uses a more complicated formula that weights multiple prior time periods and has a different algorithm for deciding how many and how much of each alternative to invest in. Regardless, the point being highlighted here is that “the best estimate of
tomorrow's value is today's value” and therefore making reallocation decisions based on recent market conditions is a far more effective way versus going with a fixed or static allocation.

The authors present their “flaw of averages” concept which asserts that any investment strategy that is based on long-term averages—which is at the core of MPT’s efficient frontier theory—exposes the strategy’s results to the enormous short-term variability that can devastate a portfolio. At Compass Investors, we refer to this “flaw” as the “Time of Retirement” risk and it can be best understood by observing the behaviors of life cycle, or Target Date Funds (TDF) over time.

If you are keeping up, you know that TDFs are all the rage. These one-stop shopping investments utilize an entirely different 2-step process: First, choose your retirement year, and then second, go away for 10, 20, 30 (or more) years. So much emphasis is put on selecting the “right” retirement year when, in fact, the year in which you retire matters little. However, what does matter is how the market is performing in the year you decide to  retire.

To see this clearly, look at this chart that compares the performance of the “best” and “worst” performing Fidelity Freedom funds over the last 15 years  to the performance of a balanced portfolio of Fidelity funds managed with the Horizon Adaptive Asset Allocation strategy. Notice that the “best” and  the “worst” TDFs are in a horse race; the best becomes the worst and vice versa as the markets ebb and flow. Also notice that the gap between the best and the worst is never very large, nor would you ever expect to be given the natural market cycles that take turns inhibiting the growth of static asset allocation portfolios.

The marketplace continues to realize that traditional investing strategies—formulaic asset allocation investing, buy-and-hold, TDFs—simply do not nor cannot generate the results that people need to have to achieve Retirement Income Security in their lifetime. And as always, there is bad news and good news. The bad news is investors have piddled around for the last decade in a haze of confusion, generating results that have barely kept up with inflation. The good news is investors have places to go to put Adaptive Asset Allocation to work for them NOW. There are several models available—including the ones proposed in the article—for the do-it-yourselfers, and there is the Compass Investors Adaptive Asset Allocation service called Horizon™ that will do the heavy lifting for you.


Kevin L. Coppola, President, Compass Investors, LLC

Toll Free: 1.866.54.COMPASS
Direct: 1.847.920.1825 x 1234
Fax: 1.847.512.7713

by Kevin L. Coppola  
(original article here)

This article entitled, “Scary study shows 401(k) matching doesn’t work” in and of itself should be a concern to a 401k investor and plan sponsor. The essence of the article is that the choice of which funds to own is a difficult one and one that the plan participant is likely to either not make at all, or make the wrong choice (at least better than doing nothing.)

This flys in the face of plan sponsors who think they are doing their plan participants a favor by giving them more choices.  My favorite is the “brokerage window” offered to many Fidelity plan participants. If the plan participants can’t do well with 20 choices, what are they supposed to do with 3,000??!!

Additionally, the article all but admits that the best return someone can expect over their lifetime is 8%, which can be shown mathematically to leave plan participants well short of the Retirement Income Security goal of being able to replace 100% of their pre-retirement salary. And this is still overstated.

             -As using historical returns of 10% for stock and 3-5% for bonds, it would require the average equity/fixed income mix over a lifetime to be 80%/20% when the reality is only the most “aggressive” investor would hold this percentage, and the industry advises all people to reduce the stock holdings – and therefore reduce the potential return – as they get older.  

            -So a 60/40 lifetime mix may be closer to reality and it’s return would be closer to 6% than 8%. Note that the BEST formulaic asset allocation fund (fixed pie-chart of XX%Stocks/XX%Bonds) over the last 14 years has averaged 6.7% return, so the average would of course be lower.

ATTENTION: Plan Sponsors 
    - Make the best use of the plan you already have     
    - Contributions—yours or your employee’s—matters little. What matters are the results.       
    -Most plan participants just want to be told what to do.
The Horizon™ Model Portfolio does exactly that.
    -The return for default investments can AT BEST be between 6-8% which are insufficient to generate enough income in retirement.
Horizon™ offers 12-14% on average (Hard to believe? These results were audited by Ashland Partners).

ATTENTION: Plan Participants (401k Investors!)
    - Get a regular analysis of your 401k fund options every 5 weeks with SIMPLE guidance on how to align your portfolio for success
    - Empower yourself to have ACTIVE CONTROL on your own money with the proven support of the
Horizon™ service
    - Achieve better results for yourself and your money!
    - Have confidence that your retirement investments are on the right track!

Kevin L. Coppola