PLANADVISER - March/April 2020 - 28

investment-oriented
The Risks of DC Investing
Some risks are 'participant experienced' and some 'participant controlled'
P
eople face a long succession of risks in their lives, and
while many of these possible threats never go away,
some can be shifted around and compensated for.
Some materialize all at once-damage from a car accident,
home fire or bank failure. The insurance industry calls these
discrete events " occurrences, " and they can be protected
against by some sort of defined policy or coverage program.
The risks that face workers funding their own retirement
through defined contribution (DC) plans are quite
different: Rather than happening all at once, the risks
are less distinct and evolve over a career. While difficult
to measure, they are genuine nonetheless; however, plan
sponsors and their advisers can take steps to ensure best
possible outcomes through the design and implementation
of the sponsor's DC plan.
In a world of defined benefit (DB) pension plans, the
complexity of retirement risks is borne by corporate plan
sponsors or governments, which have fleets of actuaries,
consultants and advisers to manage these plans. Participants
just see periodic benefit statements and, ultimately, a stream
of retirement income checks; the risks are largely invisible.
Under DC structures, however, participants are handed
a bundle of risks. Retirement experts at J.P. Morgan Asset
Management (JPM) had defined a structure they advanced
in a March 2015 white paper- " Off Balance: The unintended
consequences of prioritizing one risk in target-date fund
[TDF] design " -that remains relevant today.
" There are a multitude of risks a participant will face;
they're all related, and you don't know what the timing
of those will be, " notes Dan Oldroyd, a managing director
in the Manhattan office of JPM and an architect of its risk
framework.
Some risks are incoming, or " participant experienced, "
in that they are thrown at participants by the markets and
the world at large-sharp falls in stock prices; shocks to
the bond market when interest rates lurch higher; or a drop
in portfolio purchasing power from the bite of inflation, all
of which can be rolled into the longevity risk of outliving
one's savings.
Other risks are outgoing, or the result of the participant's
own doing, through low saving rates, poor investment choices
or early withdrawals, all hampering accumulation of capital.
The spotlight most often falls on market and event risk,
or the dramatic declines in stock prices, which make up the
lion's share of the potential risk in retirement portfolios.
During the decade just passed, investors had few reminders
of market risk, as the S&P 500 turned in solid gains in seven
out of 10 years and only small losses in the rest.
But a look at the last 80 years of market history shows that
patterns change. From 1939 through 2009, each decade saw,
28 | planadviser.com March-April 2020
Art by Carol Rollo
http://www.planadviser.com
PLANADVISER - March/April 2020

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