By: Russ Kamp, Managing Director, Ryan ALM, Inc.

I’ve been enjoying my time at the Opal Public Funds Summit East conference in Newport, RI. Day two has been illuminating, especially as it relates to real estate and the lack of liquidity available from “open-end” funds. One of the plan sponsors that I spoke with has been waiting on a queue for 10 months at this time with no information on when the first distribution may become available.

As we at Ryan ALM, Inc. have mentioned many times, current asset allocation models within DB plans have significantly impacted the availability of liquidity to meet monthly benefits and expenses by migrating significant plan assets to alternative investments, including real estate, without a formal plan to meet ongoing liquidity needs. We believe that having all of a plan’s assets focused on the return on assets (ROA) assumption is the wrong approach. Plan sponsors and their advisors should bifurcate the asset base into two buckets – liquidity and growth.

The liquidity bucket should be a defeased bond portfolio through a cash flow matching (CFM) strategy focused on near-term liabilities chronologically, while the growth bucket can be invested as aggressively as allowed by the IPS with a much longer investing horizon as it will no longer be a source of liquidity. The rising US rate environment is creating challenges for many aspects of our capital markets but a blessing for fixed income assets used as liquidity to fund benefits + expenses. DB plans should be striving for less uncertainty by focusing more attention on the benefit promises that have been made to the participants and less on the potential return.

As a reminder, the only reason that these DB plans exist is to meet a benefit promise that has been made to the participants. Providing the necessary liquidity to meet those promises should be a major consideration. Bonds are not a return-seeking asset. They are the only asset with a known cash flow (terminal value + contractual interest payments). Use the certainty of those cash flows to SECURE the promised benefits. Everyone will sleep better at night!