Retirement investing is an integral part of American personal finance. With $8.9 trillion parked in over 800 thousand retirement plans such as 401K, millions of Americans will increasingly rely on their 401K accounts to fund their future retirement needs. This article is part of a series of case studies we are conducting for various 401K plans. In this article, we will discuss how participants in Vanguard Variable Annuity can achieve reasonable investment results using asset allocation strategies. We will also discuss how those portfolios are positioned in today’s market environment.

Vanguard Variable Annuity provides investment options in VVA (Vanguard Variable Annuity) funds. Vanguard has an excessive trading policy which is different from most of brokerages: it imposes 60 days waiting period before one could repurchase a fund again afer selling the fund.  IMPORTANT NOTE: because MyPlanIQ does not have VVA fund data, all of these funds are substituted by their Vanguard mutual fund equivalents. We believe the Vanguard mutual funds should closely track their corresponding VVA funds.

The following is the excerpt on the Vanguard Variable Annuity exchange policy from its prospectus. Based on the description, MyPlanIQ has yet to work out a way to handle so caled 'round trip' limitation. We will fix this shortly.

L I M I T A T I O N S  ON Exchanges

Because excessive exchanges can disrupt management of the Fund and increase the Fund’s costs for
all Contract Owners, the Fund limits exchanges as follows:
■ You may make no more than two substantive round trips through a Portfolio (not including the
Money Market Portfolio) during any 12-month period.
■ The Fund and the Company may refuse an exchange at any time, for any reason.
■ The Company may revoke a Contract Owner’s exchange privilege at any time, for any reason.
A round trip is a redemption from a Portfolio followed by a purchase back into the Portfolio. Also, round
trip covers transactions accomplished by any combination of methods, including transactions conducted
by check, wire, or exchange to or from another Vanguard fund. “Substantive” means a dollar amount
that Vanguard determines, in its sole discretion, could adversely affect the management of the Fund.

Vanguard Variable Annuity's 401K plan consists of 15 funds. These funds enable participants to gain exposure to 4 major assets: US Equity , Foreign Equity , REITs , Fixed Income . The list of minor asset classes covered:

Foreign Large Blend: EFA , VEU , GWL , PFA
High Yield Bond: HYG , JNK , PHB
Intermediate-term Bond: AGG , CIU , BIV , BND
Large Blend: IVV , IYY , IWV , VTI , VV , SPY , DLN , RSP , SCHX
Large Growth: IVW , IWZ , JKE , VUG , ELG , QQQQ , RPG , SCHG
Large Value: IVE , IWW , JKF , VTV , ELV , PWV , RPV , SCHV
Mid-cap Blend: IJH , IWR , JKG , VO , MDY , EMM , PJG , DON , EZM , MVV
Moderate Allocation: AOM
Real Estate: IYR , ICF , VNQ
Short-term Bond: CSJ , BSV , VCSH
Small Blend: IJR , IWM , JKJ , VB , DSC , PJM , DES , SAA , UWM , SCHA

As of Dec 3, 2010, this plan investment choice is rated as above average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:

Diversification -- Rated as above average (83%)
Fund Quality -- Rated as average (64%)
Portfolio Building -- Rated as above average (75%)
Overall Rating: above average (74%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies ( SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 4 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity :( SPY or VTI )
Foreign Equity :( EFA or VEU )
REITs :( IYR or VNQ or ICF )
Fixed Income :( AGG or BND )

Performance chart (as of Dec 3, 2010)

Performance table (as of Dec 3, 2010)

Currently, asset classes in US Equity ( SPY , VTI ) and REITs ( IYR , VNQ , ICF ) are doing relatively well. These asset classes are available to Vanguard Variable Annuity participants.

To summarize, Vanguard Variable Annuity plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on US Equity and REITs funds.


Disclosure:

Symbols: , SPY , VTI , EFA , VEU , IYR , VNQ , ICF , AGG , BND , HYG , JNK , PHB , AOM , CIU , BIV , GWL , PFA , IVE , IWW , JKF , VTV , ELV , PWV , RPV , SCHV , IVV , IYY , IWV , VV , DLN , RSP , SCHX , IVW , IWZ , JKE , VUG , ELG , QQQQ , RPG , SCHG , IJH , IWR , JKG , VO , MDY , EMM , PJG , DON , EZM , MVV , IJR , IWM , JKJ , VB , DSC , PJM , DES , SAA , UWM , SCHA , CSJ , BSV , VCSH