Asset Class Correlation Hits New High

Even as it hits alpha, correlation might itself turn into an asset class, research firm says

advisorone.com:

BY JOHN SULLIVAN, ADVISORONE

June 7, 2013 • Reprints

In what is sure to please alternative investment providers, a study released Thursday by CRISIL Global Research & Analytics, based in Mumbai, India, shows that there has been an “accentuated” correlation among traditional asset classes over the past five years when compared with any period before 2008.

CRISIL (Photo credit: Wikipedia)

The study notes the increase in correlation has also been accompanied by lower returns, thus giving cause for concern to global fund managers. Around 88% of respondents to the survey indicated that correlation was now among the top five investment risk factors, and 65% believed that correlation was causing a “material negative impact on the availability of alpha-generating opportunities.”

“Our survey shows a structural uptrend in correlation with low possibility of returning to historical levels, supported by globalization and financialization of assets,” V. Srinivasan, senior director of CRISIL GR&A, said in a statement. “This will have two implications for financial research. First, research will get further streamlined; second, we will see more investments in high-end research to capture alpha.”

1. Strong correlation, 2. Weak correlation, 3. No correlation between variables x and y. (Photo credit: Wikipedia)

According to the firm’s analysis of 33 assets and 528 pairs of correlation from 1998 to 2012, the proportion of asset classes with correlation level above 0.3 has risen from 31% to 58% between 1998-2002 and 2008-2012. This increase in correlation is particularly pronounced during the last five years, the study adds.

It notes a “material increase in correlation across all dimensions, a corresponding drop in opportunities for securing benchmark-beating returns and a reduction in the level of outperformance.”

At a more granular level, it explains, this increase is more pronounced within equities, leading to a reduction in the extent of outperformance. The equity correlation across various pairs has increased from 0.6 during 1998-2002 to a relatively steep 0.86 during 2008-2012.

English: A chart showing the correlation between MSCI World Index of equities ( yellow line ) and the US Dollar Index ( green line ). (Photo credit: Wikipedia)

This has prompted investors to pursue noncorrelated assets. However, even assets that have been historically low on correlation are now seeing a rise in correlation with their returns converging. For instance, returns from multiasset funds, which tend to invest in alternative asset classes, have converged with the MSCI World Index, an equity index.

 “We see this becoming a trend,” Suresh Krishnamurthy, director of CRISIL GR&A, added. “As newer, noncorrelated assets emerge, we see them eventually getting correlated and offering lower alpha potential over time. This calls for a healthy pipeline of new-age alternative assets to emerge.”

Even as correlation has emerged as a key risk factor, CRISIL GR&A believes it will soon develop into an investable asset class of its own, similar to the way in which volatility has transformed from a risk factor to an asset class. The signs are already visible, as seen in the CRISIL GR&A survey, which was conducted with global fund managers spread across Americas (60%), Europe (33%) and Asia (7%).

'via Blog this'

Related articles

• Alternative Investments: What, Why and Who?
• Ways to overcome high correlations
• Hedge Fund Role in S&P 500 and Emerging Markets Sell-Off
• Investing In Gold

Are Advisors Making All the Wrong Moves When Preparing Clients for Retirement?

Financial Planning magazine
By Elizabeth Wine
July 30, 2012

…[A] recent study predicted three in five retirees will outlive their money if they try to maintain their working standard of living, but one financial advisor says most of her colleagues are still doing all the wrong things to help clients avoid this fate.         




The (Markowitz) efficient frontier. CAL stands for the capital allocation line. (Photo credit: Wikipedia)

“The paradigm needs to shift: the whole idea of a balanced portfolio with asset allocation - modern portfolio theory - with systematic withdrawal is nuts,” says Erin Botsford, a financial planner and author of “The Big Retirement Risk: Running Out of Money Before You Run Out of Time.”
“That’s the way people have been doing business for 40 years. That all works when the markets go up, but it falls apart when the markets fall flat or go down. I think as financial advisors, we put our clients at huge risk when we continue to operate that way,” she said. The Frisco, Texas-based Botsford says job one for advisors should be securing income streams for clients….




Asset Allocation on Wikibook (Photo credit: Wikipedia)

She also charges advisors with another big fault, the failure to separate clients’ “non-negotiable” financial needs from their wants. “Quit lumping everything into one pie chart like it’s equal: all things are not equal,” she says, ... In her book and with her own clients, she counsels building a “House of Security.” In this back-to-basics approach, she asks clients to list their non-negotiable expenses: housing, food, health care and utilities. Everything else, from country-club memberships to manicures and pedicures, does not make the cut. She allows, however, that for wealthy clients, the non-negotiable list can be longer. “If they have $10 million, everything is non-negotiable.”




Housing (Photo credit: james.thompson)

Once the needs are separated from the wants, she then plans for securing them differently. Botsford counsels matching the investment to the priority. She invests for the needs with what she considers secure investments: annuities, TIPs, muni bonds. (She notes that with annuities, the income is guaranteed. “The insurance companies have to set aside reserves -  “The government doesn’t,” she added.) “Make sure that income is going to come in, no matter what.” Then, she says, “going up the food chain,” the “extras” can be funded with less secure investments, such as stocks.

Despite all the problems, she says the picture is not quite as grim as it first appears. She notes that many clients have pensions and social security that can be used off the top to fund some of the needs. “Sometimes the needs aren’t as big a problem. The problem is, with most advisors take however much money the people have and throw it in a pie chart, and then you put your client at the risk of running out.”

Related articles

• Will your family business survive the transition to the next generation?
• 5 Key Questions You Should Be Asking When Choosing a Wealth Advisor
• Jargon, Big Words, and Wasting Your Time
• 5 Steps to choose your Financial Advisor
• Aiming For Advisors
• Gloucester County College to offer financial, healthy living workshops for individual needs

Americans understand diversification, but not inflation - Articles - Employee Benefit News

Image via WikipediaAmericans understand diversification, but not inflation - Articles - Employee Benefit News Surprisingly, most Americans showed understanding of diversification, asset allocation and dollar-cost averaging, while flunking basic questions about other financial concepts in a survey for Northwestern Mutual. This discrepancy is consistent with findings in a 2006 study.

Related articles

• Northwestern Mutual Reports More Than Two Out Of Three Americans Fail Personal Finance Quiz (bespacific.com)
• Asset Allocation, Diversification Now Passé? Whoa! Not so Fast, Says Risk Management Expert (prweb.com)
• National Survey Finds Three-Quarters of Financial Advisors Familiar with Absolute Return Strategies and Close to Sixty Percent Likely to Recommend Absolute Return Strategies to Their Clients (eon.businesswire.com)

Protection from the Storm

PLANSPONSOR.com

Thinking about investment-management outsourcing? Here are seven of the biggest myths and realities
“If it is raining, you are looking for the best umbrella,” says Joshua Dietch, Managing Director at Waltham, Massachusetts-based Chatham Partners, a market research and consulting company. Some employers—who sponsor underfunded defined benefit (DB) plans that need better risk management or defined contribution (DC) plans that need less-costly, more-customized investment options, for example—have looked to the expertise of investment-management outsourcers as that protection from the current storm.

However, this complex field is ripe for confusion among employers considering it. Sources talked about several of the most common investment-outsourcing myths:

1. It is just for mid-size sponsors. “The real sweet spot for outsourcing is mid-size companies,” says Seth Masters, CIO of AllianceBernstein Blend Strategies and Defined Contribution, and most of the first wave of deals did, in fact, happen with these plans. These employers often do not have the in-house resources to do all the work effectively, but have enough in assets to make deals scalable for an outsourcer.

Image via WikipediaWhile the mid-size market remains active, “we also see much more of a trend at the larger end,” says Joseph Gelly, Russell Investments Investment Outsourcing Practice Leader. “It is less around ‘I do not have buying power’ or ‘I do not have the resources or the technical competence’ and more around ‘I need to focus on running my company,’” he says, adding that many of those larger employers have frozen DB plans and want to devote their time and resources to core parts of their business rather than legacy benefits.

2. It is just about managing managers. Many sponsors traditionally see outsourcing in terms of investment oversight, says Clint Cary, Senior Vice President at Aon Investment Consulting. “It is not just managing assets; it is managing the funded status,” he says. Sponsors of active DB plans “are migrating to a risk-management approach, where they are trying to improve the funded status of the plan and de-risking the plan as they get better funded,” he says, “and they do not have the risk managers internally.”…

Image via Wikipedia3. Only defined benefit plans get outsourced. These plans have used outsourcing the most, but defined contribution (DC) sponsors increasingly consider it, says Jennifer Tretheway, a Senior Vice President and Managing Director at Northern Trust Global Advisors. “The most common thing we see from DC plans is an interest in having some type of oversight done, anything from overseeing the mutual fund options on a recordkeeper’s platform to something more proactive, in terms of having discretion on which investment-management firms to utilize,” she says.

DC plans may need outsourcers’ expertise even more than DB plans, Masters says. “Historically, DC plans did a kind of outsourcing by hiring recordkeepers that provided a bunch of options, mostly in mutual fund form and often, frankly, at a fairly high cost,” he says. However, DC plans have become most Americans’ primary retirement-savings vehicle, leading employers to want to limit the cost to participants as much as reasonably possible.
“The single biggest thing that people will get help with is customizing target-date funds,” Masters predicts. “In the next 10 years, virtually all growth in DC assets will be in target-date assets. So, as that unfolds, it becomes increasingly important for plan sponsors to get the target-date decision right.” Designing and implementing a customized target-date structure so that it comes as close to the cost of a DB plan as possible “is a fairly specialized task,” he says, and many employers lack that in-house expertise.
4. It costs a lot, or saves a lot. “Another primary misconception is that outsourcing is more expensive than doing it in-house,” Tretheway says. “The majority of our clients do recognize some savings, in the form of hard-dollar expenses for investment management, custody, and performance measurement. On average, clients might recognize a savings of around 10%.”…
“[Sponsors] do not go in thinking the overall fees are lower; they go in thinking they will get a more comprehensive service set,” Cary says. “They see it as a cost-neutral solution. Cost is not a main driver, and is also not a hindrance.”
Remember that the cost of administration for a DB plan pales compared with the cost of funding the plan, Dietch says. The argument for outsourcing a pension plan is “you reduce your cost of funding if you generate higher returns and less volatility, and reduce tracking error,” he explains.
5. Sponsors can offload their fiduciary responsibility. Dietch wonders if most employers realize that they retain significant fiduciary obligations if they outsource. Even if they think they can transfer that responsibility legally, Masters says, “I think you cannot morally: The reputational risks are too great.”
Yet, the desire to forgo as much fiduciary responsibility as possible “is a big motivator” to outsource, Dietch says. “It is certainly being aggressively marketed.” However, an ERISA plan sponsor remains a fiduciary, he adds, and has to operate with that standard in selecting and monitoring an outsourcer.
“That fiduciary role does not go away,” Gelly says. “The responsibility shifts from day-to-day to more strategic. Their involvement is extremely critical, but it is more at the strategic level,” such as approving the investment policy. The employer also still needs to evaluate the investment outsourcer’s performance regularly, Tretheway says, and most clients look at quarterly committee meetings as a good time to cover that.
6. It means giving up all control. “One thing I hear a lot is that people feel like, ‘Oh, I am giving up control,’” Gelly says of employers thinking about outsourcing. In reality, Tretheway says, clients’ ongoing involvement level really ranges. For instance, some clients delegate to Northern Trust the authority to hire and fire investment managers but, in other cases, it does not have complete discretion. For those with less day-to-day involvement, she believes, they ultimately have more control because they can track progress more closely to meet their goals.
There is no one right answer on how involved in day-to-day workings a sponsor should stay after outsourcing, Masters says. …
7. Outsourcers only sell pre-packaged solutions. “There is a little bit of a myth out there around, ‘This is a black box,’” Gelly says. “Unfortunately, some people think that everybody is treated the same.” Sometimes yes and sometimes no. For instance, Gelly says that Russell highly customizes the weighting among plan clients’ asset classes based on factors such as a plan’s liabilities.
Outsourcing has a lot of different permutations in the marketplace, Dietch says, but to do this business profitably, outsourcers have to create something scalable. As for customizing to specific clients, he says, “a lot of it comes down to what the contractual terms say.” Some outsourcing providers take a more-standard approach: “They have one fund, and everybody goes into that fund,” Tretheway says, “but all of our clients have a unique asset allocation, and a unique investment policy statement. We really have a hard time believing that any two organizations have identical needs.”
Judy Ward
editors@plansponsor.com

Related articles by Zemanta

• 401(k) Abuses: The Mutual Fund Industry's Next Nightmare, By Ted Siedle and Steve Lansing, Sentinel Fiduciary Services (July 2, 2004 ) (blogs.forbes.com)
• Northern Trust Completes Outsourcing of Hermes Fund Managers Investment Operations (eon.businesswire.com)
• Another Perspective on the Shifting 401(k) Landscape: David Witz of Fiduciary Risk Assessment LLC (March 20,2008) (blogs.forbes.com)

Annuities Get a Behavioral Finance Makeover

PLANSPONSOR.com

May 17, 2010  – An appreciation for the influences of behavioral finance has had a critical impact on retirement plan designs – so what about applying those principles to the decumulation phase?

To explore the alternatives and implications Allianz worked with Professor Shlomo Benartzi of UCLA to reach out to a number of academics in the field, several of which were on hand at a meeting in New York City to present some of those findings and their implications.

The findings, which Allianz said it submitted as its response to the February request for information by the Department of Labor and Treasury Department on retirement income products, was produced under the title “Behavioral Finance and the Post-Retirement Crisis”, broadly defined as being “about outliving your assets.”

…To kick things off, Benatzi used the example of ten high school friends who retire at age 65. Of those, Benatzi said that the first of the 10 would die just four years into retirement, at age 69, while the last in the group to die would, according to statistics, not die until age 99.

This post-retirement crisis is magnified by the poor financial decision-making of retirees, who according to the research presented, pay too much attention to recent stock market performance (those retiring after stock market increases of six to 12 months are much more likely to select the lump sum option rather than lifetime income), have trouble making financial decisions, and are "hyper" risk averse. 

“Nudging” the Annuity Decision

Dr. Alessandro Previtero of UCLA … cited a study that found that in a period from 1999 to 2005, only 2% to 6% of retirees elected guaranteed lifetime income [over the default lump sum] when it was available in their 401(k) plans – much lower than expected, and a disparity he referred to as the “Annuity Puzzle" (the puzzle being why people don't choose annuities).

However, Previtero recently conducted new research with …more than 100,000 retirees. Each of these individuals had to actively choose between guaranteed lifetime income and a lump sum. Because there was no default, they had to decide themselves how to withdraw funds – and Previtero said that 49% of retirees making an active choice between guaranteed lifetime income and a lump sum actually picked the lifetime income option.

He went on to note that defined benefit payouts are typically communicated in terms of producing monthly income, and annuity payout options tend to look attractive to participants accustomed to thinking of those benefits in like terms; but he contrasted that with cash balance plans that are often, …communicated in terms of account balances or lump sums. Previtero said he found that retirees in defined benefit plans were 17% more likely to choose the guaranteed lifetime income than their peers in cash balance plans.

The recommendation; make retirement income solutions available in 401(k) plans and … “nudging” retirees to actively make a choice.

Framing

… Professor Jeffrey Brown of the University of Illinois … found that when an annuity choice was presented in a “consumption” frame … as providing monthly income of $650 for life, 70% preferred the annuity. But when it was presented in an “investment frame” (an investment with a $650 return for life), only 21% opted for the annuity. …[Defined] contribution plan designs have “taught” people to think of these accounts in terms of investments, rather than pension plans, where participants are more likely to think of the monthly benefit they provide. The suggestion from the researchers; present the programs with an emphasis on the income they will provide, not the return on the investment made.

Professor Eric Johnson of Columbia University pointed out that for most of us, “losses loom larger than gains.” …[Investors] experience the pain of a financial loss much more acutely than they feel the pleasure of the same size gain – and by a factor of about two to one. … [Recent]research he conducted with ACLI and AARP found that retirees displayed “hyper” risk aversion – …they tended to weight losses about TEN times more heavily than gains.

…[While] Johnson said he assumed that this hyper loss aversion would translate into a preference for products with guaranteed lifetime income, his research revealed that retirees with hyper loss aversion actually responded less favorably to financial products with more protection and guarantees. Johnson said that it seemed that … giving up control of their money was viewed as just another type of loss. Consequently, he said that solutions should emphasize that those guarantees and protections were a way to restore, not surrender, control.

Cognitive “Dissonance”

A study by Professor David Laibson of Harvard University reported a significant decrease in “analytic cognitive functioning” as people age, as well as an increase in the occurrence of dementia. For example, after age 60, the prevalence of dementia roughly doubles every five years, and the research suggests that by the time people reach their 80s, more than half will suffer from either dementia or other “significant cognitive deficits”. The older adults that Laibson studied also showed marked declines in “numeracy”— the mathematical skills needed to cope with everyday life and to understand information in graphs, charts or tables, and they also had “great difficulty” understanding simple measures of risk. The optimal age for making those decisions? 53.

A suggestion to counter this problem; solutions,“including investment strategies and public policies that encourage people to make binding decisions earlier in life and prior to the onset of cognitive impairment”.

One of the reports included in the handouts was based on an interview with Professor. Brigitte Madrian of Harvard University, who suggested that one-size-fits-all-defaults are ill-suited to helping different groups of participants achieve optimal results. … [She] said that plan sponsors would be well advised to evaluate the potential impact of inertia on different types of retirees, and said that policymakers should make it easier for sponsors to customize decumulation options by eliminating non-discrimination rules that require all retirees—even those with unique needs—be presented with the same default payouts.

"Future" Self

Professor Daniel G. Goldstein of Yahoo Research and London Business School said that part of the problem was that people have trouble relating to their “future self” when it comes to making decisions and trade-offs regarding retirement savings …, pointing out that those with a strong connection with the perspective of their future self tend to save more and invest better (in one of the more whimsical parts of the presentation, he suggested the deployment of tools that could age pictures of the individual as a way to better help them visualize that future self).

“Obvious” Decisions

… Professor John Payne of Duke University … said that for lifetime income solutions, retirees are typically presented with materials highlighting the monthly payouts provided by each option – and for many, the optimal choice is obvious: the highest monthly payout. That, in turn, tends to lead them toward choosing single life annuities (with larger payouts), rather than joint and survivor. In fact, 69% of married women and 28% of married men opt for single life annuities rather than joint and survivor annuities, according to the report. But, that tendency to go for the option that is easiest to understand means that retirees may fail to recognize the implications of their decision on their spouse.

Other challenges highlighted in the report; people vastly underestimate the impact of inflation on their cost of living (leading to a suggestion that some kind of inflation protection be incorporated in retirement income solutions), and that the attractiveness of a retirement income solution depends on its perceived fairness. Part of the perceived “unfairness” of the annuity is a perception that an early death on the part of the annuitant benefits the financial institution that issued the product. Professor Suzanne Shu of UCLA suggested countering that perception by positioning it as benefiting other people in the annuity “pool.”

=====================================

The complete Allianz report, “Behavioral Finance and the Post-Retirement Crisis," is available at http://www.allianzinvestors.com/documentLibrary/RFIbehavioralFinance/Allianz_DOL_RFI_Response.pdf

Nevin E. Adams
editors@plansponsor.com

Alternative UCITS Luring More Interest

PLANSPONSOR.com

11 May 2010 (PLANSPONSOREurope.com) – Alternative and absolute return UCITS have garnered nearly $200 billion in assets, according to new research.

“The search for better performance and diversification is encouraging innovation in the fund industry, and leading to faster growth of alternative products, some of them unimaginable in a retail context just a decade ago”, says Jag Alexeyev, Head of Global Research at Strategic Insight, an Asset International company.

According to the firm’s Simfund database, investors across the globe have channeled nearly $200 billion of assets into more than 1,000 alternative and absolute return UCITS funds. Based in Europe, UCITS (Undertakings for Collective Investment in Transferable Securities) funds are sold cross-border internationally, with rising commitments from Asia, Latin America, and other emerging regions, as well as from institutional investors in the United States. UCITS are a set of European Union (EU) directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state.

“Several alternative UCITS have been quite successful, raising billions of dollars in assets while delivering uncorrelated returns with lower volatility”, adds Alexeyev. According to a press release, many of the winners are traditional fund companies that managed to expand their investment capabilities. A few products are highly innovative, for example, exchange traded funds offering hedge fund exposure linked to a managed account platform.

Hedge firms offering regulated “Newcits” funds represent rising competition, but many of them have yet to show meaningful gains, according to the report. New research from Strategic Insight, released this week in their Managing Investment Fund Innovation book, claims that nearly 75% of alternative and absolute return UCITS so far have raised less than $100 million each.

Concerns by wealth advisors and distributors about risks, performance tradeoffs, fees, and service levels have been among the challenges, according to the report, which notes that as comfort levels increase and track records get established, alternatives “will become hard to ignore” in the industry.

Strategic Insight’s book is available at http://www.strategicinsightglobal.com/innovation.

Strategic Insight is a research firm for the fund and wealth management industry, providing clients with in-depth industry data, research reports, and executive consulting services for product, distribution and business strategy decisions. Strategic Insight assists over 250 firms worldwide, and its Simfund databases and analytical platforms cover more than 70,000 funds.

PLANSPONSOREurope Staff editors@plansponsoreurope.com

Equity Analysts Still Too Bullish

After almost a decade of stricter regulation, analysts’ earnings forecasts continue to be excessively optimistic.

McKinsey Quarterly

APRIL 2010 • Marc Goedhart, Rishi Raj, and Abhishek Saxena

No executive would dispute that analysts’ forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a decade ago … . Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.¹

…[A] recently completed update of our work …reinforces this view—despite a series of rules and regulations … that were intended to improve the quality of the analysts’ long-term earnings forecasts, restore investor confidence in them, and prevent conflicts of interest.² For executives, …this is a cautionary tale worth remembering.

Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually hit the mark. This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions. When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases.³ …

Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year,⁴ compared with actual earnings growth of 6 percent.⁵ Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession (Exhibit 2). On average, analysts’ forecasts have been almost 100 percent too high.⁶

Capital markets, on the other hand, are notably less giddy in their predictions. Except during the market bubble of 1999–2001, actual price-to-earnings ratios have been 25 percent lower than implied P/E ratios based on analyst forecasts (Exhibit 3). What’s more, an actual forward P/E ratio⁷ of the S&P 500 as of November 11, 2009—14—is consistent with long-term earnings growth of 5 percent.⁸ This assessment is more reasonable, considering that long-term earnings growth for the market as a whole is unlikely to differ significantly from growth in GDP,⁹ as prior McKinsey research has shown.¹⁰ Executives … ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.

About the Authors

Marc Goedhart is a consultant in McKinsey’s Amsterdam office; Rishi Raj and Abhishek Saxena are consultants in the Delhi office.

Notes

¹ Marc H. Goedhart, Brendan Russell, and Zane D. Williams, “Prophets and profits,” mckinseyquarterly.com, October 2001.

² US Securities and Exchange Commission (SEC) Regulation Fair Disclosure (FD), passed in 2000, prohibits the selective disclosure of material information to some people but not others. The Sarbanes–Oxley Act of 2002 includes provisions specifically intended to help restore investor confidence in the reporting of securities’ analysts, including a code of conduct for them and a requirement to disclose knowable conflicts of interest. The Global Settlement of 2003 between regulators and ten of the largest US investment firms aimed to prevent conflicts of interest between their analyst and investment businesses.

³ The correlation between the absolute size of the error in forecast earnings growth (S&P 500) and GDP growth is –0.55.

⁴ Our analysis of the distribution of five-year earnings growth (as of March 2005) suggests that analysts forecast growth of more than 10 percent for 70 percent of S&P 500 companies.

⁵ Except 1998–2001, when the growth outlook became excessively optimistic.

⁶ We also analyzed trends for three-year earnings-growth estimates based on year-on-year earnings estimates provided by the analysts, where the sample size of analysts’ coverage is bigger. Our conclusions on the trend and the gap vis-à-vis actual earnings growth does not change.

⁷ Market-weighted and forward-looking earnings-per-share (EPS) estimate for 2010.

⁸ Assuming a return on equity (ROE) of 13.5 percent (the long-term historical average) and a cost of equity of 9.5 percent—the long-term real cost of equity (7 percent) and inflation (2.5 percent).

⁹ Real GDP has averaged 3 to 4 percent over past seven or eight decades, which would indeed be consistent with nominal growth of 5 to 7 percent given current inflation of 2 to 3 percent.

¹⁰ Timothy Koller and Zane D. Williams, “What happened to the bull market?” mckinseyquarterly.com, November 2001.

The Next Asset - Financial Planning

The Next Asset - Financial Planning With small- and micro-cap choices shrinking, should advisors turn to venture capital to fill the gap? By Joan Allen Schriger and William Banks Traditionally, those seeking additional growth would consider increasing exposure to small- and micro-cap equities to juice up potential returns. The problem, though, is that this asset class just ain't what it used to be. The Sarbanes Oxley Act of 2002, ... has created an environment where the most innovative companies-... are opting to stay private until they are more mature. What's left in publicly traded micro- cap, ... is a bit of a used car lot. To a great extent, the micro-cap space was diluted by mature companies whose businesses are flat or declining. Today, over 40% of the companies in the index are in financial services, durables, consumer staples or utilities-not sectors typically equated with high growth. For those seeking the risk/return characteristics that small and micro-cap used to exemplify, we believe the best opportunity resides in the private marketplace of late-stage venture capital. There are some practical challenges, however. Access is critical. The trouble is, venture capital has long been an exclusive club. ... Typically, there are limited LP slots available to invest in VC funds and the top funds are oversubscribed through legacy relationships. So, how does one incorporate venture as a part of a core portfolio allocation-...? ... Many advisors and consultants have structured SPVs (special purpose vehicles) specifically to accommodate these opportunities for their clients. These vehicles may be structured as LLCs, LPs or other pooled investment vehicles. Whatever the structure, the purpose is to pool together either direct deals or limited partnership interests in order to allow clients to get broader diversification in manageable investment increments. This is one way to go, and it allows for diversification across a client base where daunting minimums might otherwise prove insurmountable. The next wave is toward providing institutionally managed structures that make these private investments more accessible and economical for a broader group of investors, and that allow for better integration with the core portfolio. ...

A Yale Tale - Financial Planning

A Yale Tale - Financial Planning The Yale Endowment Fund has excelled through all kinds of markets. Is it possible to build a similar portfolio that is accessible to everyone? By Craig L. Israelsen

401(k) plans: Achieving the Lake Wobegon effect

Channeling the serene Minnesota town from

Employee Benefit Adviser
By Roger Levy
December 1, 2009
One might imagine in regard to the 401(k) plans found in Lake Wobegon that all the employers are models of fiduciary conduct, all investment expenses are low and all investment returns are above average. In the rest of the country, however, much work needs to be done to improve 401(k) investment performance.
This article suggests some alternatives consultants, 401(k) providers, employers and participants might consider…

Professional management

…What's really needed is a basic acknowledgment that participant-directed accounts don't work. The signs were there even before the market meltdown. …
While few investors survived 2008 unscathed, there is evidence to suggest that professionally managed pension investments fared better than investments that were participant-directed.
According to Milliman, investment returns within the largest 100 U.S. pension plans were -18.9% in 2008, compared to a -28.3% median rate of return in the same year for 401(k) plans, as reported by Hewitt, another pension consulting firm. …
… [These] statistics suggest that where investments are managed by investment professionals, … investment returns will be better. …
The solution to the problem is not to add more bells and whistles to what is an already overly complex employee benefit, but to take the investment decision out of the hands of plan participants and put it in the hands of professionals on a trustee-directed basis. This is perfectly permissible and, by following prudent investment practices, can be achieved without increasing the employer's fiduciary exposure.
First, the plan must be amended to make it trustee-directed. Then, the following steps should be taken:
* The employer appoints a trustee who will accept responsibility for investment direction. This could be a corporate trustee or members of management.
* The trustees(s) name the plan fiduciaries to manage the plan assets. The fiduciaries could be members of the investment committee that oversees the selection and monitoring of the plan's current participant-directed investment options.
* The investment committee adopts a new investment policy statement. This sets out the investment guidelines which will control how contributions are to be invested.
* The investment committee then selects an investment manager. Then it delegates to him or her the day-to-day management of the prudent investment of the plan assets according to the new investment policy statement.
As long as the manager to whom investment authority is delegated is a Registered Investment Advisor, bank or insurance company that acknowledges in writing its fiduciary status, the plan trustees and fiduciaries are relieved of their fiduciary responsibilities for managing the assets.
However, they remain responsible for prudently selecting managers, establishing appropriate investment guidelines and monitoring investment performance, just as they are for the participant-directed plan. …

Embrace annuities

Another alternative for employers who want to help participants protect themselves from large losses is to introduce annuities as an investment option within the plan.
Annuities provide a guaranteed rate of return and a guaranteed income upon retirement, which can increase under some annuities if market returns exceed the guaranteed floor.
However, annuities are a tax-deferred investment vehicle, and some see them as a bad idea because they potentially add cost.
…The answer is because of the guaranteed income and the potential to take full advantage of market upswings.
Also, today, a variety of annuity arrangements are emerging from reputable insurance companies which are not as costly as those of yesteryear, and improvements in recordkeeping and the design of annuity products is making them increasingly attractive as a 401(k) investment option. Such an option could be included in both a trustee-directed plan as well as one that is participant-directed. … info@cambridgegroup.net.

---

Levy, LLM, AIFA, is CEO of Cambridge Fiduciary Services, LLC, a fiduciary adviser and audit firm with offices in Greenwich, Conn. and Scottsdale, Ariz. He can be reached at (480) 607-2608 or

Achieving Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach

Journal for Financial Planning
by Craig Lemoine, CFP®; David M. Cordell, Ph.D., CFA, CFP®, CLU; and A. William Gustafson, Ph.D.

Executive Summary

• This article contrasts sustainable retirement withdrawals from strategies with annuity components and strategies without annuity components.
• The authors discuss today's market environment as it affects retirement planning strategies with and without annuity components.
• This study evaluates common retirement planning strategies by analyzing the withdrawal stability for portfolios consisting of equity, fixed income, variable annuity, and fixed annuity assets.
• This article uses replacement Monte Carlo methodology to determine retirement success over investor accumulation and withdrawal phases. The goal of each trial was to secure calculated retirement funding rather than to maximize wealth.
• Five retirement portfolio strategies are evaluated: (1) 50 percent in equities and 50 percent in bonds, (2) 100 percent in equities, (3) a combination of equities and bonds in which the equities percentage is calculated as 128-minus-attained-age, (4) a variable annuity with a 5 percent withdrawal rate, and (5) 100 percent equities with a fixed annuity lock.
• Different rebalancing strategies were modeled to capture any variances between frequency. Portfolios composed of a higher portion of equities outperformed those with a higher portion of bonds. The trials using 50 percent equities and 50 percent bonds yielded the lowest chance of success. Attempting to reduce portfolio risk by reallocating to fixed-income assets annually is less likely to provide long-term success than an allocation that remains fully invested in equities.
• The results indicate that using an equity portfolio with a fixed annuity component provides a higher chance of maintaining retirement distributions than other alternatives.

Craig Lemoine, CFP^®, is an assistant professor of financial planning at the American College. He also works with retirees and is completing a doctoral dissertation at Texas Tech University.
David M. Cordell, Ph.D., CFA, CFP^®, CLU, is director of finance programs at the University of Texas at Dallas.
A. William Gustafson, Ph.D., is an associate professor at Texas Tech University.

Removal “Spot”: the duty to remove investments

PLANSPONSOR.com

It is commonly accepted that fiduci­aries of participant ‑ directed plans, such as 401(k) plans, have a duty to select, monitor, and remove investments prudently.
The threshold question is whether a fiduciary’s duty to remove investments applies to individual investments or whether the decisions are judged on the basis of the investments in the aggregate. The trial court in DeFelice v. US Airways, Inc., applied an aggregate test. …
The court was wrong. The duty of fiduciaries is to select, monitor, and remove individual investments prudently, in addition to considering the portfolio as a whole. …
The DoL made it clear in the preamble of a regulation that its view is that the prudent selection of investments incorporates both a consideration of the individual investments and the portfolio.

The regulation, however, is not intended to suggest either that any relevant or material attributes of a contemplated investment may properly be ignored or disregarded, or that a particular plan investment should be deemed to be prudent solely by reason of the propriety of the aggregate risk/return characteristics of the plan’s portfolio. Rather, it is the Department’s view that an investment reasonably designed—as part of the portfolio—to further the purposes of the plan, and that is made upon appropriate consideration of the surrounding facts and circumstances, should not be deemed to be imprudent merely because the investment, standing alone, would have, for example, a relatively high degree of risk.

… While participants can decide which of the offered investments to use, they cannot decide which investments are offered—that job belongs to the fiduciaries. In fulfilling that responsibility, ERISA requires, in effect, that the fiduciaries make a legal “promise” to the participants that each of the investment options is selected and monitored prudently (and removed, if it is no longer a prudent choice) and that the lineup of options offered to the participants is prudent in the aggregate.
Why is this the case? Unless a participant’s account is professionally managed, the participant must put together a portfolio in his account that is allocated among different categories of investments to create an appropriate blend of risk and return. If the investment choices are not prudent in the aggregate (for example, if the investments do not constitute a broad range that allows participants to balance risk and reward by selecting among them), the participants could not construct portfolios according to their needs. On the other hand, if some or even all of the investments were individually imprudent, then even a well-constructed portfolio would likely underperform. Thus, each investment must be prudent and suitable on a stand-alone basis, and the lineup of investments must be prudent in the aggregate. …
Returning to my earlier statement that “the court was wrong,” it was not as brazen as it may have seemed. The 4th Circuit Court of Appeals subsequently reversed the trial court saying:
“[A] fiduciary must initially determine, and continue to monitor, the prudence of each investment option available to plan participants.”

---

Fred Reish is Managing Director and Partner of the Los Angeles-based law firm of Reish & Reicher. A nationally recognized expert in employee benefits law, he has ­written four books and many articles on ERISA, IRS and DoL audits, and pension plan disputes. Fred has been awarded the Institutional Investor Lifetime Achievement Award and PLANSPONSOR’s Lifetime Achievement Award. He is also one of the 15 individuals named by PLANSPONSOR magazine as “Legends of the Retirement Industry.”
PLANSPONSOR staff
editors@plansponsor.com

Plan Sponsors May Face New Fiduciary Responsibilities

Summary



Plan sponsors need to increase their educational efforts and may find it prudent to engage an outside investment advisory firm as well as competent legal counsel so as to assume and delegate fiduciary responsibility for the advice provided on behalf of the plan, as well as plan participants and beneficiaries, ensuring that suitable guidance is provided with respect to guidelines pursuant to ERISA law.



GLG News

December 7, 2009

• Analysis by: GLG Expert Contributor
• Analysis of: 401(k) response to be automatic
• Published at: www.pionline.com

Summary

Plan sponsors need to increase their educational efforts and may find it prudent to engage an outside investment advisory firm as well as competent legal counsel so as to assume and delegate fiduciary responsibility for the advice provided on behalf of the plan, as well as plan  participants and beneficiaries, ensuring that suitable guidance is provided with respect to guidelines pursuant to ERISA law. 

Analysis

…As a result of the Pension Protection Act of 2006, conditions were developed in order to provide professionals the ability to provide specific investment advice rather than solely investment education. The PPA later requested that the DOL provide further clarification and more detail as to what would be considered permissible concerning advice rendered.  … Effective November 19, 2009 the U.S. Department of Labor announced the publication of notice withdrawing the final rule on the provision of investment advice  …
In general, the reason for withdrawing the final rule stems from issues concerning possible conflicts of interests with certain service providers and as to whether the associated exemptions proposed in the rule would adequately protect the interests of plan participants and their beneficiaries. …
From the standpoint of pension service offerings, most employers or Plan Sponsors to a pension plan are deemed to have fiduciary responsibility. … An employer or Plan Sponsor is considered a fiduciary with respect to an employee pension plan if the employer is named as a fiduciary in the plan, or if the employer exercises any discretionary authority over assets or with respect to the administration of the plan.
… Most importantly, Plan Sponsors have a duty to inform, providing participants with sufficient information to make investment decisions; furnish relevant data concerning benefits and plan provisions; and notify participants with respect to amendments to the plan.
…   ERISA also imposes fiduciary obligations on anyone who promulgates or renders investment advisory service for compensation, or those having the authority or responsibility to render such advice, with respect to any pension plan money or property. ERISA maintains enforcement procedures that may be initiated in some circumstances, by participants, beneficiaries, as well as the U.S. Department of Labor for negligence on the part of fiduciaries or any service providers to the plan.
Necessary steps should be taken by all Plan Sponsors to establish guidelines for investment policy, participant education, and legal compliance. Although ERISA expressly permits trustees and other fiduciaries to appoint investment managers, as part of their fiduciary responsibility, Plan Sponsors should ensure that pension plan operations are monitored. It is also critical to establish procedures that clearly indicate that fiduciary responsibilities are being satisfied. Plan fees should also be reviewed to ensure compliance with sponsor prudence.
While 404(c) regulations do not specifically require participant education, Plan Sponsors should make reasonable attempts to provide general investment education, particularly since the U.S. Department of Labor provides guidance on how to provide investment education without creating fiduciary liability for investment advice.  …  Additionally, the new regulations are likely to increase the responsibilities of retirement Plan Sponsors as a whole.
Employers and Plan Sponsors should avoid providing individualized advice or assistance to plan participants and beneficiaries with regard to the selection of investment vehicles. Furthermore, if an employer or Plan Sponsor has not retained a registered investment advisor, a disclaimer should be provided in all related materials stating that the information is not intended to be specific investment advice and those participants are urged to seek advice from their own investment professional.
By actively managing the risks associated with participant directed plans through activities that include, but are not limited to; conducting annual fiduciary reviews; adopting written procedures concerning investment policies; and providing information through investment education, Plan Sponsors may be able to reduce their liability exposure and facilitate the process of managing their fiduciary responsibility.
Given the current status of the regulations with respect to advisory guidance provided to participants of tax qualified retirement accounts, Plan Sponsors need to prepare for additional investment rules that could potentially arise regarding defined contribution plans. It may also be prudent for Plan sponsors to … wait to see what the new requirements will be before safely assuming who may provide such investment advice to plan participants.
End Notes
Department of Labor Field Assistance Bulletin,
Employee Benefits Security Administration News 
http://www.dol.gov/ebsa/regs/fab_2007-1.html
http://www.dol.gov/opa/media/press/ebsa/EBSA20091444.htm
None of the information or content contained herein is intended to create an investment advisory client relationship between the reader and the author. The information contained within this article is not be construed as personalized investment advice or a substitute for investment advice. Investments or strategies mentioned in this article may not be suitable for all individuals. All readers of this article should make their own individual decisions. The material contained within this article, does not take into account each reader’s particular investment objectives, financial circumstances, or needs. All readers should strongly consider seeking advice from their own investment advisor, tax practitioner, or legal counsel.

The four stages of an annual review

A top-down approach to assembling, analyzing and acting on portfolio data is advisable

Investment News
By Blaine F. Aikin
December 6, 2009
As the year draws to a close, fiduciaries should be turning their attention to one of their most important responsibilities: the annual portfolio review. This is a prime event conducted in the process of fulfilling the continuing fiduciary duty to monitor. It is the time when the fiduciary undertakes a comprehensive assessment of whether the investment objectives of the investors they serve are being met.
Monitoring involves four stages: gathering material information, analyzing the implications of the information, acting appropriately on the findings of the analysis and documenting the basis for actions considered and actions taken. Effective monitoring hinges on deciding at the outset what information is relevant to determining whether the current portfolio management process is meeting investor objectives and is likely to continue to do so. A top-down approach is generally recommended to assemble, analyze and act upon this information.
Start by addressing what has changed at a level above portfolio composition and holdings. Most importantly, consider whether the investor's objectives have changed, in which case there is a direct effect on what information is material, as well as on the decisions that will bring the portfolio management process into alignment with the new objectives.
Change in laws or regulations, the economy and the financial markets is also relevant to most portfolios. For example, 22 states this year introduced or enacted the Uniform Prudent Management of Institutional Funds Act. This should be a major discussion topic in the annual portfolio review process of most endowments and foundations in those states.
Similarly, the implications of historically high unemployment, unprecedented government stimulus spending and extraordinary market volatility have profound implications for domestic investments. While no one can say with certainty the precise nature and magnitude of these implications, the annual review process should demonstrate thoughtful deliberations of these matters and how they influenced investment decisions.
Next, examine portfolio composition and asset allocation issues. Performance of the broad asset classes over the past year and longer time periods is generally the focus of attention, but unusual volatility within certain asset classes and apparent changes in the correlation among asset classes are important factors for analysis. Even if certain asset classes are not represented in the investment portfolio being reviewed, it is advisable to consider a wide range of accessible asset classes for potential introduction to the portfolio.
Simply by improving the asset allocation of the portfolio, it may be possible to achieve higher-than-expected returns for the level of risk the investors are prepared to take. To make this determination, Monte Carlo simulation, mean-variance or re-sampled efficiency optimization, or a comparable analytical tool may be applied. Model portfolios supported by sound research and analysis may serve as the basis for decision making.
For participant-directed plans, changes in the available asset classes may be warranted, based upon findings from this stage of review.
If tactical asset allocation (a form of market timing) is employed in managing the portfolio, the value added by asset allocation moves should be carefully analyzed at this stage. The value of this approach can be assessed by comparing the results of tactical decisions against what would have been achieved by using a strategic benchmark allocation.
Finally, revisit the due-diligence criteria used to select the specific investments held in the portfolio and evaluate each position for shortfalls that may have developed. With respect to performance, each portfolio holding should be compared with an appropriate index and peer group benchmark. While manager performance is often the focus of attention during quarterly portfolio reviews, the annual review should be more comprehensive and balanced. In rough order of priority, an effective annual review process should result in sound decisions with respect to: current investor objectives and investment policy provisions, investment philosophy and strategy, asset allocation, re-balancing activities, and investment manager watch listing and replacement.
The annual review will be incomplete until the deliberations and decisions of the process have been recorded. These records help ensure that planned actions are taken and subsequent moves planned with the benefit of information previously considered, and demonstrate that a prudent process has been followed. That is especially important at a time such as the present, when an extraordinary investment environment lends itself to rampant second-guessing.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.

The Roth of Con(versions)

Tax Increase Protection and Reconciliation Act of 2005 (TIPRA)

TIPRA has a forward-looking provision regarding Roth conversions. It repealed the MAGI limit of $100,000 for 2010 and beyond on conversions. The contribution limits remain intact.
TIPRA also provided for a special tax treatment of Roth Conversions made in 2010. Unless a taxpayer elects otherwise, income from the conversion is taxed over a two-year period, beginning in 2011. So, if a taxpayer converts $100,000 of Traditional IRA money to a Roth IRA in 2010, he will add $50,000 to his tax return for the 2011 tax year, and $50,000 to his tax return for the 2012 tax year. If the taxpayer elects, he may add the entire $100,000 to his tax return for the 2010 tax year.

Cents and Sensibilities

The feasibility of a Roth Conversion depends on tax rates at the time of conversion, tax rates at the time of distribution, availability of funds to pay the taxes, expectations of portfolio growth, and likelihood of passing the account to non-spouse beneficiaries. Many of these factors are unknown; a decision needs to be made based on reasonable expectations. By evaluating the following questions, a Traditional IRA owner can to determine what the practical approach is:

1. Will tax brackets rise after 2010?
   
2. Will tax brackets remain above current rates for an extended period of time?
   
3. Do you expect the account balance to increase meaningfully during 2010?
   
4. Do you have non-retirement funds that you can use to pay the tax liability upon conversion?
   
5. Will the Roth IRA likely survive both you and your spouse?; also,
   
6. Will Congress initiate new taxes in 2010 that will be retroactive?
   
7. Will a conversion trigger Alternative Minimum Tax or other surtaxes, or will it accelerate the phase-out of deductions and exemptions?
   

The more confident the taxpayer is that the answers to questions 1-5 are "Yes" and the answers to questions 6 and 7 are "No," the more confident he can be that a conversion early in 2010 would be practicable. The taxpayer should also consult his tax advisor before committing to any conversion.

To Bifurcate or Not To Bifurcate, That Is the Question

Assuming we convert to a Roth IRA in 2010, we have a choice of when to pay taxes. For conversions that occur in 2010 only, the taxpayer may pay the tax liability by April 15^th, 2011, or they can add one-half of the converted amount to the tax return they file by April 15^th, 2012 and the other half on the tax return they file by April 15^th, 2013.
At first blush, you would think that we want to defer taxes until later. However, we are making the conversion in the first place to take advantage of the known lower tax rates currently in effect. Things are not as they seem—it is, as if, something is rotten in Denmark (or D.C.).
First off, converting to a Roth IRA becomes more advantageous if tax rates rise. Whether we pay the tax from the IRA or not, we are in essence betting that taxes will go up. Taxes are at historically low levels. Many political and economic pundits say that ballooning deficits will put pressure on the Government to raise taxes.
Secondly, the current tax law expires on December 31, 2010. Unless Congress acts, tax rates will return to 2006 levels on January 1, 2011. Tax brackets shift from the current 10%, 15%, 25%, 28%, 33%, and 35% rates to 15%, 28%, 31%, 36%, and 39.6%. Taxes on capital gains and dividends will rise, and certain credits will cease or be reduced.
Barring the unknown of Congressional action, we know the tax structure will be higher in 2011 and 2012 than it is in 2010. Unless a taxpayer knows that his taxable income will be significantly lower in the latter years, it makes sense that he pay taxes on the conversion in 2010. (As a broad supposition, if many taxpayers convert great amounts of IRA dollars and choose to pay the tax with their 2010 returns, it may ease the pressure on Congress to raise taxes in 2011 or 2012 beyond the de facto increases in place.)

Diversify, Diversify, Diversify

Investment advisors recommend that we diversify across asset classes to reduce purchasing power risk. They recommend we diversify within asset classes to reduce systematic risk. They recommend we diversify among banks and insurance companies to reduce unsystematic risk. We now have an opportunity to diversify among taxable, tax deferred and tax favored ownership to reduce income tax risk.
We know that mechanisms are in place to change taxes in the future, as they have changed over the past 100 years. Tax deferred assets such as qualified plans and IRAs are exposed to future tax risk. Taxable assets are exposed to both current tax risk and future tax risk. Roth IRAs (and their similar ownership forms such as 529 plans) are exposed to current tax risk, but avoid future tax risk—barring an outlying event such as a retroactive tax law change. As our assets accumulate in tax deferred ownership, we become over-weighted in future tax risk. Roth IRA conversions allow us to diversify this risk, just as we attempt to diversify to reduce the other risks.

Should You Use a 401(k) to Buy an Annuity?

SmartMoney.com
Published October 22, 2009
by Aleksandra Todorova

…About a quarter of all companies these days offer their employees the option to purchase annuities with their 401(k) money, according to the Profit Sharing/ 401(k) Council of America, an industry group for plan sponsors. But these are lump-sum purchases that typically happen at the brink of retirement and aren’t too popular with employees, says David Wray, president of the PSCA.

What insurers have been working on during the past several years are specially-designed guaranteed-income products that can be purchased in small chunks with each paycheck, just like shares of a fund. ...

So far, sales of the products have been slow, according to Robyn Credico, the national director of defined contribution consulting at Watson Wyatt, a benefits consulting firm. But the products are being refined and improved, so industry representatives are hopeful that the tide is starting to change. …

If your employer offers any of the three guaranteed-income solutions – the option to annuitize at retirement, the ability to purchase annuity shares with each paycheck or invest in a mutual fund with an income guarantee – you should make sure it's the right solution for you. The three most important questions to ask:

1. What is the investment risk?

The much-touted guarantee is only there as long as the insurance provider behind it is healthy. … One solution the industry is considering is pairing up two or more insurance companies to back a product. In the meantime, employees can do their own research into the insurance providers’ financial health. …

2. What are the costs?

Adding an insurance aspect to any investment leads to higher costs – but how much of a premium you pay depends on the annuity provider. … “The quest right now for plan sponsors is to drive down costs as low as possible for their participants,” [Tom Idzorek, chief investment officer of Ibbotson Associates, a Morningstar company], says.

3. What is my exit strategy?

Another important question to ask your employer or 401(k) plan administrator before you start contributing: What happens to your investment if you change jobs? The insurance company will likely allow you to leave the investment in the plan, let you roll it over in an IRA, or will issue a certificate for you have accumulated so far. Make sure there are no penalties and you’ll keep the investment guarantee, Credico says.