In the midst of the 2008 financial crisis, Howie Schaffer took a look at his finances and decided that he needed to do something to protect his investment earnings against inflation. So he moved 12 percent of his portfolio into Treasury Inflation-Protected Securities, or TIPS.
Schaffer, a 43-year-old vice president at corporate consulting firm Cook Ross Inc. in Silver Spring, Maryland, says protecting what he has earned so far is more important than risking all of his savings should an economic crash like 2008 happen again.
"Instead of looking at earning 8 to 10 percent a year, now we need to worry about inflation," Schaffer says. "It made a lot of sense to protect a portion [of his investments] against it."
Schaffer is taking advantage of what many plan sponsors of 401(k) plans are offering participants today: some type of stand-alone inflation-protection strategy. Forty-six percent of plan sponsors offer or plan to offer a stand-alone inflation-protection option, Mercer Investment Consulting's U.S. Defined Contribution Investment Survey from August 2011 shows.
"In recent years it's become much more evident to plan sponsors that they should be providing additional tools to participants so they can diversify risk," says Winfield Evens, partner and director of human resources outsourcing investment strategy for Aon Hewitt in Lincolnshire, Illinois. "Right now we are living in a volatile and uncertain economy, and [an inflation protection strategy] does appeal to this concern."
Nearly a quarter of the 233 plan sponsors that responded to Mercer's survey say they offer TIPS, while 12 percent have an inflation hedge that combines multiple asset classes including Treasuries, real estate investment trusts and commodities. Ten percent of respondents said that next year they would provide some choice that helps protect participants against inflation.
The strategy is even more popular with large plans. Thirty-one percent of plans with assets of more than $1 billion have a stand-alone TIPS fund, while 16 percent offer something using multiple asset classes. Nineteen percent of these plan sponsors say they will have it in their fund lineup by next year, the Mercer study showed.
TIPS are one of the fastest-growing investment classes right now, says Toni Brown, director of U.S. client consulting at Mercer's San Francisco office.
Increasing concerns over inflation, baby boomers looking for more conservative options that will preserve assets, as well as plan sponsors trying to reduce the number of options available are all driving TIPS' popularity, Brown says.
"The only thing we've seen move this quickly is the implementation of target-date funds," Brown says, adding that more investment managers are entering the market with products combining multiple asset classes to hedge against inflation.
Last year, American Century Investments introduced a multiasset mutual fund, Strategic Inflation Opportunities, which was designed to hedge against inflation. This is an addition to the investment management firm's two other fixed-income inflation-protection strategies, which were introduced in 1997 and 2005.
As the federal government "continues to print money, inflation has to occur," says Mike Jackson, vice president at American Century in Kansas City, Missouri. "From a fiduciary standpoint, plan sponsors need to be taking a look at this asset class."
But while many plan sponsors are offering or are considering putting a stand-alone inflation protection strategy in their 401(k) investment lineup, 54 percent have no plans to include it, the Mercer study showed.
Barbara Coombe, director of retirement and disability for Shaw Industries Group Inc. in Dalton, Georgia, says the company's investment committee talked about offering a hedge or gold fund this year. The committee decided against it because members didn't want to have investment options that might be hard to understand, as well as risk participants not rebalancing their investments as they aged.
In April, the flooring-manufacturing company eliminated several investment options and added target-date funds, mostly so participants could invest without rebalancing their funds.
"We have to protect our participants against their own lack of knowledge on risky investments," Coombe says. "The target-date fund reallocates as you go along."
And, like Shaw Industries' target-date funds, which are managed by Principal Financial Group in Des Moines, Iowa, many inflation protection strategies are already in many target-date funds, experts agree.
"Many plan sponsors are interested in these tools but are concerned about offering them to participants. They are more challenging for the typical participant to understand and use effectively," Aon Hewitt's Evens says. Inflation protection strategies "work very well in target-date funds where managers can decide what is appropriate."
Learn more about Mercer's U.S. Defined Contribution Investment Survey here: http://www.mercer.com/articles/1422725
Aon Hewitt conducted a similar study. To learn more, click here: aon.com/attachments/thought-leadership/2011%20Hot%20Topics_Final.pdf
Patty Kujawa is a freelance writer based in Milwaukee. To comment, email firstname.lastname@example.org.