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While some defined contribution plan sponsors may say that they want to keep it simple and “just go passive,” we would suggest that there really is no such thing as a passively managed defined contribution (DC) plan or, for that matter, even a passively managed target-date strategy. Many active decisions to define the structure and select the suitable investments for a plan must be made by the plan sponsor in its role as a settlor or as an Employee Retirement Income Security Act (ERISA) fiduciary. In the role of fiduciary, sponsors must meet multiple duties of care, including acting with the skills and diligence of a prudent person as they structure the plan (with a focus not on results but rather on process) and diversifying plan investments in such a manner that the risk of large losses is minimized. To fulfill these legal duties, plan sponsors must make a number of critical decisions that could determine whether or not their plans will succeed; that is, the plans will help enable participants to meet their future retirement liabilities.
Insurance solutions such as deferred or variable annuities also may offer a degree of market protection (subject to certain conditions), longevity insurance, or both. We have found interest in insurance solutions to be high, yet there are often many obstacles that still stand in the way of most plan sponsors moving forward with them. Plan sponsors may be reluctant to add these options, given their concerns with cost, transparency, fiduciary oversight, and the risk of insurance company default. Still, increased support, especially from the government, may encourage more plan sponsors to consider adding these risk-reducing solutions.
Conclusion: All DC plans require active decision-making
All investments carry risk. The risk-free rate can be considered the return on an investment that,in theory, carries no risk. Risk-free assets usually refer to short-dated government bonds.
PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features.
All investments contain risk and may lose value. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Tail risk hedging may involve entering into financial derivatives that are expected to increase in value during the occurrence of tail events. Investing in a tail event instrument could lose all or a portion of its value even in a period of severe market stress. A tail event is unpredictable; therefore, investments in instruments tied to the occurrence of a tail event are speculative.
Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that aposition could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested.Swaps are a type of derivative; while some swaps trade through a clearinghouse there is generally no central exchange ormarket for swap transactions and therefore they tend to be less liquid than exchange-traded instruments. There is noguarantee that these investment strategies will work under all market conditions or are suitable for all investors and eachinvestor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) thatadjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the GlidePath is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longertime horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and theyare able to make larger contributions (depending on various factors such as salary, savings, account balance, etc). Generally, older participants and eligible retirees have shorter time horizon to retirement and their investment risk level declines as preserving income wealth becomes more important.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject tochange without notice. This material has been distributed for informational purposes only and should not be considered asinvestment advice or a recommendation of any particular security, strategy or investment product. Information containedherein has been obtained from sources believed to be reliable, but not guaranteed.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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