The financial market forces that have beset defined benefit plans in recent years also have hurt defined contribution plans. Yet the revolution in pension fund investing so far has passed by 401(k)s and other defined contribution plans.
That needs to change.
Pension executives are restructuring their defined benefit plan investments in response to a new outlook on the financial markets that appears to demand new types of investing products to succeed. But those who leave their defined contribution plans in an array of traditional index funds and actively managed portfolios risk being accused of neglect and, potentially, negligence.
As Keith Ambachtsheer, president, K.P.A. Advisory Services Ltd., has said, investment management is becoming a risk management business. Outperformance in relative returns is no salve when traditional strategies' absolute returns are negative, as they have been since 2000, which is a reason some defined benefit sponsors are changing their investment structure.
How can defined benefit plan executives move so aggressively to non-traditional strategies while leaving their defined contribution plans in the types of investments that are being abandoned on the other side? Relative return strategies are all defined contribution plans have.
Defined contribution sponsors and consultants must come up with ways that allow participants to invest in alternative investments - from absolute strategies such as hedge funds and long-short portfolios to venture capital and other private equity.
There are obvious obstacles. One is that participants don't have the knowledge and experience necessary to understand the risk of such investments. Another is how to package alternatives for a 401(k)-type market. The Securities and Exchange Commission, too, typically forbids such management firms from marketing to small investors.
But for defined contribution plans to have the same chance of success and even to remain viable, participants must have alternative investment choices available to them.
Any change likely will take years, in part because defined contribution plans aren't as nimble as defined benefit plans can be. But it shouldn't take long for executives to start considering ideas on alternatives for defined contribution plans. That discussion should begin now. The viability of defined contribution plans may depend on it. n
