According to the white paper “Keepin’ it Real: Inflation Risk as an Asset Allocation Problem,” from J.P. Morgan Asset Management, defined benefit (DB) and defined contribution (DC) plans are affected differently by inflation.
Maddi Dessner, client portfolio management executive director, J.P. Morgan Asset Management and co-author of the white paper, explained to PLANSPONSOR: “DB plans are in a sense exposed largely to their liabilities. As their liabilities increase their funded ratios decrease. Now due to the fact that inflation expectations are incorporated into long-term and medium-term interest rates, rising interest rates can be a good thing. DB plans can look at inflation as a positive development.”
On the other hand, DC plans are contributed by individual participants, and have a different effect from inflation. “It’s very much deteriorating purchasing power that participants need to protect against,” said Dessner. She adds that investors are affected the most by inflation in the last 10 years prior to retirement. “When you get into those shorter time horizons, participants are exposed to inflation. So it is in those shorter periods that participants need to put allocation into inflation sensitive asset classes.”