In an age of uncertainty, plan sponsors should continue to focus on protecting participants’ savings through making careful investing decisions and maintaining strong communication tactics.
That was one of the overarching themes at Pensions & Investments‘ Defined Contribution West conference Oct. 23-25 in Carlsbad, Calif., as industry experts discussed how to handle rising inflation, increasing cybersecurity attacks, and environmental, social and governance investing, among other topics.
“This is not the time to put your money under the mattress,” said Renee Bowen, professor in the Department of Economics and School of Global Policy and Strategy, and director of the Center for Commerce and Diplomacy at the University of California, San Diego.
Delivering the keynote presentation on Oct. 24, Ms. Bowen noted that a never-ending cycle of bad news can lead to feelings of “bewilderment,” but there is still room for opportunity in these hard times.
She emphasized the importance of trust between employers and employees, and she encouraged listeners to “never let a good crisis go to waste.”
Target-date funds, for the most part, are correctly allocating for inflation, according to five panelists that addressed the topic on Oct. 24.
“This inflation thing for all practical purposes is noise,” said Randy Welch, managing director and portfolio manager at Principal Asset Management.
Mr. Welch encouraged participants to stay the course because long-term “equities are still the best inflation hedge,” he said.
Venkat Balakrishnan, managing vice president of asset allocation for MissionSquare Retirement, added that while participants should stay the course, they and their employers should be careful about what their target-date funds use for inflation protection because even inflation-protection assets, such as TIPS, are sensitive to interest rates.
Mr. Balakrishnan said he believed that alternative investments, such as private credit and private real estate, in target-date funds could help in the current highly volatile, inflationary environment because the investments are good inflation hedges over the long run.
Mr. Welch added that there are other ways to get exposure to alternatives through investments in commodities and public infrastructure, things that he said “are going to be more publicly traded but have a positive correlation to inflation.”
The outsourcing of defined contribution plans to OCIO managers has increased as a result of market volatility, according to a panel held on Oct. 25.
“Market volatility and market complexity generally have dialed up the interest in the OCIO model,” said Holly Verdeyen, a partner and U.S. defined contribution leader at Mercer.
The top OCIO managers, for instance, saw a 70% increase in the number of defined contribution clients and 113% growth in assets from 2018 to 2022, said panel moderator Nikki Pirrello, Pensions & Investments‘ chief operating officer, citing P&I data.
Ms. Verdeyen attributed the increase to a tight labor market as well as high turnover in human resources and benefit teams, which she said makes it difficult to make decisions in a timely manner.
In a typical plan investment committee, it takes an average of three meetings to make an investment manager change, “a long time” in today’s volatile market environment, Ms. Verdeyan said.
Plan sponsors also want to do more “to be relevant to today’s workforce and be relevant at the corporate level,” but don’t have the capacity to do so, she said.
Ms. Verdeyen predicted that corporate sustainability objectives, such as ESG and diversity, equity and inclusion, are going to make their way into DC plan investment lineups in the coming years, and OCIO providers can help with timely decision-making around those types of topics.
A lively panel discussion on the highly polarized topic of ESG investing focused on what moderator Thomas Cook, a senior consultant at NEPC, described as “bringing it back to the middle.”
ESG investing is not about “not investing in this or that industry” but rather about “how it can be used as a risk-return economic factor within investment processes,” he said.
Liana Magner, executive vice president and head of retirement and institutional at Natixis Investment Managers, echoed the same sentiment, saying that the old view of negative screening and social responsible investing has been replaced with “positive screening” or “what’s best in class from an ESG perspective within this bucket of stocks that you have to choose from.”
As long as plan fiduciaries place financial risk and return considerations ahead of any social agenda, they should feel comfortable in implementing an ESG investment strategy, she said.
Steve Slakey, vice president, chief financial officer and treasurer of industry trade group Western States Petroleum Association, also talked about moderating the polarization around ESG investing. Joking that he felt a bit like a Philip Morris representative at an American Lung Association event, Mr. Slakey noted that the current economy is not sustainable without oil and gas.
“Transition to a green economy is not going to be easy, it’s not going to be quick, and it will certainly not be cheap,” he said.
He warned that “leaving the world a better place” is not going to happen without “constructive dialogue among the affected parties.”
“The dialogue of saying, ‘divest from oil and gas’ or worse ‘just end oil and gas’ is counterproductive to the transition to a green economy,” he said. “Oil and gas has to be part of that transition.”
In a panel on “Navigating the Fiduciary Responsibilities of Plan Sponsors,” four panelists discussed how they fulfill their fiduciary duties, which includes maintaining a dialogue with those affected by their decisions.
Ryan Haislup, a pilot and member of the union-retirement and insurance committee at United Airlines, said the committee tries “to maintain a good relationship with the company and other union committee members” so they can have open communication.
He added that pilots can send emails to the committee with any questions they may have or issues they would like addressed.
When it comes to improving financial wellness for employees, effective communication remains an important tool as well, according to a panel on financial wellness education.
Especially for women and other minorities, “speaking to those particular groups in terms of why it is that they are not saving and understanding that” can help companies boost participants’ savings, said Erika Grace, head of financial wellness and digital strategy at Empower.
Ms. Grace noted that many women are caregivers and prioritize their children’s financial needs over their own. However, “being able to speak to somebody about their particular situation” could help change their behavior going forward, she said.
Cybersecurity issues were another major topic of discussion during the conference. At a panel discussion on the topic, Ray Conley, CEO of Benetic, an online platform for advisers, record keepers and other plan service providers, said over half of retirement industry record keepers have experienced breaches in the last few years.
The Department of Labor issued cybersecurity guidance in April 2021, including 12 best practices for plan sponsors and record keepers. According to Mr. Conley, the guidelines are a way to lower the risk of a cyberattack, but they can’t prevent one altogether.
“Here’s 12 things that would be good to make sure, as a fiduciary, you’re checking that your vendors are following to mitigate your risk,” he said. “Now mitigate, I think, is the key word, because you’re not going to prevent it. It’s inevitable.”
Barbara Kontje, director of retirement and smart saving at American Express, echoed this, adding “a breach can happen to anybody…but you need to be prepared to act quickly.”
Ms. Kontje said that one of the best preventative measures is to educate participants on best measures for keeping their accounts secure, as retirement accounts are likely the largest sum of assets that people have in one place.
During his closing remarks, Ali Khawar, principal deputy assistant secretary of the DOL’s Employee Benefits Security Administration, emphasized that responsibility for cybersecurity protection falls on all those involved.
“I view this as an area where…I’m heartened by the fact that there’s a shared commitment, but we all have a really important role to play,” Mr. Khawar said.
Robert Steyer contributed to this story.
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