Goals-Based Investing: Defined Benefit Portfolios for the 21st Century

When I began my investment career in the early 1980s, most Americans knew little about the investment markets, for good reason: they were covered by defined benefit pensions offered by their employers. These plans provided participants monthly retirement income, the amount of which was formulaically related to their salaries.

Because their benefit was clearly defined, Americans cared little about how their nest egg was invested; employers took care of that for them. Beginning in the early 1980s, however, employers increasingly converted to defined contribution retirement programs, commonly known as 401(k)s. This employer-provided benefit, by focusing on matching employee contributions, turned the responsibility of investing to their employees.

In 1983, 62 per cent of Americans covered by pension plans were defined benefit beneficiaries. Fifteen years later in 1998 that share had dropped to 24 per cent, according to the Center for Retirement Research at Boston College. Meanwhile, only 12 per cent of Americans were 401(k) holders in 1983. That number spiked to 60 per cent by 1998.

Employers, by handing the investment keys to their employees, for better or worse, unleashed a generation of investors eager to understand the markets. Sensing the need for investment information, NBC and Cablevision formed a joint venture to launch the Consumer News and Business Channel (CNBC) in April 1989. At that time, the average trading volume on the New York Stock Exchange (NYSE) was about 10 billion shares per quarter. Volume had spiked ten-fold by 2003. The ensuing years have witnessed a veritable mushrooming of financial grocery stores where investors select products and assemble meals that they hope will nourish them through retirement.

Even access to the finest, most sophisticated ingredients, however, has failed to make defined contribution investors successful financial chefs. Market volatility, blended with fear and greed, have added up to sub-par results. The average investor’s asset allocation delivered less than 2 per cent annually over the last 20 years. In fact, investors’ portfolios have failed to keep pace with inflation, according to research by Richard Bernstein Advisors.

By employing a goals-based investing framework, Cresset customizes defined benefit portfolios based on the individual client’s specific cash flow needs. We strive to balance expected portfolio return with the statistical likelihood of success in delivering cash flows. By focusing on an outcome, clients no longer fret over the ingredients. Instead, they enjoyed fully prepared, nourishing meals.