How Will 401(k)s Perform Over the Next Decade?

Bad news about 401(k) 10-year returns.
Bad news about 401(k) 10-year returns.

An accurate reflection of the New Normal, or another pessimistic 401(k) prediction destined to pass?

“Portfolios dominated by mainstream asset classes have a very low probability of earning a 5 percent annualized real return over the next decade,” writes Research Affiliates in a brutal new report.

It’s a reality most investors are “blithely overlooking,” according to the California-based firm.

“A comparison of the most popular investing strategies used to build retirement nest eggs suggests the chances of any producing a 5 percent annualized real return for investors over the next decade is quite slim. Portfolio alpha and/or alternatives allocations are unlikely to change this conclusion.”

It studied the default returns in 11 retirement calculators, robo-advisors and institutional investor surveys built on hundreds of underlying participants. The average and median annualized long-term expected returns, it found, were 6.2 percent and 6 percent, respectively.

After reducing the “nominal 10-year average and median returns we arrive at 5 percent. If investors are counting on earning a 5 percent real return, what are the odds they will be able to do it?”

Allowing that “perfect foresight” eludes them, they find a 60/40 portfolio has a 0 percent probability of achieving a 5 percent. A target date fund TDF+10 glide path achieves a real return of 5 percent in only 2 percent of their range of returns.

As for alternative investments, “If the vast majority of the portfolio is expected to produce a 2.5 percent real return, then the pie slice of alternatives has to earn closer to a 12 percent real return after all fees and expenses in order for the entirety of the plan to generate a 5 percent real return.”

Adding mischief to misery, Research Affiliates further asserts, “Allow us to observe that these estimates may be, in fact, too optimistic.”

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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