Retirement planning isn’t just long-term investing, it’s long-term spending, too. How can retirees help insulate the nest eggs they’ve accumulated from the corrosive long-term effects of inflation?
While today’s US defined contribution (DC) plans are good at providing sensible investments for the accumulation phase of retirement planning, many plans need a sensible investment that participants nearing or in retirement can include in their portfolios to offset inflation and maintain the purchasing power of their savings.
Social Security has that built into its design, providing potential annual increases based on the rise in the Consumer Price Index (CPI). But for many DC participants, their plan savings will likely play a larger role in their retirement planning than Social Security. So they would benefit from adding a component that responds well to inflationary pressures—a diversified basket of real assets (e.g., natural resource stocks, commodities futures, real estate).
We believe this should be a compulsory element in any target-date glide path as workers move to and through retirement. In a fully diversified portfolio, the volatility of real assets could be tempered by an appropriate allocation to Treasury Inflation-Protected Securities (TIPS) as well. For example, a professionally managed target-date glide path would likely start incorporating TIPS in the decade or so leading up to retirement, gradually increasing the allocation modestly as the overall portfolio becomes more conservative.
But there are many participants who still like to actively construct their retirement portfolios. For them, real assets should be available as an option on a DC plan’s core menu. And real assets should also be available to retirees who may choose to roll their assets over into an IRA.
But real assets, on their own, can be quite volatile—much like equities. Active investors in or heading toward retirement may not be prepared for the potentially high volatility of real assets.
That’s where DC plan sponsors can help. The retirement industry often turns to “educating” participants as the answer for how to get them to invest sensibly. While education will always be a component of DC plans, we believe it would be disingenuous to think education has actually overcome any participant investing issues to a significant degree.
To offer a stand-alone real asset option on a DC investment menu could be problematic, because participants might be overly attracted to the substantial gains real assets have historically produced while not paying enough attention to the inherent volatility risks. That’s why we feel that a core menu option of real assets would be more suitable if it included a built-in volatility-moderating element, like TIPS.
All in all, this more balanced approach makes the inflation-fighting benefits of real assets available to retirees, but does so in a measured, sensible way.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Richard A. Davies is Senior Managing Director of Defined Contribution at AllianceBernstein (NYSE: AB).