Amid a rise in short-term inflation — the July consumer price index was 5.4% higher than the corresponding period last year — the defined contribution industry's response could best be described as inquisitive and wary but not apprehensive.
"The questions come up in the context of due diligence meetings with sponsors and consultants," said Steven McKay, the Boston-based head of DCIO at Putnam Investments, Boston. "There's plenty of conversation. They ask for our views on managing target-date funds or investment strategies."
Plan sponsors' attitudes — so far — are forged, in part, by uncertainty over whether the recent rise in inflation is transitory or a harbinger of something longer lasting. However, DC experts point out that the past 12 months aren't a replay of the mid-1970s, an equity bull market has served as an inflation proxy for many investors and target-date funds have baked in risk mitigation and inflation protection for many DC plan participants.
"With plans currently offering best-in-class target-date fund solutions, they have already addressed long-term inflation protection," said William Ryan, the Chicago-based partner and head of North America defined contribution multiasset solutions for Aon PLC."I am confident that as long as we continue to see 60% and growing of all new money going into investments like target-date funds we are helping set up participants for success."
He encouraged sponsors to plan ahead. "While inflation is currently top of mind, we should be evaluating a plan’s go-forward investments and advice solutions to ensure they are addressing both long-term inflation and the next cycle of unanticipated inflation,” Mr. Ryan said.
“There’s definitely a lot of interest” about inflation among sponsors, added James Martielli, the Malvern, Pa.-based head of investment solutions within Vanguard Group Inc.’s institutional investor group. “It’s at the top of the investment reviews. There’s a lot of talk and conversation, but we haven’t seen action” in adding funds to investment lineups.