Volatile Market Presents Challenges for DB Plan Investment Decision Making

October 5, 2010 (PLANSPONSOR.com) - At a time when U.S. pension plan funded positions have been battered by volatile equity markets and falling interest rates, many defined benefit retirement plan boards and investment committees take months to execute investment decisions, a Mercer survey has found.

More than half the respondents (55%) take from one to three months to execute a decision to change asset allocation within their pension portfolio or to make a manager change.  Approximately a quarter of survey respondents take more than three months to execute such decisions. Only 21% of respondents said that they could execute such changes in less than one month, according to a news release. 

One fifth of survey respondents said they are aware that they had missed investment opportunities due to the time it takes to make or implement investment decisions.  

In addition, the survey found 64% of respondents indicated they will likely increase the monitoring of their plan’s funded status.  Thirty-one percent said they will seek to de-risk their DB investment portfolio either proactively by a pre-determined schedule or immediately.  A larger percentage (41%) of the respondents plan to take a “wait-and-see” attitude and try to de-risk on an opportunistic basis.  

The news release said very few of the organizations surveyed plan to hire additional staff to monitor more proactively their investment portfolio and funded status. Instead, some 15% of respondents said that they are considering outsourcing investment decisions in the next twelve months.  

“We believe the trend to investment outsourcing will accelerate due to market conditions and the drive to reduce pension plan financial risk over time,” said Kim Plummer, U.S. leader for implemented consulting at Mercer, in the news release. “The practice of evaluating investment strategy infrequently carries great risk, especially given how quickly markets are moving in the present environment.  

Mercer’s survey was conducted in June 2010 of 124 organizations with defined benefit pension plans.  Sixty-eight percent of respondents are corporate DB plan sponsors, 18% are not-for-profit organizations, and 8% are government entities.