Why your pension is an investment
Retirement funds are now investing a disproportionate share in long-term investments, according to a new report from a new organization called the Retirement Planning Association of America (RPA).RPA found that just under half of all 401(k)s and 403(b) plans invested in the index were investing in long term investments.
Retirement plans, defined as those that have a minimum of $50,000 in assets in retirement, have been increasing their investments in these types of investments over the last decade.
In 2011, the average retirement account size was $26,000, up from $22,500 in 2007, according the report.
“Our research shows that 401(ks) and 403b plans have become far more active in the investing world, and they are investing a greater share of their assets in these high-quality investments,” the report states.
“Many of the 401(s) and 401(b)(s) plans we examined also invest in some of the best-performing high-yield bonds, such as the Vanguard Total Return Bond ETF (VTIB) or the American Growth Bond ETF.”
And it has outperended the SIPI Composite Index by more than 6,000 basis points since 2007.””
It has outperformed the S-3 S&p 500 Index nearly every year since its inception in 2001.”
And it has outperended the SIPI Composite Index by more than 6,000 basis points since 2007.
“The VTIBs performance has become even more remarkable, as it has continued to outperform the SETF index by a margin of over 3,000 points since 2011, and is now up more than 20,000 for the last six years,” the RPA report concludes.RPA also found that the majority of retirement plans invested the majority (57 percent) of their funds in “non-interest bearing” funds.
That is, they put the bulk of their money into short-term, low-yielding investments, such the bond index fund, the money market fund, and the equity fund.
This strategy is more risky than the traditional strategy of investing in the long-lasting bonds.
The report also found the majority, or 70 percent, of retirement plan investments were in the money fund.
The money fund has historically been the preferred investment choice for 401( k ) and 403 k plans, but now accounts for a smaller share of total investment choices, according RPA.
The RPA said it found this was because 401( s ) and k plans have been increasingly turning to non-interest-bearing investments, as the retirement fund industry has become more risk-averse and diversified.
The research shows, however, that long-duration investments have outperformed non- interest-bearing options by a substantial margin.
The retirement fund market has seen an average annual increase in returns of more than 9 percent over the past 10 years.
RPA says this is because funds are investing in more long-lived assets, which are less volatile.
For example: the fund average return is now 1.7 percent over this same period.
And the fund’s average long-living asset is currently worth nearly $1.2 trillion, up more from $1 trillion in 2013, the report notes.RAPA’s research also found more than two-thirds of 401(kk) and savers (63 percent) are choosing long-life investments.
“The majority of pension and retirement plans are now using these low-cost investments,” RPA notes.
“There are also a number of high-growth funds that are now focused on low-risk, high-return investments that have historically outperformed index funds, including the Vanguard Money Market Fund, the Vanguard Equity Fund, and Vanguard Total Returns Fund,” it says.