Fixed income can be a daunting topic for even the savviest of investors. So, it is no surprise that a recent Edward Jones survey found that 63% of Americans "don't know" how rising rates will affect their portfolios, while another 24% feel "completely in the dark."
Many plan sponsors feel the same way. With all the change coming to the employee benefits space, fixed income may not seem like a high priority. After all, they look to their retirement plan advisors and investment managers to monitor changes in the markets. What do bonds and interest rates have to do with a healthy retirement plan or happy employees? There are at least 3 answers:
Employees will ask.A 2015 Financial Finesse Report found that the two self-selected priorities for baby boomers were: 1) retirement planning (93%); and 2) investing (44%). Many of those boomers will be turning to their employers for information as they anticipate working longer, or transitioning into retirement with part-time employment. Today, the majority of employers provide online retirement planning tools and investment education through plan service providers, but Transamerica Center for Retirement Study research found that only 60% of baby boomers find the online tools and calculators to be helpful. Employees will likely turn to their employer for the information they seek.
There may be fiduciary risk.
Recent litigation suggests that plan fiduciaries must consider changing circumstances and market environments when choosing the plan's investments. Today's fixed income environment is creating significant challenges for participants - especially those nearing retirement, who are more likely to be invested in fixed income solutions. Based on estimates by the Employee Benefits Research Institute, "about a quarter of baby boomers and Gen Xers who would have had adequate retirement income under historical average returns run short of money in retirement if today's low rates are permanent." With the fiduciary's mandate to act exclusively in participants' best interest, plan sponsors are well advised to contemplate if and how the economic outlook impacts their plan decisions.
Plan sponsors can never completely delegate fiduciary responsibility.
Fiduciaries have the difficult task of providing participants with investment options that provide adequate diversification, but also simplifying the investment menu to limit participant confusion. That balance is not easily struck, especially in the slow-growth, low interest rate outlook that prospective retirees now face. Plan sponsors are wise to seek the expertise of a seasoned retirement plan advisor or consultant to help with these decisions, but the plan sponsor can never completely delegate the responsibility or liability. There is always a fiduciary duty to monitor the plan's service providers, including the plan's co-fiduciaries.
The good news is that retirement plan advisors and consultants are ideally situated to help improve plan sponsor's fixed income literacy. The month of April was designated Financial Literacy Month because too many Americans lack adequate education about their personal finances. Similarly, many plan sponsors could benefit by better understanding how the market outlook impacts retirement plan decisions.
Sources: Edward Jones, 2015 Financial Finesse Report, Transamerica Center for Retirement Study, Bloomberg Law, Forbes, and United States Department of Labor.