How is Your 401k Doing?
November 02, 2010
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Is it meeting its stated goals? Do you feel like your retirement plans are going well? Or are you deciding you have to work a few more years than you planned to?
http://www.nasra.org/resources/InvReturnAssumption_Final.pdf
Some members of the media, academics, and policymakers recently have questioned whether public pension fund investment return assumptions are unrealistically high. If this were true, it could encourage these funds to take too much risk in investing pension fund assets, or it could understate the cost of pension liabilities, reducing their current cost at the expense of future taxpayers. Alternatively, an investment return assumption that is set too low would result in overstating liabilities, which would overcharge current taxpayers.
Public retirement systems employ a process for setting and reviewingtheir actuarial assumptions, including the expected rate of investmentreturn. Most systems review these assumptions regularly, pursuant tostatute or system policy. The process for establishing and reviewing theinvestment return assumption involves consideration of various factors,including financial, economic, and market data. This process also is based on a very long‐term view, typically 30 to 50 years.
Although public pension funds, along with most other investors, haveexperienced sub‐par returns over the past decade, median public pensionfund returns over longer periods exceed the assumed rates used by mostplans. As shown in Figure 1, median investment returns for the 20‐ and25‐year periods ended 12/31/09 exceed the most‐used investment returnassumption of 8.0 percent. For example, for the 25‐year period ended12/31/09, the median investment return was 9.25 percent.
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