PLAN ADVISORS

To help achieve participant goals,
a prudent retirement plan should seek to:

1

Seek smooth, consistent returns over many market cycles

2

Minimize large losses to help participants remain invested

3

Reduce costs where possible

4

Adjust allocations over time based on participant age and risk tolerance

SOUNDS LIKE PRUDENT PLAN CONSTRUCTION, RIGHT?
But is that what we see in the
retirement plan marketplace...?

Expectations Meet Reality

Participants and Sponsors likely expect their retirement plan:

Plan participants have different goals.
$1.5M $1.2M $2M $2.5M $1M $1.6M
And they expect their retirement plan will achieve them.

8%

Annualized gain typical participant expects to earn over time in retirement account

Source: MFS, see 2013 Participant Pulse

But are their
expectations realistic
going forward?

4 .9 %

Yet the average forecasted
return for equities is only 4.9%

Source: MFS, see 2013 Participant Pulse

That’s much lower than
returns assumed by
most retirement plans.

#1 driving emotion of plan participants is
LOSS AVERSION - the fear of losing money

Source: Save More Tomorrow, Shlomo Benartzi

They expect a professional
is 'watching the store' to
help them avoid
catastrophe.

Participant 'risk tolerance'
selections indicate this...

41%

of Plan participants
identify themselves
as “aggressive
investors”

Source: MFS, 2013 Participant Pulse

reality

In a product-driven marketplace, the investment 'products'
pushed as ideal for retirement plans may not be…
Major market events produce a rude 'reality check'
Major
event
MARKET
HEADED
DOWN IN…
MARKET
BOTTOMED
OUT IN…
THE
MARKET
LOST
A $ 1,000,000 PORTFOLIO
WOULD HAVE FALLEN TO
THAT PORTFOLIO
WOULDN’T HAVE
RECOVERED UNTIL
Dot-Com Crash Sept 2000 Sept 2002 -44.73% $552,700 October 2006
Financial crisis Nov 2007 Nov 2009 -50.95% $ 490,500 March 2012
Source: Zephyr StyleADVISOR; Based on monthly index close
And even ‘diversified’ portfolios experienced tremendous losses in the 2008 Financial Crises:
-38%

LOSS

Average 'diversified'
U.S. equity fund

Source: Zephyr StyleADVISOR
-24%

Average 'at-retirement' vintage Target Date fund

2000-2010

Source: Zephyr StyleADVISOR Morningstar Target Date 2000-2010 category average
And major market events occur MORE
often than many investors expect

In fact, since 1929, the S&P data shows that, on average,
bear markets…

occur every

3.5

years

last

10

months

erase over

35%

of market value

take

3.3

years to recover

The Reality Is Often An Unexpected or Undesired Result

When major loss events occur, plan participants often...

move to cash after taking large losses, and miss rebounds,

get off-track and miss goals,

grow cynical and even give up on their retirement goals.

Dalbar studies and others prove this happens repeatedly.

Why does this
'Dalbar behavior'
keep happening?

The American Retirement Crisis

AMERICANS AREN'T SAVING ENOUGH

1

in

3
Americans has $0
Saved for Retirement

How confident are you that you will have enough
money for a comfortable retirement?

22 %

of workers are
‘very confident’

24 %

are ‘not at all
confident’

Source: 2016 survey results from GoBankingRates

The DOL started getting more involved in the marketplace due to concerns over "Americans not saving enough for retirement".
Yet their emphasis seems to be more focused on fees, versus risk management.

BLAME GAME

Investment "products" are often designed based on what's easiest to sell, or best "fits" into a box or new trend.

TDFs 2000-2010 were marketed to and supposedly "designed" for investors scheduled to retire near or around 2010.
Why would such a "product" lose over 24% in 2008 just 2 years before their retirement? Source: Zephyr StyleADVISOR, Morningstar Target Date 2000-2010 category average.
Instead of reconsidering portfolio construction to address risk directly,
fees and consumer behavior is blamed.

THE RACE TO THE BOTTOM

1.15%
1.07%
1.01%
0.94%
0.75%
0.29%
Did investors lose 20%, 30% 40% or more in 2008 because of fees?
No, it was a failure of the 'products' used in retirement plans to appropriately address market risk.
TO ADDRESS THE REAL PROBLEM, WE MUST GET TO REAL CAUSE.
The REAL Cause of the American

RETIREMENT CRISIS

1

Poor Portfolio
Construction

leads to

2

Statement Shock &
Poor Investor Behavior

When major market events occur:
  • Participants often lose big;
  • They react emotionally;
  • And often exit market;
  • Only to get back in after a market rebound.
Source: Morningstar
As a result, participants often do NOT achieve the 'assumed' rate of returns in their financial plan.

Investor Behavior is often driven by their emotional reactions to the market.

What it Feels Like When the Inevitable Occurs
Dalbar studies repeatedly show investor behavior driven my emotions and timing errors.
Source: various QAID reports by Dalbar, Inc.
Auto-enrollment and default options have been effective in helping increase plan participation.
But little has been done to address loss aversion, which can trigger emotional overreactions.
Source: Save More Tomorrow, Shlomo Benartzi
Click to Follow the Market (Emotional) Roller Coaster

Not THE INVESTMENT
THEY thought THEY HAD

The NEW Products Aren't the Solution

While the industry is happy to slap a sticker on a product and call it new, that doesn't make it a better solution.

TARGET DATE IS OUT OF DATE

Target Date and Index Funds have become an industry obsession - the new shiny product.
76%

of DC plans with automatic
enrollment use Target Date
strategies as the default (QDIA).

PIMCO

But how has this product
served participants?

-24%

Target Date Fund 2000-2010
vintage lost an average
of 24% in 2008.

Zephyr StyleADVISOR,
Morningstar Target Date
2000-2010 category average.

Many participants in those strategies were “subjected to
a risk of loss that exceeded
their capacity for loss.”

PIMCO

Passive, Low-Cost Index Funds and ETFs

Lowering the price of a product does NOT make it more effective.

In the next bear market, will participants
in these products behave differently?

Participants are told to 'buy and hold'.

Yet the data shows they often don't
'hold on when large losses occur'.

TDFs, Index Funds, ETFs do NOT address poor investor tendencies...
They may even exacerbate them.

While invested in these products, do you believe particpants will behave diffently in the next bear market?
  • They'll experience statement shock.
  • They'll get out of the market after taking large losses.
  • If they get back in, they'll likely miss most of the rebound.
  • Most will be off track, and many will suffer undesired
    outcomes when they need the income most!

A BETTER BUY-AND-HOLD

Your retirement plan needs to address participant behavior,

While navigating daunting investment challenges ahead.

BONDS

Fixed income is challenged
to protect capital and/or
provide income.

STOCKS

Forecasted equity returns
look bleak, yet volatility
will likely remain.

A Better Buy and Hold
Looks LIke This

SEEK CONSISTENT,
SMOOTH RETURNS

  • Smooth returns are easier on participant emotions
  • Address investment timing risk
  • DOL Tip Sheet for QDIA selection
    indicates that smoothing of returns is desirable

MINIMIZE
LARGE LOSSES

  • Address loss aversion and emotional overreactions
  • Help preserve participant confidence in the plan and goal achievement
  • Increase portfolio compounding time, reduce portfolio recovery time

We Need to Change How we Keep Score

Our Score Board Should Align with Participant Outcomes

Most plan reporting tools track the number of participants, but not outcome achievement.
Success is not measured by participation rate alone...
Success is the % of plan participants on track for desired income replacement.

ALIGNMENT OF INTEREST

The Achilles heal of retirement plans
is a bear market or major loss event.

A Strategy Designed to Smooth Returns Streams
and Minimize Large Losses:
  • Aligns with Plan Participants #1 Desire - Avoid Big Losses
  • Aligns with Plan Sponsor goals to meaningfully help employees
  • Aligns with broadening Fiduciary definition

IT'S TIME

Time to become Outcome focused, not ‘product’ focused
Time to start 'Keeping Score' based on Outcomes
Time to seek a Solution to Address Risk and Smooth Returns
Time to Become the Outcome-Oriented Advisor

THE OUTCOME-ORIENTED ADVISOR

It's time to put the Advisor back in the center
of participant and plan success.

The Outcome-Oriented
Advisor needs the
right tools to…

UTILIZE AN OUTCOME-ORIENTED
INVESTMENT STRATEGY

Help participants
  • reduce losses
  • avoid 'Dalbar behavior'
  • stay on track towards goals
CLICK here to Learn How

SEEKING A MORE SUITABLE QDIA

Align Participant Interests with Fiduciary Interests
TDFs are a popular QDIA, but 2008 shows they may be deficient. Should you have a more suitable QDIA?

Advisors can no longer be comfortable selecting
strategies for QDIA that lack a risk
management component.

COLLECTIVE INVESTMENT
FUNDS (CIFS)

Learn how the CIF structure can serve plan participants

WHAT IS A CIF?

OUTCOME-ORIENTED
STRATEGY

Learn how to apply such a
strategy in your plans

SWAN CIFs