Defined contribution plans have turned into defined consternation plans. There are many retirees and even more Baby Boomers getting ready to retire. The global market meltdown during the past eighteen months has caused very real worries as many people are wondering how their retirement is going to be effected. Plan sponsors are taking action to see that retirement plans are as well-funded as they can be.
Reallocating Assets
Research by the consulting firm Greenwich Associates has shown some startling recent trends because of the performance of the equity markets over the past year and a half. The percentage of assets allocated to stable value funds dropped from 35% to 19% from 2007 to 2008 while at the same time assets allocated to target date funds rose from 35% to 53%.
Plan participants are understandably concerned, as for many these retirement funds comprise the bulk if not the entirety of their retirement assets. Plan sponsors are doing what they can to help their employees cope with the failure of the equity markets and to learn to act rationally and not panic by abandoning the equity markets at the worst possible time.
Corporate Efforts
Many plan sponsors are doing what they can to help their employees understand that the current economic and market conditions are severe in an historical context. They are doing their best to help people understand that by continuing to invest as they have will help them buy assets that are under valued by almost any measure.
Plan participants should understand some basics: In many cases, such as in the United States, contributions are made pre-tax and that over time, assets do grow on a tax deferred basis. Payroll deductions help the employee reap the benefits of dollar-cost averaging and that their monies are watched over by investment professionals and that fees are more cost effective than if they did it by themselves.
Asset Allocations
Although there are some subtle differences between defined contribution plans and defined benefit plans, by far the most popular asset class in active managers of domestic equities followed by the company’s own shares and them passive managers of domestic equities. International equities come next followed by stable value investments. This last class sees a large disparity between DC and DB plans.
Smaller asset classes seen are guaranteed investment contracts, balanced funds, target retirement date, target risk funds, real estate investment trusts (REITs) and money market funds.
Your choices
For those that wish professionally managed retirement accounts, many plan sponsors offer some choices: The vast majority offer target retirement date funds while about a quarter, offer managed accounts. Approximately half have target risk funds while a fifth have real estate investment trusts and small percentage have commodity funds and hedge funds.
Institutional investors are committed to long-term diversification with increasing allocations to not only international markets but alternative asset classes as well. The choice is yours.
It’s May 2009- do you know where your retirement funds are?
Source: Greenwich Associates report to Research Partners, "Bad Timing: Growing Ranks of DC Plan Participants Stung by Market Collapse" January 2009
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Dean Lundell - A capital markets professional with over thirty years of experience and a licensed Commodity Trading Adviser.
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