Quantitative regulations — such as limiting how much can be put in risky investments — may help reduce retirement income risk in defined contribution systems, according to a report by Allianz Global Investors and the Organization for Economic Cooperation and Development.
The report, “Investment Regulations and Retirement Income from DC Pension Plans,” recommends that policymakers investigate the cost and complexity of implementing and monitoring different regulations to protect future retirement income in DC plans, according to a news release.
“Simple regulations,” such as placing a limit on equities of 30% to 40% of a participant's portfolio, may achieve this goal as well as more complicated approaches like limits on value at risk, according to the report.
However, more complicated regulations can lead to “problematic pro-cyclical investment strategies, forcing funds to sell equity holdings at unfavorable times of market downturn,” the release said.
The report comes as U.S. regulators are investigating possible rules governing target-date funds after many of these funds approaching their target dates were found to have high exposures to equities and were slammed by the market last year. One option — championed by Putnam Investments President and CEO Robert Reynolds — is to set caps on equity exposure in target-date funds as they become mature.