http://www.reit.com To reach retirement income goals especially in an anticipated lower return, higher volatility environment, defined contribution (DC) plan participants need a more conservative, diversified and risk-managed approach to investing--fortunately this is attainable especially through professionally managed target-date strategies.
Stacy Schaus, senior vice president and defined contribution practice leader for PIMCO, spoke with REIT.com recently about the DC market, the role REITs should play in the plans, and advice for plan sponsors. She also discussed the paper she recently co-authored, "Designing Outcome-Oriented Defined Contribution Plans: Maximizing Absolute and Risk-Adjusted Returns for a New Normal Economy."
Schaus said there are three areas plan sponsors should focus on to improve retirement success for their DC participants: help participants increase savings rates; offer professional asset allocation; and improve risk management.
"The first step is to get them into the plans," Schaus said. "Auto enrollment programs have helped increase participation rates. Defaulting in at the match level, which is typically 6 percent, will make a significant difference. Then get them saving more, which can be done by pumping up their savings rate via auto escalation at a 2 percent rather than 1 percent clip."
Schaus said that plan sponsors should offer professionally managed asset allocation, for instance target-date strategies. She said these strategies allow professionals to determine the asset classes, asset mix, and how to change it over time.
"Whether packaged funds or open architecture, these strategies tap into the expertise of plan sponsors, consultants or other investment experts to deliver better outcomes than participants may achieve on their own," Schaus said. "What's important is the professional oversight opens the door to more institutional or 'DB-like' investing, allowing inclusion of important diversifying asset classes such as TIPS, commodities and real estate."
Risk management is also critical to improving outcomes for participants, Schaus said.
"By placing the asset allocation and management in the hands of professionals, the door is open to evaluate and manage risk with more advanced techniques and skill. This includes introducing more assets that are likely to add important diversification to reduce overall risk, implementation of tactical asset allocation to enhance returns, as well as introducing strategies to cushion participant assets in the event of a market shock," Schaus said.
PIMCO is a believer in a real assets strategy, which includes healthy allocations to asset classes such as commodities, TIPS and REITs because most workers in the U.S. will depend on their DC plan to provide the primary source of retirement income beyond social security.
"We know that perhaps the most significant risk retirees face is the erosion of purchasing power of their hard-earned dollars," she said. "To address this risk, we want to make sure that worker's DC savings keep pace with inflation as they approach retirement and more importantly as they begin drawing down these assets during their retirement years."
With this objective in mind, Schaus said PIMCO seeks assets that are most likely to keep pace with inflation. "TIPS provide some inflation protection over time, with low volatility and low credit risk. Commodities, while more risky, provide exposure to food and energy, which are the most volatile components of inflation," she said. "And real estate provides some diversification as well as some protection from longer term inflation."
PIMCO's recommended target-date fund glidepaths feature allocations of up to 15 percent to REITs.
"During accumulation, while a participant is still working, real estate can provide some diversification as well as longer-term inflation protection," Schaus said. "Also, the liquidity of REITs is a great way for a DC plan to get its real estate exposure."
By Kurt Walten
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11/2/2011 The Pulse : Mainland Moneyby RTHK344 views
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