Study: Plans Need 11% Average Annual Return

September 20, 2004 ( - Despite their increasing popularity among retirement plan participants, a new study asserts that managed and/or life-cycle funds won't generate enough to allow participants to reach their savings goals.

The Compass Institute study, The Fiduciary Trap – Plan Participants and The 4th Metric, maintained that participants will only be able to meet their goal with an 11% average annual return with participants nearing retirement requiring an even more robust performance. The often-quoted 8% annual return figure, Compassed argued, “is no longer valid.”

“Most companies’ existing plans can yield an 11% or more return with extremely low risk,” researchers for the investment think tank wrote. The potential AAR yield of a specific investment management strategy is also plan specific, Compass claimed. The same strategy applied to Company A’s plan will yield a different return when applied to Company B’s plan.

Because of what Compass said was the inability of a portfolio made up of life-cycle funds to reach the 11% average return threshold, directing participants into the funds could open plan sponsors to fiduciary liability, the company claimed. While many plan sponsors are adding enhancements such as managed accounts and investment advice, those changes might still not be enough to keep plan sponsors in the clear from fiduciary liability, Compass said.

“To meet the ‘appropriate to their needs’ standard, fiduciaries must understand the impact and expected long-term outcomes for plan participants of the enhancements they are introducing,” Compass researchers wrote. “Success from a plan participant’s perspective is clearly understood – to have retirement plan values that provide enough money for the expected duration of their retirement.”

Free copies of the Compass report are available by sending an e-mail to .