Risks Threatening DC Plan Success

October 17, 2012 ( – Amid market volatility, the changing role of defined contribution (DC) retirement plans, a shrinking work force and longer life expectancy, plan sponsors must tackle more issues that threaten DC plan success.

By Kristen Heinzinger | October 17, 2012
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Three risks exist for DC plans in the current retirement environment: yesterday’s risk, or the growing risk of low risk; today’s risk, that qualified default investment alternatives (QDIAs) need to be better understood; and tomorrow’s risk, or the issue of retirement income, according to BlackRock.

Participant attraction to low-risk products can be the greatest when counterparty risk is the highest, BlackRock executives said in a roundtable led by Chip Castille, managing director and head of U.S. and Canada defined contribution at BlackRock. The primary goal of low-risk products, such as stable value or money market funds, is to provide a stable yield and principal protection to participants. The key is to make sure that the investment committee understands stable value. BlackRock suggests the use of other investment options that provide similar features with fewer risks, such as a declining duration fund. In this fund, risk decreases over time until the maturity date. There is no counterparty risk and it gives the same yield as a stable value fund.

Another alternative for low-risk funds is a target-maturity series, BlackRock said. This series of bond funds with specified maturity dates has a return target based on the term of the fund and market yields. The fund invests in high-quality fixed-income assets with individual maturities targeted to within six months to that of the fund. A target-maturity fund can be an appropriate low-risk option because of the expected return of principal maturity; the term yield for a specified investment horizon; and the relatively low volatility. This option is easy for participants to understand and the returns, over time, are similar to stable value, BlackRock contended.

The “today” risk facing plan sponsors surrounds target-date funds (TDFs) and developing a QDIA framework, according to BlackRock. One of the key ways to address this risk is to ensure TDFs are better understood. The objectives for these funds range from the newer issue of designing a TDF that gets a participant “to” and “through” retirement; to maximize consumption; to provide a reasonable range of investment outcomes; and to deliver a secure floor of retirement income, commonly through the 4% rule. Plan sponsors should consider what they want to accomplish with a TDF, and to communicate how they monitor and select these funds. This way, customization by the provider can serve its purpose, BlackRock said.