Evaluating Investment Choices for Retirees

When an employee retires, that’s the end of the connection between the ex-employee and the former employer’s plan. Right? Not necessarily, say researchers at PIMCO.

In “Turning Defined Contribution Assets into a Lifetime Paycheck: How to Evaluate Investment Choices for Retirees,” Stacy Schaus and Ying Gao of PIMCO argue that it may benefit retirees and the former employer’s plan for retirees’ assets to stay right where they have been for a long time — in the plan.

Why? Schaus and Gao say that doing so can benefit the plan — and participants — by increasing plan assets and, because of that greater financial heft, enhancing their ability to negotiate lower fees. And retirees would benefit from access to institutional investments and fiduciary oversight.

To help generate and support sustainable lifetime income, Schaus and Gao suggest that a plan should evaluate its investment lineup. They posit that managing market, longevity and inflation risk is of key importance. They also suggest measures by which to evaluate how appropriate portfolios are to retirees needs:

• How well does the strategy correlate to estimates of retirement liability?

• What is the information ratio relative to retirement liability?

• What level of risk is appropriate given a retiree’s risk capacity?

• How long are assets likely to remain during the distribution phase?

• To what extent is a retiree’s account likely to keep up with inflation and hold purchasing power?

Schaus and Gao suggest that plan fiduciaries carefully consider active investment management, and that employers consider making available to retirees an institutionally priced annuity purchase program. “Combining an objective-aligned target-date strategy or a multi-sector fixed income strategy with a deferred annuity may create a more secure life-long retirement income stream,” they add.