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Plan-Level Rate of Return—Useful or Useless?

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Many people use plan-level rates of return to determine the quality of an investment lineup. However, several variables may impact plan-level rates of return making them not as useful as a plan management tool. They may actually be counterproductive when trying to determine the quality of an investment lineup. As an extreme example, you may have a lineup full of excellent mutual funds, but if your participants have 50 percent of their plan assets in a cash account, the plan’s effective rate of return would suggest a poor investment lineup. Furthermore, a reasonably well-funded plan with an appropriately conservative fund menu would have an average rate of return appear sub-par during a bull market.

There are many other examples, most of which revolve around participant behavior (poor diversification, market timing, etc.) effecting a composite rate of return for the plan. We all recognize that participants consistently may not make responsible investment decisions, but imprudent participant investing should not color the quality of the investment menu.

This makes any conclusions based on average plan-level rates of return potentially misleading and probably counterproductive. A better idea is to focus on the investments that are designed to reflect the plan’s goals, objectives and participant demographic needs … like a well-selected target date fund (TDF). The TDF return rates, over a reasonable time period, make more sense for comparative purposes. These options are already optimized in terms of asset allocation and divisible by age group to obtain a more risk-based conclusion. Lastly, many experts project that the vast majority (more than 80 percent) of defined contribution assets will be in TDFs by 2020¹, which makes this evaluation even more meaningful.

How SDM can help?
The SDM Advisors Retirement Service was created to support senior management with design, implementation and maintenance of a retirement plan. We understand the importance of providing meaningful retirement benefits to your employees while maximizing your tax benefits. At SDM, we are your trusted financial advisors, taking the time to fully assess your potential investments and verifying that you are within the set boundaries at all times. As trusted advisors, the Retirement Service at SDM incorporates investment guidance and consultation services not only for senior management, but employee and/or participant consultative support as well. Contact Jeff Stephens for more information.

¹Center for Due Diligence.


Securities and Advisory Disclosure: 
Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Fee based planning offered through SDM Advisors, LLC. Third party money management offered through ValMark Advisors, Inc a SEC registered investment advisor. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431. 1-800- 765-5201. SDM Advisors, LLC is a separate entity from ValMark Securities Inc. and ValMark Advisers, Inc.

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