How does ComposedPro determine rollover recommendations?

Inherent conflicts of interest arise when an investment advisor makes a recommendation for a client to rollover an employer plan into an IRA.  The account moves from an employer plan that the advisor does not directly charge a fee on, to an IRA which the advisor can deduct a fee.  ComposedPro seeks to minimize these conflicts with rules-based guidance that helps clients determine whether their employer plan has enough GOOD investment options according to the client's personal situation.   If a client has enough GOOD investment options within the employer plan, then we simply will not recommend that they rollover to an IRA.  

ComposedPro is primarily focused on fees and will only recommend a rollover over an employer plan when certain conditions are met.   You will be notified of additional Factors to Consider Before Rolling Over an Employer Account to an IRA. 

ComposedPro performs the following steps before recommending a client rollover their employer account to an IRA:

1.  Obtain all the investment options in the employer plan

First, we obtain a list of investment options for the plan from a third-party provider, which we verify with the client.  Each employer plan has different investment options available, and an accurate list is a crucial input when determining a rollover recommendation.  Clients should notify ComposedPro any time the list of investment options changes within their employer plan.

2.  Evaluate each option individually to determine if it is a GOOD option

GOOD investment options are those that have:

• Low Fees- we set fee hurdles that each investment option must satisfy in order to be classified as having low fees.  Some investments are more expensive to invest in than others so we assign different hurdles that each investment must satisfy.  For example, investing in US Large Cap Equities is typically less expensive than investing in Non-US Emerging Equities.  So a US Large Cap investment option with a 0.15% expense ratio may not qualify as low fee, whereas an investment option in Non-US Emerging Equities with the same 0.15% expense ratio may qualify as low fee.

• Performance as Expected- we next make sure the investment option being analyzed is highly correlated to its benchmark.  We determine each investment option's beta and r-squared to assess whether it performs as expected.  Beta tells us how much investment option's price may move in relation to a movement by its benchmark.  We require each investment option to have a beta between 0.9 and 1.1.  This means that a price change in the benchmark should translate to a similar price change in the investment option. R-squared tells us the percentage of an investment option's movements that are explained by movements in its benchmark.  In other words, it tells us the reliability of our beta calculation.

3.  Determine if enough GOOD options are available given a client’s overall portfolio composition

We then tailor our recommendation specific to the client.

If the employer plan account’s balance is more than 50% of all the money in a client’s retirement portfolio, then the employer plan must have more than 6 GOOD investment options, or else we will recommend a rollover. 

If the employer plan account’s balance is more than 25% but less than 50% of all the money in a client’s retirement portfolio, then the employer plan must have more than 4 GOOD investment options, or else we will recommend a rollover.

If the employer plan account’s balance is less than 25% of all the money in a client’s retirement portfolio, then the employer plan must have more than 2 GOOD investment options, or else we will recommend a rollover.

Disclosures:

Assumptions, Limitations and Inherent Risks

The factors to consider before rolling over an employer account to an IRA vary according to your personal situation and preferences.  The decision to rollover may be irrevocable (or very costly to reverse), may involve a substantial portion of your net worth, and can thus have significant long-term impacts.  You should consult with your tax advisor before making such a decision.

Nothing herein should be interpreted as tax advice.  ComposedPro does not represent in any manner that the tax consequences described herein will be obtained or result in any particular tax consequence. Please consult your personal tax advisor as to whether ComposedPro's asset location strategy is a suitable strategy for you, given your particular circumstances. The tax consequences of asset location are complex and uncertain. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. ComposedPro assumes no responsibility for the tax consequences to any client of any transaction.

In addition to the assumptions described in the documentation above, all of our recommendations are based upon Modern Portfolio Theory (“MPT”) - the theory that return can be maximized for a given level of risk through portfolio construction.  By introducing assets that not perfectly correlated with one another (i.e. diversification), portfolio risk may be reduced without a proportional decrease in return.  Limitations of Modern Portfolio Theory include:

• Changing market assumptions – MPT relies on market assumptions that need to be updated over time. Correlation between assets are never stable and fixed; they tend to change together with the changes in the universal relations, existing between fundamental assets.  Expected return and risk assumptions may not be realized.
• Some degree of reliance on past performance – MPT uses mathematical calculations on expected values, based on past performance to measure the correlations between risk and return. However, past performance is not a guarantee of future performance. Taking into account only past performances leads to overpassing newer circumstances, maybe not having existed during the time when the historical data were compiled.
• Irrational investors - MPT assumes that investors are always rational and risk-averse – this is not always true, and the field of behavioral finance seeks to explain these diversions from rational thought.
• Less than perfectly efficient markets – MPT assumes all investors have access to the same information at the same time. In reality, markets are not perfectly efficient.

Limitations of our rollover recommendations include not being able to value the ‘soft’ benefits of the employer plan.  These include:

• The level of service available in the plan (i.e. access to a CFP®)
• The ability to take penalty-free withdrawals (i.e. 457b accounts)
• The application of required minimum distributions (RMDs)
• Protection from creditors and legal judgments
• Holdings of employer stock
• Other special features of the employer plan account

Please see our article on Factors to Consider Before Rolling Over an Employer Account to an IRA for more information.

There is a risk that the options in the employer plan may have changed by the time we give our recommendation.  Market conditions could change that impact our determination of whether a particular employer plan investment option is a GOOD option.  

Internal Development and Review

No third parties were involved in the development, management, or ownership of our algorithms.  ComposedPro develops the recommendations for its algorithmic recommendations internally and performs a review at least annually of its four main recommendation algorithms.