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Compass Institute Blog
Members of the Compass Institute have contributed to various blog sites regarding topics of interest to the Retirement Income Security business.

Source Article: http://www.smartmoney.com/retirement/planning/the-cost-of-living-longer--much-longer-1328897162395/#printMode

If you are like me and HATED Statistics in school – sadly the one class I had to repeat twice and ultimately drop in an otherwise stellar college career – then you will give yourself a massive headache reading the article by Charles Passy that appeared in SmartMoney magazine this past February.

So allow me to summarize for you. Mr. Passy addresses the answer to the age-old (technically 429 year since the first life-insurance policy was issued in 1583) problem of how long you can expect to live, or as my favorite Investment Risk Profile questionnaire asks, “When do you expect to DIE?” I don’t know about you, but I’m really concerned about what happens if I get the answer to that question WRONG!!

Of course, you’ve heard me lay out the simple solution that makes the need to answer this question irrelevant, and that is you must “Save enough during yInnovationsing years so as to be able to replace your final salary with just the guaranteed interest on your savings.” And you can find that solution here.

But back to the article at hand…

Mr. Passy provides some idea of the magnitude of what the Compass Institute refers to as the “Investment Return Gap,” i.e., the difference between the amount of money you HAVE and the amount you NEED, when he lays out the total amount in the United States invested in investment sources like company retirement plans, IRAs, state worker funds, corporate pensions and Social Security versus the amount of money that will be needed by Americans during their retirement. The size of the problem has 14 – that’s FOURTEEN – zeros after it. That’s not even a number most humans can comprehend. Let it suffice to say it’s a problem that may not be fixable by any rational or socially acceptable means.

The author interviewed several experts in the area of human longevity, one of whom is Stephen C. Goss, the chief actuary of the Social Security Administration. When asked to categorize the people in America whose retirement strategies will lead them to have a financially secure retirement, he could think of just one; not one “category” but one person—none other than one Mr. William Henry Gates III, aka 2011’s wealthiest American.  Surely Mr. Goss was exaggerating because I have a hard time seeing Warren Buffett, Larry Ellison, George Soros, or the Waltons (the Wal-Mart ones, not the TV ones) facing a financial crisis anytime in their future. But nevertheless, the point is this is a severe issue faced by nearly every American and one that will only get worse without prompt attention.

So, unless you share financial stratosphere with Mr. Gates, etc., the author essentially sounds the alarm – as well he should – to the real problem of people outliving their money. The Compass Institute coined a phrase, Retirement Income Security Risk, meaning “the risk of running out of money before you die without a substantial reduction in your standard of living.”  This is a classic “good news/bad news” scenario. The good news is people are living longer due to advances in medical science. The bad news you are likely to end up needing far more money than you will have to live out those extra years, however there may be.

True, people will not live forever and as Alan Glickstein, a pension actuary with benefits consultants Towers Watson points out, “all things in the natural world are destined to stop growing sooner or later.” There are several competing factors at play.  Despite the fact there are 2,200% MORE centenarians in the US that there were in 1950, one third of Americans are classified as obese and therefore at risk for such life-shortening ailments as diabetes and heart disease.  But even if we were to put America on a much-needed diet, scientists would still have to come up with a way to slow the biological processes of aging itself, which experts agree may not be possible.

But since some of these concerns are not for our generation – or even the next – lets deal with today’s realities.  University of Illinois at Chicago researcher, S. Jay Olshansky concludes that “no matter what cures doctors discovered, humanity would hit a longevity wall -- with men and women, on average, reaching age 85 for the foreseeable future.” However, at the very least, say most pros, “It’s essential to plan financially at least through age 95 -- and if you have a history of longevity in your family, figure on surviving to the century mark.”

And, if you are counting on your current (or former) employer to help, you may be gravely disappointed as pensions continued to be depleted. And those government employees depending on state pensions may have it even worse. According to a 2010 study from the Pew Center on the States thirty-one states "have less than 80 percent of their pension obligations funded."

So the challenge to each of us is not to answer the question “How long can you expect to live,” (answer somewhere between 85 and 100) but rather answer the question “What am I going to do about it now!” The answer is to start taking an active investment approach to growing and protecting the one thing that you can control—your retirement plan.

Kevin L. Coppola, President, Compass Investors, LLC

Commentary on "DC Plan Sponsors Should Focus More on Deferral Rates" by Kevin Coppola


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

Study: https://content.putnam.com/literature/pdf/PI007.pdf

By 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!

1.       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.

2.       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.

3.       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.

4.       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.

Bottom-line. 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

Commentary on "America's Retirement System Is Failing Us: Economist" by Kevin Coppola

by Kevin L. Coppola

Source Article: http://finance.yahoo.com/blogs/daily-ticker/america-retirement-system-failing-us-economist-153445894.html

More validation today for our messages of the past decade to a growing problem. It’s nice to see other people starting to finally get it.

The article highlights the problem Compass Investors has been trying to alert people to for the past decade. As you know we call it the "Retirement Income Security Crisis".

Employers were given cart blanche 30 years ago to "punt" their responsibilities to provide retirement income for their workforce back to their plan participants through the implementation of the defined contribution program. However, it's like being given a car without the keys or without driver’s-Ed!! It's a great idea and concept but people are ill-equipped to use it. 

The Defined Contribution plan, or the "do-it-yourself pension plan" as the author calls it (I love that term) forgot that most people without investment experience and, even potentially more disastrous, those people who think they have investment "experience," would be unable to get the same results (as poor as they may be) as professional investors and money managers.

But that's only half the problem. As you know even those "professionals" have been unable to fill the gap left between what a TDF (the investment vehicle of choice) will produce and what will be needed to obtain Retirement Income Security.

Compass Investors has been saying for 10 years that people should save not the 8-10 times their final salary before they retire that the "professionals” have advised, but rather they should save at least 20 times in order to have Retirement Income Security. Well this author agrees to the number (I wonder if she took a look at our web site?!) and it’s about time people are stepping up to these realities.

Furthermore, we've stressed that to have Retirement Income Security you need to divorce yourself from dependence on government programs (Social Security, Medicare) that are not under your control and potentially insolvent. If they survive until you need them, great! No one will ever complain about having too much money!! But why risk it when the retirement plan, properly and actively managed, CAN by itself provide most Americans with Retirement Income Security regardless of any government entitlement programs.

The article, as well as all others, stop short of providing any answers to these burning issues. But the good news, is Adaptive Asset Allocation™ is a solution to closing the Investment Return Gap which will lead to many more people finding Retirement Income Security in their lifetime.

This article joins the growing list of external supporting references posted on the Compass Institute web site where the “Retirement Income Security Crisis” and Adaptive Asset Allocation™ stories have been told going back a decade now.

Kevin L. Coppola, President, Compass Investors, LLC

"Adaptive Asset Allocation: A True Revolution in Portfolio Management" by Kevin Coppola

by Kevin L. Coppola

Article source: https://www.advisorperspectives.com/commentaries/bp_51412.php

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 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

(Original Article by Neil Frankie)

by Kevin L. Coppola

Life Cycle funds continue their stay in the line-of-fire of the financial services community with this latest article appearing in the Wealth Pilgrim blog. These former “darlings” of the industry are suddenly not so attractive. The fact that life cycles, or Target Date Funds (TDFs) as you may know them, have many warts will come as no surprise to our customers as we published a white paper way back in 2007 outlining the inherent flaws in these – or for that matter – any approach to traditional asset allocation.

Understand that there is a very clear division amongst the financial community: Those that love life cycles because they are a money-minting machine for them (i.e., to those that SELL life cycle products), versus those that have clients whom they advised to invest in life cycles and who now have to explain the “whats” and “whys” of that now questioned counsel.

The author of the article highlights 3 reasons why life cycles are NOT a good choice for all but the very few – none of whom are future retirees which I assume means almost everyone.

First, life cycle funds don’t actually deliver what they promise, namely, the implication that by investing in a life cycle fund you will achieve Retirement Income Security. Why? Because they will always hold some percentage – and for most life cycle funds, a majority percentage – of their value in stock funds. So when stocks were taking a beating back in 2001, 2008, 2011, investors saw the MAJORITY of their accounts go down proportionately. So even those people who were “only” 10 years out from retirement, found themselves absorbing terrific losses at the worst possible time.

Second, the entire concept of a life cycle fund is contrary to the facts facing retirees, namely that actuaries give relatively healthy retirees 2 decades (or more) of life without employment income. As such, in order to ensure the investment return needed to deliver Retirement Income Security, the first move that most retirees will have to make if they want to ensure they don’t outlive their money is to move back INTO the so-called “aggressive” strategy of investing in stocks. This comes immediately after having followed the life cycle’s decades-long path of moving them OUT of stocks. What? Does this make sense to you?

The bottom-line is this: in order to achieve Retirement Income Security, you need to have investment returns that eclipse those possible following any traditional, fixed asset allocation approach, including life cycles. The solution to generating the level of returns needed is to take an ADAPTIVE and ACTIVE approach to monitoring the world and market around you and making moves at the appropriate times to ensure that you are going with—not against the market—as often as possible.

Kevin L. Coppola
by Kevin L. Coppola
November 9, 2011

In reference to the article posted on the Compass Institute’s website… https://www.compass-institute.org/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
by Kevin L. Coppola

 (Click Here to Read the ORIGINAL ARTICLE)

The on-again-off-again public concern over Social Security seems to me to be an inversely correlated concern over what the markets—and correspondingly, retirement plan balances—are doing. When times are good for the stock market, people seem to want to raise concerns about Social Security. And when the markets are going down, Social Security seems to take a back-seat to concerns about the market.

Why is this? I have 2 theories: 
  1. Greed and fear are the 2 emotions that drive most people. No offense to you if you are one of the few who have those emotions well in check. However, for the “greed” driven, when all is well with their retirement plan, they go looking for MORE. “Social Security…woe is me…may not be there when we “need” it, etc.”
  2. For those already resigned to the possibility that Social Security may not be around—or at least insufficient to provide Retirement Income Security—their focus, AS IT SHOULD BE, is on the fate of their retirement plan…how to fix it…what is their employer going to do for them?, etc.
We don’t have a Social Security crisis in this country…what we DO have, and what the article confirms and Compass Investors has been saying for a decade, is that we have a retirement security crisis. And between 92% and 100% of those surveyed, depending on their age believe that to be the case too. And, BTW, having 90% of respondents agree to something is an unheard of number as far as surveys are concerned.

Compass Investors begins our education process by encouraging new customers them set a goal for having Retirement Income Security. That goal is, simply put to “make sure you can generate your pre-retirement level of income, no matter how long you should live.” This can be done by growing a nest egg large enough so that you can invest it in a guaranteed product (such as an annuity) and live off the interest alone.
The author speaks to the use of annuities in the article too. However, annuities have a bad rap for some reason. Well, we don’t sell them, but I can tell you I have a few for just the reasons I mentioned. If my company is not going to have pension money left for me when I retire, and/or if the government is not going to give me a “pension” (aka, Social Security), then I’ll just go create my own by growing my retirement plan large enough so that I can annuitize it and live off the interest—forever, if need be.   After all, my retirement plan the ONLY thing I can control or do anything about!

Learn more about the SOLUTION today! Research Compass Investors LLC

Kevin L. Coppola
by Kevin L. Coppola 

(click to see the original article)

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 flies 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) return, so the average would of course be lower.
ATTENTION: Plan Participants (401k Investors!)
  • 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


Compass Institute, LLC  •  PO Box 94  •  Kenilworth, IL •  60043-0094 •  USA  •  1.866.54.COMPASS (1.866.542.6672)