Avon Independent Representative Retirement Plan

Investment Menu Approach

The Plan is proud to offer a high quality, low cost and broadly diversified investment menu.

Please find the following Q & A to better understand our approach:

All the investments (beyond the stable value) are index based, what are the benefits of this approach?

Index investing provides three primary benefits; low cost, broad diversification and predicable returns. The index options in the Plan are all low cost solutions by the industry’s leader in index investing, Vanguard Investments. Please find the Plan’s Investment Performance and Expenses.

What are the Vanguard Target Retirement Funds?

Vanguard Target Retirement Funds invest in several low-cost index funds to create a broadly diversified mix of stocks and bonds. The year of a Target Retirement Fund’s name is the approximate year in which an investor in the fund expects to retire. To reduce risk as the target date approaches, the investment manager will gradually decrease the fund’s stock holdings and increase its bond allocation.

The core investment menu in the Plan consists of only 7 funds, plus the suite of the target retirement funds, however, most plans I have seen offer far more options, what is your rational?

As an investment fiduciary, our priorities are to offer well diversified options across different asset classes, provide low investment expenses, and create a menu that facilitates positive participant outcomes. Studies have shown that asset allocation drive the vast majority of a portfolio return.

All the investments (beyond the stable value) are from Vanguard, does that compromise diversification?

No, diversification is achieved based on the holdings within the portfolio. All of the Vanguard funds are based on broad indices, and there is essentially no discretion on the part of the asset manager.

By offering investments that are always tied to broad indices, does that mean our investment results will be mediocre compared to the competition?

No, ironically just the opposite is true. By owning a broadly diversified index fund at a minimum cost, investors will usually outperform most actively managed funds. For example, according to the SPIVA US Scorecard (data as of June 30, 2017) the majority of US Large-Cap equity funds underperform their benchmark; 1yr 57%, 5yr 82% 10yr 85%.

While indexing may perform well for US Large-Cap equity, does active management perform better in less efficient markets like US Small-Cap Equity and International Equity?

While this is a popular notion, the data does not reflect this narrative. According to the same SPIVA Scorecard, US Small-Cap equity funds underperform their benchmark; 1yr 60%, 5yr 94%, 10yr 94%. For International equity funds the results were 1yr 78%, 5yr 72% 10yr 80%.

While we examined individual funds, how does a portfolio of index funds compared to portfolios of actively managed funds?

The argument for indexing is enhanced when examining portfolios rather than just funds. According to A Case for Index Fund Portfolios (Ferri & Benke 2013) the researchers found over the longest period studied (1997-2012) the actively managed portfolios underperformed 83% of the time versus an index based portfolio available to individual investors.

The stable value fund has a much higher return than the benchmark, how is that possible?

A stable value fund consists of a portfolio of low risk and return fixed income securities that are insulated from interest rate movements by insurance contracts. Stable value funds are generally only available in defined contribution retirement plans, and may outperform money market funds.