Defined contribution plan sponsors are doing more to control investment volatility but many still are grappling with issue of how — or whether — to control or eliminate the biggest post-retirement risk their participants face: income adequacy.
“Risk is the new mantra. Everyone is asking how to define and mitigate or eliminate risk,” said Mark Fortier, senior vice president and head of product and partner strategy, AllianceBernstein Defined Contribution Investments, a division of AllianceBernstein LP, New York.
The financial crisis of 2008-2009 was “another jolt to the system that caused both defined contribution plan sponsors and investment managers to start paying more attention to volatility management, whether at the strategy allocation level or within a particular investment approach,” said Michael Falcon. He is managing director and head of retirement at J.P. Morgan Asset Management, New York.
To date, plan sponsors have concentrated on diversifying their investment offerings, both target-date funds and stand-alone investment option lineups, to provide some downside volatility control during market drawdowns, sources including Mr. Falcon said.
For example, some sponsors have added real return strategies, usually real estate, and hedge funds to provide inflation protection and an uncorrelated return source, respectively, said Kevin Vandolder, a partner at investment consultant Hewitt EnnisKnupp, Chicago.
“The first step DC plan sponsors took in reaction to the financial crisis was to mitigate risk in their target-date funds. Most plan sponsors still are at this stage, still trying to solve the traditional investment risks, like tail risk” and asset class correlations, AllianceBernstein's Mr. Fortier said.