In this Milliman-commissioned white paper, noted employee benefits attorneys Fred Reish and Bruce Ashton discuss the benefits of managed risk funds such as Milliman’s Even Keel products. While retirement plans that rely on equities to take advantage of higher returns can generate adequate, sustainable income, they are also exposed to higher risk. Managed risk funds solve this dilemma by providing participants with access to equity investments while simultaneously mitigating volatility to help guard against the effects of poor returns.
Creating sustainable retirement income in 401(k) plans
3. one of their biggest fears – running out of money in
1 American Benee ts Council. “401(k) Fast Facts.” June 2013.
hJ p://www.americanbenee tscouncil.org
products – traditional annuities and guaranteed
minimum withdrawal benefit features – is to offer
4. retires. On the first issue – how much replacement income
is adequate – many observers use 75-80% of final pay as a
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•
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7. • The replacement income issue:
See, for example, “Workforce Management and Retirement in a
401(k) World,” Watson WyaJ Insider (September 11/ 2007).
See, Cantore, Tara, “MetLife Finds Too Many Pre-Retirees with
Faulty Math,” Plan Adviser (October 2011)
See Allianz RFI Response, at page 4.
See, for example, Aon Consulting, “Aon Consulting/Georgia State
2008 University Replacement Ratio Study.”
• Longevity:
• Withdrawal rates:
• InEation risk.
6 Reish, Fred, Ashton, Bruce and Byrnes, Pat, “The Problem with
Living Too Long,” Institutional Retirement Income Council (2010),
hJ p://www.iricouncil.org/docs/The%20Problem%20With%20Liv
ing%20Too%20Long.pdf. . . For more recent information, see Society
of Actuaries, Exposure DraG, RP-2014 Mortality Tables, February
7 One recent study showed that more than 33% of those interviewed
had no idea how much they could safely withdraw and roughly
25% expected to be able to withdraw more than 10% of their
retirement savings each year. See, Lee Barney, “American All Over
the Map on Retirement Drawdown Rates,” Money Management
Executive (October 13, 2011).
8 William P. Bengen, “Determining Withdrawal Rates Using
Historical Data,” Journal of Financial Planning, October 1994,
pages 171-180. . . Some more recent studies have suggest that a 3%
withdrawal rate is more appropriate in the investment environment
of the e rst decades of the twenty-e rst century. . .
8. • Cognitive risk:
Investment or sequence-of-returns risk:
2000s. The risk arises when a retiree takes withdrawals –
which are necessary to pay his living expenses – from a
9 See Allianz of America, Behavioral Finance and the Post-Retire-ment
Crisis (A Response to the Department of the Treasury/Depart-ment
of Labor Request for Information Regarding Lifetime Income
Options for Participants and Beneeciaries in Retirement Plans),
prepared by Prof. Shlomo Benartzi, UCLA, at page 9 (April 29,
2010) (the “Allianz RFI Response”); see also BMO Retirement In
stitute, Financial decision-making: Who will manage your money
when you can’t?, July 2011, which reached similar conclusions
based on studies of the Canadian population.
See, David Laibson, “Cognitive Impairment: Precipitous
Declines in Cognition Can Set the Stage for Poor Decisions
About Retirement Finances,” which appears in the Allianz RFI
Response, hJ p://www.dol.gov/ebsa/pdf/1210-AB33-617.pdf. .
. Professor Laibson’s research showed a signie cant decrease in
“analytic cognitive functioning” as people age and that older
adults make e nancial mistakes. In ee ect, older people are less
able to make cogent e nancial decisions, to analyze e nancial data
and properly consider risks, which suggests that they are less
able to make sound decisions about their e nancial security once
they reach their 80s…a point when they may live another 10 or
more years. . .
9. 11 ERISA §404(a)(1)(A).
12 ERISA §404(a)(1)(B)
Id. . . Emphasis added.
should
14 29 C.F.R. §2550.404.a-1(b)(1).
See, generally, Riley v. Murdock, 890 F.Supp. 444, 458 (E.D.N.C.
1995).
See, generally, Fink v. National Savings and Trust Company,
F.2d 951, 962 (D.C. Cir. 1984).
Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984); cert. denied
sub nom, Cody v. Donovan, 469 U.S. 1072, 105 S.Ct. 565, 83
L.Ed.2d 506 (1984).
18 ERISA Regulation Section 2550.404a-1(b).
10. 19 ERISA Regulation Section 2550.404a-4(b)(1) and (4). . . The
regulation relates only to the selection of an annuity provider in
a dee ned contribution plan, but the precepts in the rule may be
applicable to the selection of a GWB product by analogy.
11. 20 Mungan, Kenneth P. “The 6% Rule: Determining Portfolio
Withdrawal Rates using Stochastic Analysis and Managed Risk
Equities.” Milliman.com/insight. September 14, 2014. Milliman,
Inc.
21 Dalbar, Inc. “2013 QAIB Quantitative Analysis of Investor
Behavior.” March 2013. Dalbar, Inc.
22 Mungan, Kenneth P. “Performance of Insurance Company
Hedging Programs During the Recent Capital Market Crisis.”
Milliman.com/insight. December 1, 2008. Milliman, Inc.
12. * The backtest is based on a $100,000,000 investment from 1/1/2000 to 12/31/2013. The S&P 500 is an unmanaged index that is not
available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a
1% fund management fee but do not include taxes, sales charges, or any other expenses. The rates of return are hypothetical historical
illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will
consistently lead to successful investing.
13. * The backtest is based on a $100,000,000 investment from 1/1/1990 to 12/31/1999. The S&P 500 is an unmanaged index that is not
available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’ both include a
1% fund management fee but do not include taxes, sales charges, or any other expenses. The rates of return are hypothetical historical
illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that the investment process will
consistently lead to successful investing.
14. * The backtest is based on a $100,000,000 investment from 1/1/1990 to 12/31/1999. The S&P 500 is an unmanaged index that
is not available for direct investment. The returns for the ‘S&P 500 Investment’ and the ‘Managed Risk S&P 500 Investment’
both include a 1% fund management fee but do not include taxes, sales charges, or any other expenses. The returns for the
‘Hypothetical Investment (2.5% per year)’ do not include fees, taxes, sales charges, or any other expenses. The rates of return are
hypothetical historical illustrations and do not represent the returns of any particular investment portfolio. There is no assurance that
the investment process will consistently lead to successful investing.
15. 24 Source: United States Census Bureau, “Net Worth and
Asset Ownership of Households: 2011, Table 4. Percent
Distribution of Household Net Worth, by Amount of Net
Worth and Selected Characteristics: 2011,” hJ p://www.
census.gov/people/wealth/
saved
need
16. Appendix B-2: Ee ects of Volitility
The Sequence of Returns Ee ect
25 In this example, if the investor starts with $100, the
investment will increase to $150 (a 50% increase) and then
fall to $75 (a 50% decrease).
26 Russell Kinnel, Morningstar, 4/16/2013, “Why Investors
Lag the Returns of Their Funds: Volatility proves challeng
ing for many shareholders,” hJ p://www.morningstar.com/
advisor/t/73663027/why-investors-lag-the-returns-of-their-
17. With the Standard & Poor ’s 500-stock index near
an all-time high, it’s worth considering how
investors in stock mutual funds have fared in the
market rally that began more than 4 years ago.
Not so great, according to latest Quantitative
Analysis of Investor Behavior study by Dalbar Inc.
Fund investors have signie cantly underperformed
the S&P 500 over the past 3, 5, 10 and 20 years.
While average stock fund investors did almost
match the S&P 500s 16% total return last year,
they lagged the index by nearly 4 percentage
points per year from 1993 to 2012.
27 Tom Anderson, Forbes, 3/28/2013, “Fund Investors Lag
As SP 500 Nears All-Time High,” hJ p://www.forbes.com/
sites/tomanderson/2013/03/28/fund-investors-lag-as-sp-
This analysis is based on SP 500 returns from 1/1/2000 to 12/31/2013. The SP 500 is an unmanaged index that is not
available for direct investment. The returns do not include fees, taxes, sales charges, or any other expenses.
18. • Even Keel Managed Risk Fund – this fund
•
Fund – This fund uses U.S. small and mid-
•
– This fund uses developed international
• Even Keel Explorer Managed Risk Fund –
28 Product descriptions may be found at www.evenkeelin
vestments.com/#products.