In Face of Volatility, Diversity Rules in Retirement Plan Menus

Experts discuss how to diversify—and remain calm—despite the headlines.


What a difference a weekend makes.

In the opening months of this year, the steep market drops of 2022 appeared to be fading. Inflation, though persistent, was levelling. The job market was doing well. There was talk of recession, but it was to be a controlled one, inflicted in part by the Federal Reserve’s continued interest rate hikes. Then, on March 10, the country’s 16th-largest bank suddenly failed in a matter of days.

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“A significant tightening of credit conditions across the economy seems likely,” Stephen Auth, CIO of equities at Federal Hermes, wrote in an investment note last Friday. “Make no mistake, while the initial regulatory response was probably sufficient to stave off a panic, it certainly will have a sobering effect on lending activities at all banks in the near future.”

Craig Lombardi, managing director of DCIO and sub-advisory at Virtus Investment Partners, started the year optimistically as he began meetings with advisers and plan sponsors to discuss their plan menus after a rocky 2022. “January presented itself as a great time for plan sponsors and their advisers to go back and look at those menus and make sure they were aligned properly,” Lombardi says.

Although the Silicon Valley Bank situation is unsettling, Lombardi’s world of defined contribution investing takes a longer view. So while he’s talking to clients about it, he says the message will remain the same: “I’m there to help look at risk and look at diversification,” he says. “When you have 30-year time horizon for investments, you take a longer view—you’re less cyclical than when you’re in the market day-to-day.”

Matthew Eickman, the national retirement practice leader for Qualified Plan Advisors, notes that his firm is reminding plan sponsors of the diversity that protects their participants from failures in specific market sectors.

Optimism has continued into early 2023, even in light of SVB and other banking system challenges,” Eickman said by email. “Plan committees are interested in the answer to this question: ‘How much exposure do our plan’s investment options have?’ Once they are reminded that most plans are not directly tied to the performance of one market sector or industry, they are able to quickly return to the performance of the plan’s investors, rather than merely its investments.”

Fixer-Upper

Lombardi says he breaks down his plan menu reviews into a few key areas. One is fixed income, in which the investment manager says he considers credit risk, duration risk and whether the funds allocated to the fixed-income portfolio “have any holes in the bucket.” He then goes on to discuss with advisers adding high-yield options that have generally held up well and can further diversify their participants’ portfolios.

“We’re not saying that people should replace anything, but I challenge advisers and managers to complement what they have, and that is really resonating after 2022,” Lombardi says. “When you look at those high-yield options, they are holding up very well, and as the spreads widen, you have opportunity.”

When it comes to equities, Lombardi says to look for the known players. “I tell them that high quality, really good companies weather storms; speculative investing always has a price to pay,” he says. “If you have challenging times, high quality, great management, sustainable businesses … that is what you want.”

Beyond those investment areas, Lombardi likes sponsors to consider alternative areas such as real estate to further protect from one sector or investment area declining. No matter what, Lombardi believes his guidance can help provide participants with the best chance for long-term success.

“Set-it-and-forget-it TDF’s are fabulous and have a place,” Lombardi says. “But it’s a great opportunity when you have challenged times to reset your menus.”

Asset Class Education

Eickman of QPA notes that the push into target-date funds and managed accounts means that “participants are more diversified.” In turn, plan committees are able to focus on broader market volatility and how it impacts those strategies, as opposed to volatility in specific asset classes.

“With that said, 2022 proved to be a difficult year for growth-oriented equities and fixed income, which means first-quarter reviews have shown lagging performance,” Eickman wrote. “Even though participants use those stand-alone investments less frequently (because they’re more likely to be in a portfolio being managed for them in the form of a target-date fund or managed account), fiduciaries retain a responsibility to understand that lagging performance and consider potential replacements.”

Advisers on his team have responded by making a number of changes involving high-profile growth and fixed-income funds, Eickman says.

“Somewhat surprisingly,” Eickman added, “we didn’t experience an inordinate amount of nervousness” among clients. The calmness might have been because 2022 already teed up lower long-term expectations of the markets. It could also have been due to the fact that fewer participants are managing their own retirement accounts, he said. Then again, “it also could be because the swift recovery in 2020 led to overconfidence that we’d be swiftly recovering from the 2022 market challenges.”

Whether 2023 bounces back at some point is more of a question now due to the banking crisis.

“We are still hopeful this combination can allow the economy to lurch into slower-growth/lower-inflation mode without a full-blown recession,” writes the more daily-focused investment officer Auth. “We’ll see.”

Proposed SEC Cybersecurity Rule Requires Prompt Notice to Prevent Contagion

The SEC reopened the comment period on its cybersecurity rule last week, in part so advisers can take more time to consider its interactions with other rules.


The Securities and Exchange Commission last week decided to reopen the comment period for a proposed cybersecurity rule that would apply to the policies of registered investment advisers and fund companies. The initial proposal was introduced on February 9, 2022, and its original comment period expired on April 11, 2022.

The reopening decision was based in part on the requirement that covered actors confidentially inform the SEC within 48 hours of detecting a significant cyber incident. Additionally, according to Dan Bresler, a partner at Seward & Kissel, the reopening is also due to two new proposals, on Reg SCI and Reg S-P, which cover related topics and could “impact the industry’s comments on the cybersecurity rule.” He adds that, “It also likely signals that a final rule will be coming in the near term.”

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If approved as written, the cybersecurity rule would require broker/dealers, clearing agencies, national securities associations, national securities exchanges and transfer agents to maintain policies which identify and address their cybersecurity risks. They must also review these policies annually in light of possible changes to those risks. They must also inform the SEC of a significant cyber incident within 48 hours of becoming aware of it and make updates to that disclosure if the disclosed facts become materially inaccurate. This disclosure would be completed on a proposed new form, Form SCIR.

The new comment period opened on Tuesday, with the reopening release’s publication in the Federal Register, and continues through May 22.

The Investment Adviser Association said in an emailed statement that it supports reopening the comment period because it needs more time to study the rule’s interactions with others, such as the outsourcing rule.

The day before the SEC’s open hearing, the IAA also hosted a panel at its 2023 Investment Adviser Compliance Conference in which representatives of the SEC discussed the cybersecurity rule with representatives of the investment adviser industry.

Maria Chambers, the chief compliance officer at Klingenstein Fields Advisors, said that the 48-hour reporting and update requirements are misguided. She noted that many of the cybersecurity employees at her firm who are responsible for fixing and mitigating the breach will also be responsible for reporting. This means the reporting requirement essentially becomes a burden and a distraction while an incident is ongoing. It also is not clear what “significant” means in terms of precise events that would require a disclosure to the SEC.

David Joire, a senior special counsel with the SEC’s division of investment management who helped draft the proposal, said the SEC has received many comments which say that the 48-hour requirement is not enough time. He added, however, that many other comments, especially those from investors, said that it is too much, because those investors might be damaged severely in the 48 hours before a significant cyber event was reported.

He also explained that the 48-hour clock starts when a covered actor becomes aware of the cyber event, rather than the moment it takes place.

Joire also elaborated on what “significant” means: In the SEC’s definition, a cyber event is significant if critical operations, such as processing trades, are disrupted. A significant monetary loss or the theft of intellectual property would also qualify.

William Birdthistle, the director for the SEC’s division of investment management, who also spoke at the conference, commented briefly on the proposed rule. He said the importance of the 48-hour element of the proposal lies in the ability of the SEC to prevent “contagion:” If one critical actor is compromised, then that can impede other actors working in the same market segment. Other actors who had critical information compromised by the breach could be vulnerable to attack themselves, so the SEC position is that knowing about such an event quickly could reduce the probability of a contagion effect taking place.

SEC Commissioner Mark Uyeda expressed skepticism of this proposal in his statement at the open hearing. He also questioned the SEC’s ability to prevent contagion, noting that the SEC does not have a “cyber response team” and that the agency could not do much to limit the damage of a major cyber event.

Commissioner Hester Peirce agreed with that sentiment in a statement from last week’s open hearing. She said that a 48-hour notice requirement is a distraction from a crisis.

“Unfortunately, with this proposal, the Commission has apparently decided its role is to be an enforcer demanding that a firm dealing with a cybersecurity attack first and repeatedly attend to the Commission’s voracious hunger for data,” she said. “The Commission stands ready, not with assistance but with a cudgel to wield if the firm fails to comply with a complicated reporting regime, even if the firm resolves the incident by avoiding significant harm to the firm or its customers.”

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