As it appears the economy may be rebounding, employers and retirement plan providers are challenging long-held beliefs about the proper diversification and asset allocation of their retirement plan investments.
Employers with both 401(k) and defined-benefit plans are taking a closer look at those plans’ investments and questioning whether they should be doing more to mitigate risks, experts say.
“The whole philosophy of using diversification to manage risk has been called into question,” said Mark Ruloff, director of asset allocation at Watson Wyatt Worldwide. “Simply putting your money into many different risky assets generally failed in 2008.”
Employers with defined-benefit plans are coming to terms with the reality that while diversification can help control risk, it doesn’t always help. As a result, many employers are talking more about how they can reduce the risk within their plans, Ruloff said.
For defined-contribution plan sponsors, the conversation around diversification has become more specific, experts say. Instead of having bond funds to represent conservative investments, plan sponsors are questioning what kind of fixed-income products they should include and whether they have any associated risk, said Lori Lucas, executive vice president and defined contributions practice leader for Callan Associates, a San Francisco-based institutional investment consultant.
“For example, some plan sponsors are asking whether they need a money-market fund in addition to a stable-value fund as the conservative options in their plans,” she said.
As a result, defined-contribution plan sponsors are increasingly reviewing the funds in their plans. A February survey by Callan Associates found that fund due diligence is the top priority for plan sponsors in 2009.
Defined-contribution plan sponsors are also taking a closer look at the target-date funds and questioning whether they are too aggressive in their exposure to equities, said Bob McAree, retirement practice leader at Sibson Consulting.
“The conversation that’s emerging is whether the asset allocation strategy that many thought was appropriate historically now needs to be reconsidered,” he said. “For example, many individuals found themselves in 2010 target-date funds that were still 60 percent invested in equity.”
In an effort to increase the diversification of their offerings, many employers are adding “funds of funds” overseen by a number of managers, said John Sturiale, director of Charles Schwab’s retirement investment services group. In the past six months, Schwab has seen its fund-of-funds sales to defined-contribution plans jump 25 percent from normal levels, Sturiale said.
But what the right level of diversification and what the right asset allocation is remains a big question mark for most companies.
“I am not sure anyone has the magic answer,” said Carol Klusek, head of retirement and financial services at Aetna. “It’s almost like there is a feeling out there that the dynamics have shifted, but there is no new baseline.”
—Jessica Marquez
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