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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION — 8/29/07

Target Maturity Funds Seen As Deficient In Providing Adequate Retirement Income

From Spencer's Benefits Reports: Two recently released studies have called into question the ability of target date funds and lifecycle funds to provide 401(k) plan participants with adequate retirement income security by age 65.

The first study, conducted by the Compass Institute, compared formulaic asset allocation (FAA), such as target date funds, lifecycle funds, balanced funds, managed accounts, and Monte Carlo simulation, with an adaptive asset allocation (AAA) strategy. Adaptive asset allocation strategy responds to the actual market and economic conditions that occur (every few weeks, if necessary) rather than to a preset formula percentage mix of equities and fixed income. As explained by the Compass Institute, the AAA strategy is equivalent to driving safely, that is, adapting to the actual conditions encountered, not to those forecasted or assumed to occur; thus, it is not market timing because it does not predict future events.

The average annual return over the ten-year period from Jan. 1, 1997, to Jan. 15, 2007, was 8.8% for the best-performing FAA lifecycle fund versus 16.2% for the AAA strategy, according to Compass. Since these returns reflect investments from the beginning of an up-down-up market cycle, Compass also found similar results for investments made at the beginning of a down-up market cycle (Jan. 1, 2000 to Jan. 15, 2007): 4.0% for the best-performing FAA lifecycle fund versus 11.9% for the AAA strategy.

The Compass Institute study compared the average annual returns of an FAA fund and an AAA strategy used by three 401(k) plans for the down-up period from Jan. 1, 2000 to Jan. 15, 2007:

Professional Services Firm FAA = 4.0%  AAA = 10.0%
Global Pharmaceutical Firm FAA = 4.0%  AAA = 12.7%
National Hospital Chain FAA = 4.2% AAA = 13.2%

The 42-page report and 37-page appendix contain comparisons of specific formulaic asset allocation funds, as well as results for individuals starting 401(k) plan contributions at ages 25, 35, or 45. A copy of the report and appendix are available by sending an e-mail to

Wilshire Associates Study

Wilshire Associates is advocating more closely tailoring target maturity funds to the needs of the investors. Two issues are involved: “underfunded” retirement savings and “underestimating” longevity risk after retirement.

“Most of the existing target maturity portfolios invest too conservatively,” according to Wilshire, “and as such, prematurely shift allocation from equities to fixed income.” As a result, Wilshire contends that existing portfolios do not generate sufficient asset growth to support retirement spending needs. The Wilshire 2040 target maturity portfolio uses a 94% equity/6% fixed income asset allocation; as opposed to a typical 2040 target maturity portfolio, which uses an 85% equity/15% fixed income asset allocation. For people in their late 40s or early 50s who have “underfunded” retirement savings, Wilshire is advocating an even higher concentration in equities, beyond what existing target maturity portfolios are using.

However, when target maturity portfolios extend the target date into retirement, Wilshire contends that they tend to have a larger exposure to equities than they should. As a result, these relatively large allocations in equities can expose investors to large losses near, or in, retirement, with “no chance or ability to make contributions to offset the losses.” Wilshire believes that “it is important to manage the investor’s time horizon by incorporating a dynamic measurement of life expectancy into the portfolio construction process.”

A copy of the Wilshire study, entitled The Evolution of Target Maturity Portfolios: A Liability-Aware Approach to Investing for Retirement, can be obtained by contacting Kim Shepherd, managing director of corporate communications for Wilshire Associates, at


For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.