As consultants, we are often asked “how can we support a strategic asset allocation with an expected return (ER) that is different from the actuarial assumed rate of return (AARR)?” We believe Plan sponsors with a gap between these two metrics should work to bring the ER and AARR in line. Boards may face modest differences for three distinct reasons – each have countervailing reasons for closing the gap they cause. First, it might be argued that these forecasts are built for different purposes. Second, there is variability in ER forecasts as markets fluctuate year-to-year. Third, the timeframe over which the forecasts are used differs.
In this paper, we further explain this reasoning and conclude by offering approaches for Plans to reduce any mismatch between ER and AARR to a reasonable level, which we generally believe to be less than 0.5%.
