Some may argue that risk management only makes sense for investors who are close to retiring but recent research shows this simply isn’t the case. Nearly 60% of Generation Y investors – those furthest from retirement age – describe themselves as conservative investors, reinforcing that controlling risk is a concern for investors of all ages.
Conservative investors are typically participants that have the following characteristics:
- Close to retirement;
- Just entered the workforce or are younger participants (i.e., Generation Y, Millennials, etc.);
- Have high voluntary allocations to Stable Value and Money Market options; and
- Have few assets outside of the plan.
Since the early 1950s, attempts to manage a portfolio’s risk have relied heavily on asset allocation. As markets become more global and asset classes are increasingly correlated in times of crisis, traditional asset allocation alone is an insufficient risk management approach.A vast majority of plan participants seek easy choices to help them save and boost retirement readiness and income. Today, many conservative savers are looking to take an approach to minimize risk and reduce the levels of volatility present in their portfolios. Further, plan providers and sponsors are helping participants combat the effects of volatility in their retirement plans through innovative investment tools and techniques. Many of these offerings resonate among participants with a more conservative mindset, but they can help all participants feel more confident about staying invested in their employer-sponsored retirement plans.
 Merrill Lynch Wealth Management Affluent Insights Quarterly Survey, 2011
Conservative Saver Retirement Plan Toolbox
Risk-Managed Target-Date Funds
Target-date funds, available as Qualified Default Investment Alternatives (QDIA) options through retirement plans, have historically provided risk management through asset allocation, reducing exposure to risky assets over time so participants stay invested. In 2008, as target-date funds came under scrutiny, some 2010 target-date funds lost more than 30% of their value, causing Baby Boomers to delay and redefine their retirement. Since 2008, the Department of Labor has stepped in and released informal guidance for plan fiduciaries selecting target-date funds to offer in retirement plans.
As a result, retirement plan providers and fund companies now offer custom target-date funds that include alternative asset classes as a way to infuse more diversification into the fund and help mute volatility and losses. Plans may offer a dual glide path of risk-managed target-date funds to help alleviate steep losses and protect participants. A dual glide path includes a target equity allocation and a target risk level, each moving lower as the investor ages. A flexible glide path can cover a broader range of risk preferences, and gets more aggressive when volatility is low and more conservative when volatility is high.
These QDIA investment options also help plan sponsors fulfill their fiduciary obligations. The options provide decreased volatility for participants so they can feel comfortable with their investments and stay the course for the long-term without having to worry about ongoing investment decisions. Risk management also allows for more consistent returns, and reduces the risk of large draw-downs as participants approach retirement.
Stable Value Solutions
Stable value solutions are options that conservative investors may want to include as part of an overall diversified portfolio. Stable value products are tailored to meet the needs of participants at varying levels of risk tolerance and deliver a unique combination of liquidity and principal preservation. While all stable value products deliver the same basic benefits, there are differences in structure, levels of guarantees, as well as some contractual features, which help plan sponsors select a stable value product that is best-suited to meet the needs of their participant population.
Workforce-oriented Investment Line-upsInvestment managers are working with plan providers to design investment line-ups for retirement plans that meet the specific needs of a plan sponsor’s workforce. Workforce-oriented investment line-ups help provide participants with the diversification needed for an effective balance between risk and return, as well as an opportunity to develop a long-term investment strategy. Workforce lineups can be distinguished from one another by the number of investment options, percentage of equity options, number of alternative strategies and investment mandates. Line-ups are selected with a plan sponsor’s workforce profile and its varying levels of characteristics including financial literacy, investment experience, sponsor-driven education efforts, participant engagement and time horizon.
Target-Date Series Research Paper: 2009 Industry Survey, Morningstar
Providers are offering in-plan income guarantee solutions that can give participants a guaranteed income stream at the time of retirement. Plan sponsors can envision in-plan retirement income solutions as a new or hybrid asset class as part of their employer-sponsored retirement plan program. In early 2012, the Department of Labor and Treasury provided guidance to improve retirement security through the promotion of longevity insurance and annuities in retirement plans. This has paved the way for innovative product development and adoption of guaranteed income solutions within 401(k) and other defined contribution plans.
Guaranteed Withdrawal Benefits (GWB) guarantee a stream of income while protecting participants in a down market just prior to, or shortly after, they retire. Most GWBs help participants receive a guaranteed stream of income in retirement with the option of access to assets for emergency withdrawals. GWBs can be integrated into target-date solutions that have asset allocation strategies.
Lifetime income solutions offer participants both flexibility and a lifetime guarantee. When used with a target-date fund and risk management, the participant retains market exposure to provide growth potential that can be hedged against inflation, reduce the risk to downturns in the market and offer a steady income stream in retirement. Plan sponsors should be aware of the fees associated with guarantees and that the guarantees are subject to the claims-paying ability of the issuer.
Importance of Participant Retirement Plan Check-Ups
One of the most effective ways participants can manage risk and volatility is to conduct an annual plan check-up with a financial professional. Reviewing investments and allocations annually can help participants understand where their portfolio may be vulnerable to risk and what can be done to help mitigate losses in the event of a market decline. Retirement plan education, online tools or one-on-one support can also help participants make sure investment strategies are in line with overall retirement goals and individual risk tolerance. Plan sponsors that place emphasis on participant retirement communication and education can also help conservative savers understand the value that investment strategies and plan innovation can provide.
Advisers and consultants should work with providers that offer flexible risk and volatility strategies within employer-sponsored retirement plan programs and help make it easy for savers with varying degrees of risk tolerance. A retirement plan that is designed with options for conservative savers will ultimately help all participants feel confident in their ability to achieve better retirement outcomes.
- Daniel Hayes, Vice President and Head of Funds Management, Lincoln Financial Group
- Eric S. Levy, Senior Vice President and Head of Products and Solutions Management for Retirement Plan Services, Lincoln Financial Group
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations.
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