Defined Contribution Plan Sponsors

Targeting the Real Risk to Retirement

In this article from PlanSponsor magazine, Asset Allocation Portfolio Manager Rick Wurster explains how including inflation-hedging components in a DC plan menu or target-date fund can help prevent long-term damage to investors' wealth.

PlanSponsor: How big a risk is inflation?

Wurster: I think the risk is meaningfully higher today than it has been in years because of the monetary stimulus and the Fed's desire to prevent deflation.

PlanSponsor: Why is inflation so important in the defined contribution space?

Wurster: Inflation is the single biggest risk that retirees face. When you're a retiree, you no longer have a salary offset to help your income keep pace with inflation, and you are highly reliant on your assets. To illustrate the impact of inflation, I modeled two scenarios: one in which an individual retired in 1929, at the start of the Great Depression, and a second in which an individual retired in 1966, at the start of the Great Inflation (see chart). It turns out that retiring in 1966 was dramatically worse than retiring in 1929.

PlanSponsor: How can DC plan sponsors provide participants with more protection against the impact of inflation?

Wurster: A traditional portfolio of stocks and nominal bonds typically does poorly in periods of inflation. Plan sponsors need to incorporate a new set of assets to help participants hedge inflation, including Treasury Inflation-Protected Securities (TIPS), commodities, and inflation-sensitive equities.