September 17, 2012 (PLANSPONSOR.com) – Quantifying key retirement
risks is the first step plan sponsors can take to help participants deal with
them, according to a report.
Some plan sponsors may think they have no way to know or
influence how much money participants will save for retirement, making it “impossible”
to achieve objectives and quantify risk, but this is not true, Rod Bare,
defined contribution consultant for Russell Investments, told PLANSPONSOR. Bare is the author of the report
“Quantifying Key Risks in Retirement,” written on behalf of the Institutional
Retirement Income Council (IRIC).
Even basic assumptions about savings trends can help
tremendously to improve a plan, Bare said. Plan sponsors must keep in mind that
helping participants is not necessarily about investments; it is about finding
ways for participants to save, and implementing tools – such as automatic
escalation – that can help them achieve this goal. “Finding ways to boost
contributions is equally, if not more impactful, [than investment selection],”
Here are the six most common risks, according to Bare, and
how plan sponsors can tackle them:
Sequential risk highlights the importance of the sequence of investment
returns, especially for a retiree making regular withdrawals to cover expenses.
Poor returns early in retirement are much more harmful to
one’s retirement prospects than poor returns later in retirement, the report
said. A participant heavily invested in equities at retirement is exposed to
excessive sequential risk.
Plan sponsors can mitigate participants’ sequential risk by
encouraging them to invest more conservatively during the years close to
retirement. This can be through education, asset allocation solutions like
target-date funds (TDFs) or guaranteed retirement income products.