One of these days, the Federal Reserve will start tapering its bond-buying, reducing the flow of easy money. And one of these days, interest rates will advance and inflation will rise.
Defined contribution plan executives, however, aren't necessarily waiting for one of these days. Researchers and DC consultants say executives at many plans have discussed changes — and some have adjusted investment options — in anticipation of higher interest rates and inflation.
Among choices being reviewed or implemented:
- investing in shorter-duration bonds;
- adding international/global bonds;
- reconsidering passively managed domestic bond funds;
- increasing offerings of Treasury inflation-protection securities and multiasset funds that include tips; and
- looking at unconstrained bond strategies.
“We're facing a challenging environment for fixed income,” said Christopher Lyon, a partner at Rocaton Investment Advisors LLC, Norwalk, Conn. “For the conservative investor, there's no place to hide.”
DC plans aren't lurching to the changing headlines of Wall Street speculation about when the Fed will start tapering. Or to the Securities and Exchange Commission's proposed changes in the structure of money market funds. Or to the spike in interest rates this spring.
“Change happens very slowly in the defined contribution space,” said Sue Walton, a director of Towers Watson Investment Services Inc., based in Chicago.
And just because DC plans diversify fixed-income investment options, that doesn't mean participants will use the options, said Winfield Evens, a partner at Aon Hewitt, Lincolnshire, Ill.
Mr. Evens pointed to research by Aon Hewitt that tracks participant transfers in 401(k) plans for which Aon Hewitt is the record keeper. At the end of 2008, as the economy and stock markets were diving, Aon Hewitt found 19.6% of participants made one or more transfers. That rate has declined steadily each year through 2012 — the latest data available — to 14.5%.