Investments that protect participants’ assets from inflation
According to industry experts, sponsors of defined benefit and defined contribution plans can help protect participants’ savings by providing exposure to commodities, real estate and inflation-protected Treasury securities.
Julian Regan, senior vice president and public sector market leader at Segal Marco Advisors, advises DC plan sponsors to consider including exposures to a mix of asset classes that provide inflation protection at both in the range of term funds and in the investment menu. .
Michael Clark, managing director and consulting actuary of Denver-based River and Mercantile (which is rebranding Agilis), agrees that commodities, real estate and TIPS are good investment options for plan sponsors because they are hedged against inflation risk. “These are the important things a plan sponsor will want to look at to make sure that inflation protection is either built into the options they already offer members, or if not, at least offer them opportunities to have that exposure,” he says.
Some DC plan sponsors, mostly larger ones, might consider an investment like TIPS as a standalone investment option in the asset class, Regan says.
Real estate can protect against inflation because as it rises, house prices also rise. DB plans often include real estate in investment portfolios, and real estate exposures in DC plans are often in TDFs, Regan says. Many DB plans include an allocation between 7% and 12% towards real estate, he says.
Regan and Clark agree that many of the same participants’ options for inflation protection are useful in protecting assets against current geopolitical upheavals, oil price shocks, stock market volatility and downturns.
DC plan sponsors and pension plan advisors can help plan members select investment options through an in-depth review of the investment menu, looking for inflation-hedge exposures, Regan adds.
He notes that inflation is particularly detrimental to members who have already retired and those approaching retirement. Plan sponsors should “check under the hood for target date funds and ensure that those series of target date funds that are designed for late-career and retired employees have lower stock allocations public funds and higher allocations to fixed income and cash that provide capital preservation,” adds Regan.
Clark warns that if DC plan sponsors offer inflation-hedge investments as stand-alone options in the fund menu, they should be wary of the possibility that members are investing more than they should. “Whenever you give participants a fund they can invest in, sometimes they invest a huge amount of money in it, and in fact, more than they possibly should,” he says.
Ultimately, plan sponsors need to educate members not to overreact, especially younger workers who have time to save and invest, Regan says.
“Make sure participants are reminded that market timing is not efficient; moving assets from a high-risk investment to a low-risk investment when stock markets are down is not an effective strategy,” he explains. “Holding your diversified maturity fund or your low-risk capital preservation fund through the market cycle has proven to be the best strategy for generating returns. It’s also a great time to remind participants that we’ve had historic stock declines in the past, we’ll have historic declines in the future, but over time a well-diversified portfolio has generated sufficient returns to provide a meaningful retirement income, which is the name of the game.”
