Inflation has been calm for so long that many retirement investors have overlooked its potentially corrosive effects. But for defined contribution (DC) plan portfolios designed to last decades, we believe inflation remains one of the greatest potential risks, making inflation-hedging assets critical. In fact, the vast majority of respondents to the 2017 PIMCO DC Consulting Support and Trends Survey supported offering a variety of inflation-hedging strategies in a DC plan’s core investment menu or in a custom target-date strategy.

Although inflation may seem a distant threat, even modest inflation can prove devastating to retirees who depend on income that does not adjust with inflation. After 20 years of 3% annual inflation, for instance, $50,000 in retirement income would buy only about $27,000 worth of goods and services; with 5% inflation, the value shrivels to only about $18,000.

One way to help protect against the threat of inflation is to consider a broad set of diversifiers including real assets like Treasury Inflation-Protected Securities (TIPS), commodities and real estate investment trusts (REITs). These asset classes tend to have low correlations to stocks and bonds and may provide portfolio diversification benefits during inflationary periods, when stocks and bonds may suffer.

In addition to a stand-alone allocation to TIPS, the majority of consultants surveyed recommended that plan sponsors gain real asset exposure through a multi-asset approach.

Now could be an opportune time to act. PIMCO expects U.S. inflation to average 2% over the secular horizon of three to five years. After years of missing their inflation targets, central bankers appear especially determined to achieve their price-target objectives. The following table shows the percentage of consultants who recommended specific inflation-fighting assets in stand-alone and blended allocations.

PIMCO offers plan sponsors a full range of inflation-hedging investment solutions to complete the defined contribution menu. Solutions include single asset classes (TIPS, Commodities and REITs), multi-asset class blends such as PIMCO Inflation Response Multi-Asset Fund and outcome- oriented, “inflation plus” solutions such as PIMCO All Asset Fund.

For more on PIMCO’s thinking on inflation, please visit “Inflation – A Perennial Investor Concern.

The Author

Stacy Schaus

Head of Defined Contribution Practice

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Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.

A word about risk:

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. 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. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss.

For risks associated with a particular Fund, please refer to the Fund’s prospectus.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein 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. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2017, PIMCO.

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