Plan sponsors tentative in approach to risk

Plan-sponsors-still-tentative-in-approach-to-risk-1The financial crisis of 2008–2009 forever altered the way retirement savers and retirement plan sponsors view risk. Years later, plan sponsors are more aware of key risks, but haven’t taken much action to reduce them, a Putnam study has found.

Plan sponsors want to help
In Putnam’s study, two findings leap off the page: Plan sponsors know about the risks, and their plan participants hunger for solutions. In fact, more than a quarter (27%) of plan sponsors surveyed care “a great deal” about helping participants minimize the risks to their income in retirement.

Vulnerable to risk while misunderstanding it
The economy and markets have surged since the financial crisis, but the recovery has been slow, periodically fragile, and punctuated by volatility. Understandably, many plan sponsors are feeling vulnerable.

Misperceiving the threat
Misperceptions abound regarding the magnitude of the threat. Plan sponsors consider health-care expenses, negative returns late in retirement, and market volatility as greater threats to a retiree’s income than negative returns early in retirement. That view is flawed.

As noted in a Putnam’s white paper, “Getting the target date right: What plan sponsors need to know,” negative returns early in retirement, known as sequence-of-returns risk, are one of the biggest threats to retirement income.

Awareness alone won’t work
Being aware of risks does not always translate into specific action aimed at mitigating them. Plan sponsors have made few concrete changes when it comes to instituting risk management measures in their 401(k) plans.

About half or fewer haven’t taken the proper steps to adjust their fund lineups — for example, replacing riskier funds with more risk-appropriate offerings or establishing a more conservative glide path in their target-date fund offering. Moreover, 2% of plan sponsors have made no changes since the financial crisis of 2008–2009.

Developing an action plan
Clearly, much work remains for retirement plan sponsors to manage investment risks. What specific steps should plan sponsors take to inoculate participant portfolios against risks, including excessively risky investment strategies, market volatility, and sequence-of-returns risk?

 


whitepaper_cta_grRetirement plan professionals:

Download the Putnam white paper, Five years after the meltdown: What has changed in DC lineups?


The Putnam study, organized in partnership with Brightwork Partners, surveyed for-profit organizations that offer a 401(k) plan with assets of $25 million or more. Conducted online between November 8, 2013, and December 13, 2013, the survey compiles data provided by 254 senior executives involved in evaluating investments available to participants in their organization’s retirement plan.

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