How Sponsors Can Address Retirement Risks

September 17, 2012 ( – Quantifying key retirement risks is the first step plan sponsors can take to help participants deal with them, according to a report.

By Corie Russell | September 17, 2012
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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],” he said.

Here are the six most common risks, according to Bare, and how plan sponsors can tackle them:

Sequential Risk  

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.