To minimize their fiduciary liability, retirement plan sponsors should offer a number of lifestyle or risk-based options on their investment menus, according to a research paper by Manning & Napier, an investment advisory firm.
Every employee is in a different place when it comes to saving for retirement, so by offering a number of risk-based options, employers are more likely to meet everyone’s retirement objectives. Employees who have many years ahead of them to save for retirement are more interested in portfolios with greater volatility, while those closer to retirement are more risk averse and interested in less volatile areas of the market, like bonds and cash.
Lifestyle options are typically grouped into a family of options with different investment and risk objectives.
Manning & Napier believes there are three basic portfolio risks that can prevent participants from reaching their investment goals: Capital risk, the risk of a sustained decline in the market value of the portfolio over the investor’s time horizon; reinvestment rate risk, the risk that, in the future, the assets of the portfolio will be reinvested at a yield lower than the current yield; and inflation risk, the risk that inflation will increase at a greater rate than the value of the portfolio, thus reducing the real worth of the assets.
Plan participants can better manage this risk by having a host of options with different risk options.