Retirement plan sponsors arguably find themselves in the best financial positions since before the global financial crisis — despite nearly two years of pandemic-induced volatility in the economy and markets.
In many ways, it has been stunning to see the growth amid the precarious position the global economy has faced since the spread of COVID-19 began in early 2020.
Following 6.6% growth in the year ended Sept. 30, 2020 — during the onset of the pandemic and subsequent vast central bank assistance — assets of the 1,000 largest U.S. retirement plans grew by 16.9% in the latest year ended Sept. 30, one of the highest annual rates in the past 30 years. Assets are up more than 50% in just five years.
Assets of defined contribution plans within the 1,000 largest plan sponsors were up a whopping 69.3% over the past five years. The longtime shifts to equity-heavy target-date funds and passive equity options have paid off in helping participants get closer to achieving a secure retirement.
With concerns around inflation, rising interest rates, and overheated equity and private market valuations, the next step for retirement plan sponsors very well could revolve around securing the huge gains over the past several years. Many corporate pension plans already find themselves on cruise control, learning lessons from the precipitous funding drop that came with the global financial crisis. Now, with many corporate plans near or at 100% funding, assets are being parked in liability-matching investments or being shipped off to insurance companies; the average asset allocation had nearly 50% in bonds as of Sept. 30.
Public pension plans have come a long way in funding but are now more reliant on equity markets and alternatives. Whether the blistering pace of commitments to private equity and private credit, among other alternatives strategies, will continue to pay off for investors or not, there is no mistake that a hunt for yield is on in what are expected to be tepid core bond markets.
But this growing reliance on investments in illiquid private equity and credit could backfire, once again putting a strain on government budgets should markets turn. It's important for public plans to do risk management exercises and work on insulating their portfolios from the kind of pain inflicted in past market downturns.
How plan sponsors navigate the coming year of inflation, central bank tightening and high valuations — already following a rough January across many markets — will go a long way in determining their long-term outlook. After years of big growth, risk measures might be put to the test this year.
