A MetLife news release said the top four risk factors received the vast majority of attention, while the bottom four items received “nearly negligible readings. ” For example, asset allocation (the top factor) was ranked most important 54% of the time, while 13 of the remaining 18 factors were picked as most important fewer than 30% of the time.
Looking separately at the responses of individual plan sponsors, the gap between most and least important risk factors is even greater. Only 26% of the individual respondents rated a majority of risk items (i.e., more than half) as important. Every respondent did not consider at least five of the 18 risk factors (assigning at least five an importance rating of 0.00%).
Lesser Ranked Risks Harder to Measure
According to the announcement, plan sponsors ranked asset allocation, meeting return goals, and underfunding of liabilities as most important, all of which MetLife said are relatively easy to model and measure. The risks ranked least important by plan sponsors are slower to change, more difficult to model/measure, and may be less well understood, including longevity risk, mortality risk and early retirement risk.
“This research suggests that many plan sponsors tend to view and manage risks individually rather than holistically,” said Cynthia Mallett, Vice President of MetLife’s Institutional Business, in the news release. “Over time, the approach of focusing on some risks – and ignoring others – could have serious repercussions, including unnecessary volatility in earnings and/or cash flow with the potential to adversely affect the ability of the plans to provide retirement security to plan participants.”
Gap Between Importance, Success
The MetLife study also measured the effectiveness of dealing with the risk factors. The announcement said the study found a significant gap between importance and success in dealing with each risk issue.
Nearly two-thirds of the study respondents report some degree of inconsistency between importance and success, and about one of every six reported significantly greater discrepancies. Of the 18 risk factors studied, eight were given an above-average importance score but below-average success score or vice versa.
The MetLife U.S. Pension Risk Behavior Index was conducted by three research partners – Greenwich Associates, Bdellium Inc. and Pension Governance, Inc. – during June through August 2008. The study consists of a quantitative telephone survey of 168 large plan sponsors (73 of which reported defined benefit assets of more than $1 billion), supplemented by a series of in-depth individual interviews and rigorous statistical analysis.