Just got back from presenting at the FPPTA conference KCS’s ideas on DB plans becoming more liability aware. We believe that a plan’s unique liabilities should be used to drive investment structure and asset allocation decisions.
We don’t believe that traditional asset allocation models are in the best interest of plan sponsors and their participants, as they inject too much risk into the process, especially in this market environment in which equity and bond valuations appear stretched.
Given the extremely low level of US interest rates (doesn’t mean that they can’t go lower), we would suggest that plans shorten duration and focus on matching near-term retired lives. It wouldn’t take too much of a back up in rates to have liability growth be negative. In that environment, a shorter-duration, cash-matched fixed income portfolio should easily outperform liability growth.
The cash-matched strategy will reduce interest rate sensitivity from your portfolio, improve liquidity to meet those near-term retired live benefit payments, and will extend the investing horizon for your growth (alpha) assets.
Let us know if you’d like to discuss this in greater detail. Happy Fourth of July Weekend!