Oct 18, 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 threatening plan success. ---
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.
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.
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