Retirement plan fiduciaries face new risks in historically safe investment options

InvestmentNews

By Keith Soranno November 9, 2008

In the wake of the market meltdown and the current credit crisis, 401(k) plan participants are agonizing over the dramatic decline in the value of their portfolios. Investment options previously considered safe — fixed-income and cash equivalents — have proven to be highly volatile.

And, while investors in their 20s and 30s may have time to make up even a 30% loss, a boomer retiree can suffer permanent financial damage with a 10% loss. The underlying fact is that all variable investment options, even fixed-income and cash-based options, carry market risk, and always have.

Plan sponsors typically have been very concerned about lawsuits pertaining to suitability of equity investment options ... and less concerned about the cash and fixed-income options and the holdings within those options. ...

They have focused intently on benchmarking the equity funds versus their peers and indexes, with little concern about the potential volatility of fixed and cash options. In this environment, fiduciaries need to focus at least as much effort on fixed-income and cash investment options as they do on the equity options in their retirement plans.

MITIGATING RISK

Plan sponsors can mitigate this risk by taking an active look at the overall makeup of their fixed-income and cash portfolios. Here are some steps to take:

• Ask your vendors and managers for their views on the market and their investment strategies for weathering the storm.

• Add additional fixed and cash accounts that allow your plan participants to fully diversify. If necessary, add options whose holdings are materially different to ensure that participants have a well-diversified safe harbor to help weather financial storms.

• Monitor your fixed-income investment options closely, applying the same logic to monitoring these options as you do with your equity strategies.

While risk in equity funds is more transparent than ever in retirement plans, fixed-income and cash accounts may be the next big wave of fiduciary exposure for plan sponsors. They need to be aware of all risks and strategies they can use to reduce their exposure, then take steps to offer diversity and reduce risk.

Keith Soranno is a regional sales executive with Securian Retirement Distributors of St. Paul, Minn.