Nearly two-thirds of consultants said their defined contribution plan clients will add either a Treasury or government money market fund to emphasize capital preservation and risk management, according to a new survey from Pacific Investment Management Co., Newport Beach, Calif.
A similar percentage also said they are helping evaluate clients' existing stable value offerings by studying the underlying manager performance and monitoring the “market to book ratio,” according to PIMCO's “2009 Defined Contribution Consulting Support and Trends Survey.”
“Given the extreme market volatility and significant decline in DC account balances over the past year, it's not surprising that DC plan sponsors are focused on reducing the risk that participants face in their DC plans,” Stacy Schaus, senior vice president and PIMCO's DC practice leader, said in a news release accompanying the survey. “Consultants are helping clients evaluate their DC plan investment structures, often to dial down risk and improve the likelihood that the plans will meet participants' retirement income goals.”
In an interview, Ms. Schaus added that while 85% of DC plans have a stable value option for plan participants or a money market fund, adding an even more conservative investment option arises in discussions with plan sponsors.
“There is no significant move away from stable value, but the questions asked to us are these ultraconservative options enough for their plan,” Ms. Schaus said in the interview. One option that has come up is a government money market fund that would include investments only in government-backed securities.
The survey also revealed that consultants are working with clients to assess volatility and inflation risk in their plans. Respondents reported that DC plans are adding asset classes that increase diversification and help hedge against a rising inflationary environment. All of the respondents said inflation protection is “somewhat important to critical” in DC plans, citing Treasury inflation-protected securities, commodities and real estate investment trusts as the top three investments for achieving this goal.
According to the survey, 84% of respondents believe it was “critical or very important” to provide inflation protection in a DC plan, up from 66% in the 2008 survey.
“TIPS give protection against unexpected inflation, and if the Fed needs to tighten monetary policy quickly (due to rising inflation), then they can be a valuable part of a fixed-income portfolio,” said John Ameriks, principal in the investment counseling and research group at The Vanguard Group, Malvern, Pa., in an interview. “The reason to buy them now is for protection from a mistake from the Fed; that is that they might not be able to pull all the liquidity they've injected into the financial system as quickly as they added it.”
Ms. Schaus agreed. “Equities can protect you from inflation, but only for those with a longer investment horizon,” she said. “However, given the amount of (financial) stimulus dollars recently put in the market, when the markets recover, inflation will be right behind — so plan participants main concern is to have inflation protection.”
The survey covered 32 U.S. consulting firms that represent about 1,400 clients with total defined contribution assets of $1.6 trillion and was conducted from late December through late January.
