Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1995-08-07
2002-01-01
Poinvil, Frantzy (Department: 2164)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S001100
Reexamination Certificate
active
06336102
ABSTRACT:
BACKGROUND OF THE INVENTION
The present invention relates generally to the field of business systems, and specifically relates to the field of investment fund management systems.
Long-term investment plans, such as pension plans, enable an investor to save for retirement. Pension plans typically are divided into two types: defined benefit plans; and defined contribution plans. A defined benefit plan involves a promise made by an employer of a lifetime definite benefit paid to the recipient after retirement. The employer funds the promise by investing in trust for the recipient. In a defined contribution plan, the employer and/or the employees contribute a definite amount of money to an investment plan. The benefit paid after retirement is uncertain; it is determined by the performance of the investment plan. 401K plans are an example of defined contribution plans.
In a typical defined contribution plan, the employer establishes a group of investment funds of specified characteristics, from which the employee may select. The group of funds typically is diverse, including funds specializing in bonds, stocks, money markets, and other asset classes, or combinations of asset classes. These funds may be collective investment funds or mutual funds, managed by the employer or by a third party.
An employee typically invests in a fund having characteristics matching his or her investment preferences, such as high-risk/high expected return or low-risk/low expected return. Over time, as the employee's investment preferences change, that employee may move his or her investment from one fund to another to reflect a change in preferences. But because the typical employee generally is not a trained investment expert, it is possible that sub-optimal selections may be made from among the funds, and that the selections are not optimally revised over time.
Many employees in defined contribution plans do not appreciate that investments with high-risk and high expected return—such as equity securities—may be appropriate even for risk averse investors if their time horizons are sufficiently far in the future, and if the investment is properly diversified. Thus, many employees tend to invest more conservatively than an investment expert would do under like circumstances. Because conservative investments generally have low returns over the long term, an unnecessarily risk-averse strategy may be expected to produce disappointing long-term performance.
Many employees in defined contribution plans do not possess sufficient expertise to select investment funds to match their risk preferences, even when their risk preferences are appropriate. As a result, investments may be selected that either expose an employee to unexpected risks, or expose the employee to unexpectedly low returns.
Finally, many employees in defined contribution plans do not possess sufficient expertise, or wish to devote sufficient time and attention, to appropriately revise their selection of funds as market conditions change, and as their own life circumstances change. If an employee neglects to revise his or her investments, or revises them inappropriately—perhaps due to emotions of fear or greed—that employee will be exposed to unexpected and inappropriate risks when market conditions change, or when his or her own life circumstances change.
The typical employee generally is unwilling to pay the costs to obtain private professional investment advice, or may be unaware that it is available. The typical employer generally is unwilling to provide advice to employees, either due to a lack of sufficient expertise, or due to an unwillingness to bear potential legal liabilities. Thus, there remains a need for a system and method for a typical employee in a defined contribution plan to make appropriate investments, to reflect appropriate long-term trade-offs of risk and return, to select investments that accurately reflect those trade-offs, and to revise those investments through time in response to changing market conditions and the employee's changing preferences.
SUMMARY OF THE INVENTION
The present invention relates to a method and system for managing one or more investment funds over a specified life of that fund. The data processing method of the present invention involves determining a time horizon H
t
associated with each investment fund F
n
. The time horizon H
t
defines the expected date at which cash may need to be withdrawn from the fund and has an associated parameter L
H
representative of the length of time remaining between the present and the time horizon H
t
. A plurality of investment assets are stored, together with information regarding each asset. These assets may be maintained within portfolios, each portfolio having a predetermined characteristic, thus the compilation of associated assets may reflect or establish the portfolio characteristic.
Cash initially is directed to selected ones of the assets or portfolios, to establish an investment mix. The investment mix is adjusted at periodic intervals in accordance with some criteria that is related to the diminishing length to time horizon L
H
. The criteria may include a change in risk tolerance R
I
, as a function of the remaining length to time horizon L
H
, associated with each fund. Typically, the R
I
value decreases as the fund approaches the time horizon H
t
. The criteria may include other processes or rates that are keyed to the time horizon of the fund.
The assets or portfolios included in each investment fund may be correlated to the fund based on factors in addition to L
H
and H
t
, such as initial risk tolerance R
I
, and/or some predetermined investment criteria L
I
. The predetermined investment criteria L
I
may include such criteria as invest only in equity securities, diversify across a minimum number of asset classes, invest a percentage in money market instruments, and the like. In addition, individual portfolio characteristics may be based on several criteria, including expected volatility of the investment assets, expected responsiveness of the investment assets to market conditions, and expected return on the investment assets.
The present invention also is directed to a data processing system that corresponds to and performs the above described method. The invention is described in further detail in the following drawings and detailed description.
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Luskin Donald L.
Tint Lawrence G.
Fenwick & West LLP
Poinvil Frantzy
Wells Fargo Institutional Trust Company, N.A.
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