Tag Archives: Investing

03.31.25
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DC Participants: “Just Say No”

By: Russ Kamp, CEO, Ryan ALM, Inc.

Most everyone who lived through the ’80s will remember the slogan “Just Say No”. The slogan was created and championed by Nancy Reagan during her husband’s presidency. As you’ll recall, the slogan was part of the U.S.-led war on drugs.

I’d like to reuse the slogan of JUST SAY NO as it relates to using alternatives, especially private equity and credit in defined contribution (DC) plans. DC plans are proving to be a failed model for the vast majority of participants given the anemic median balances, as asking untrained individuals to fund, manage, and then disburse a “retirement” benefit with little to no disposable income, investment acumen, or a crystal ball to help with longevity is just silly policy. Trying to push alternatives onto these folks is maddening! They don’t need more offerings providing complicated structures, little transparency, high fees, and poor liquidity.

Importantly, what happened to being a “qualified or accredited” investor? As you may recall, private investments are restricted in most cases to individuals who meet certain financial thresholds that have been established by regulatory authorities. These considerations included minimum income levels (>$200k for some period of time and sustainable), net worth considerations at >$1 million not including your primary residence, and finally, investment knowledge, in which individuals need to demonstrate sufficient knowledge and experience in financial and business matters to evaluate the risks and merits of a prospective investment. Do you honestly think that the average 401(k) participant qualifies under any of these considerations?

The alternative suite of product offerings is proving to be challenging for many institutional investors/boards, often requiring the retention of a specialist consultant to support the plan’s generalist advisor. Given that reality, does it really make sense that an untrained individual will truly understand the potential risk and reward characteristics? Furthermore, these investments are NOT the magic elixir that they are made out to be. Performance results range far and wide and liquidity (capital distributions) is proving illusive. Do providers of these products really believe that more assets are needed at this time given how difficult it is to invest the current dry powder?

I put a similar comment to this post on LinkedIn.com earlier today. Somebody commented that a simple NO without exploration perhaps would violate my fiduciary responsibility. My answer: Someone needs to be the grown up in the room trying to keep our industry’s greedy hands off DC plans. I believe that I am acting very much in a fiduciary capacity.

I could apply the “Just Say No” slogan to so many practices within our pension industry, but for now I’ll restrict it to this one area of concern. This one rant!

03.26.25
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An Element of Certainty Can Be Achieved

By: Russ Kamp, CEO, Ryan ALM, Inc.

I’ve spent the last few days attending my first GAPPT conference in Braselton, GA. The conference has been terrific as the venue is beautiful, the attendees/trustees delightful, and the speakers/topics topnotch. Senior, highly experienced members of our pension community have been sharing their insights on a variety of subjects. For those addressing the current state of our capital markets and pension asset allocation, the common theme has been uncertainty. Uncertainty as to the direction of equity markets, inflation, and interest rates. Furthermore, given that uncertainty, it should not be surprising that when asked about the direction of asset allocation trends going forward that the speaker would again claim that they don’t know. Of course not.

Regular readers of this blog know that I’ve addressed uncertainty in several blog posts. As human beings we despise uncertainty, yet the approach to pension management within the public sector has been to embrace uncertainty through a traditional asset allocation focused on a return on asset (ROA) target. We learned today that the ROA has fallen for the average public pension from 8% prior to the great financial crisis (GFC) to the current 6.9% today. Given the outsized returns provided by the public equity markets in recent years, funded ratios should have improved, but ironically, they are roughly at the same level they were at prior to the GFC. Yes, the lower discount rate increases the value of plan liabilities, which impacts the funded status, but it also increases contributions that should have offset some of that impact.

Instead of just accepting the fact that markets are uncertain, plan sponsors and their advisors should be seeking strategies to minimize that uncertainty, at least for a portion of the asset base. I know of only a couple of ways to bring certainty to the management of pension assets. One is through a pension risk transfer that shifts the liability from the plan sponsor to an insurance company. Given that public pension plans believe that they are perpetual, there is little appetite to terminate the DB plan. Furthermore, with funded ratios at roughly 75%, the cost to fully fund and then offload the liability would be prohibitive.

We, at Ryan ALM, want to see pensions protected and preserved. We don’t want our public workforce to be forced into managing their own retirements through a defined contribution offering. These vehicles have not worked for a significant majority of the private workforce, as asking untrained individuals to fund, manage, and then disburse a “benefit” with little to no disposable income, investment acumen, or a crystal ball to help with distributions is just poor policy.

So, what can sponsors do? They can adopt a cash flow matching (CFM) strategy that will defease (SECURE) pension liabilities by matching asset cash flows of interest and principal from bonds with the liability cash flows of benefits and expenses. This process is done chronologically from the first month of the assignment as far into the future as the allocation to the strategy will go. In the process of securing these promises, liquidity is enhanced allowing for the balance of the assets (alpha assets) to now grow unencumbered. As we all know, a long investing horizon enhances the probability of success for those alpha assets to achieve the expected outcome.

Isn’t it time to engage in a strategy that will provide the sponsors and their advisors with a better night’s sleep? Wouldn’t it be great if attendees at pension-related conferences learned that there is a strategy that can secure the promises given to plan participants? Given the elevated interest rate environment, CFM should become the core strategy within pension asset allocations. The allocation to CFM should be determined by multiple factors including the current funded status and the plan’s ability to contribute. We witnessed a failure on the part of sponsors back in 1999 to secure the promises when funded ratios were significantly > 100%. We aren’t at that level today, but an element of risk can be reduced and it should be. Let’s get these plans off the asset allocation rollercoaster and volatile funded status.

03.20.25
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FOMC and Powell Deliver Worrying Message

By: Russ Kamp, CEO, Ryan ALM, Inc.

I produced a post recently titled, “Parallels to the 1970s?” in which I discussed the challenging economic environment that existed during the 1970s as a result of two oil shocks and some sketchy decision making on the part of the US Federal Reserve. The decade brought us a new economic condition called stagflation, which was a term coined in 1965 by British politician Lain Macleod, but not widely used or recognized until the first oil embargo in 1973. Stagflation is created when slow economic growth and inflation are evident at the same time.

According to the graph above, the FOMC is beginning to worry about stagflation reappearing in our current economy, as they reduced the expectations for GDP growth (the Atlanta Fed’s GDPNow model has Q1’25 growth at -1.8%), while simultaneously forecasting the likelihood of rising inflation. Not good. If you think that the FOMC is being overly cautious, look at the recent inflation forecasts from several other entities. Seems like a pattern to me.

Yet, market participants absorbed the Powell update as being quite positive for both stocks and bonds, as markets rallied soon after the announcement that the FOMC had held rates steady. Why? There is great uncertainty as to the magnitude and impact of tariffs on US trade and economic growth. If inflation does move as forecasted, why would you want to own an active bond strategy? If growth is moderating, and in some cases forecasted to collapse, why would you want to own stocks? Aren’t earnings going to be hurt in an environment of weaker economic activity? Given current valuations, despite the recent pullback, caution should be the name of the game. But, it seems like risk on.

Given the uncertainty, I would want to engage in a strategy, like cash flow matching (CFM), that brought an element of certainty to this very confusing environment. CFM will fully fund the liability cash flows (benefits and expenses) with certainty providing timely and proper liquidity to meet my near-term obligations, so that I was never in a position where I had to force liquidity where natural liquidity wasn’t available. Protecting the funded ratio of my pension plan would be a paramount objective, especially given how far most plans have come to achieve an improved funding status.

I’ve written on many occasions that the nearly four decades decline in rates was the rocket fuel that drove risk assets to incredible heights. It covered up a lot of sins in how pensions operated. If a decline in rates is the only thing that is going to prop up these markets, I doubt that you’ll be pleased in the near-term. Bifurcate your assets into two buckets – liquidity and growth – and buy time for your pension plan to wade through what might be a very challenging market environment. The FOMC was right to hold rates steady. Who knows what their next move will be, but in the meantime don’t bet the ranch that inflation will be corralled anytime soon.

03.19.25
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That Door’s Closed. What’s behind Door #2?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I’ve mentioned often through posts on this blog that we as an industry tend to overwhelm good ideas by allocating ridiculous sums of money in the pursuit of the next great idea. Sure, the idea was terrific several years ago, but today…? We are currently witnessing the negative impact of such an occurrence in private equity. According to many recent reports, the ability to generate liquidity from PE funds is proving to be as challenging as it has ever been. There are only two ways to liquidate holdings in a private fund: 1) a private transaction with a company or another PE fund, and 2) an initial public offering (IPO).

It appears that neither option is readily available to the private equity advisor at this time. Public markets seem to have lost their luster, as there are more than 1,000 fewer companies today than just 10-years ago. Current valuations are also acting as an impediment to going public with portfolio companies. Couple this with the fact that the lack of transactions is limiting the liquidity available to engage in private transactions among PE firms.

Given this situation, one would think that perhaps PE firms and their investors would reduce the demand for product and allow for the natural digestion of the “excess” capital. But no, that does not seem to be the case. According to an article by Claire Ruckin (Bloomberg), private equity firms are “turning to cash-rich credit investors for money to pay dividends to themselves and their backers.” Furthermore, a few are “getting back as much as they first invested, if not more, in effect leaving them with little or no equity in some of their biggest companies.” So much for being equity funds!

According to Claire’s article, more than 20 businesses in the US and Europe have borrowed to make payouts to their owners, according to Bloomberg-compiled data. Ironically, these “dividend recap” deals are a boon to lenders (private creditors) who have lots of cash to deploy. Could this be indicative of another product area overwhelmed by pension cash flows? Private equity firms are happy to take those resources off the creditors hands to return capital to their investors, but is the stacking of additional debt on these companies a good strategy? What happens if the current administrations policies don’t result in growth and worse, lead us into recession? Will these deals prove to be a house of cards?

As we’ve mentioned just shy of 1 million times now, a pension plan’s primary objective should be to SECURE the promised benefits at a reasonable cost and with prudent risk. Do you think that allowing private equity firms, which are already expense investment vehicles, to stack additional debt on top of their equity investments is either a reasonable cost or fiduciarily prudent? Come on! What are we trying to do here?

Defined benefit plans are critically important for the American worker. Continuing to place bets on the success of a PE firm to identify “attractive” equity investments in an environment as challenging as this one and then allowing them to “double down” by adding layers of debt just to pretend that capital is being returned to the investor is just wrong. Let’s get back to pension basics when we used the plan’s specific liabilities to drive asset allocation decisions that centered around securing the promised benefits. You want to gamble – go to Atlantic City. DB pensions plans aren’t the place.

03.12.25
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Lessons Learned?

By: Russ Kamp, CEO, Ryan ALM, Inc.

My wife and I are rewatching The West Wing, and we are often amazed (disappointed) by how many of the social issues discussed 20 years ago when the show first aired that are still being debated today. It really just seems like we go around in circles. Well, unfortunately, the same can be said about pensions and supposed pension reforms. We need to reflect on what lessons were learned following the Great Financial Crisis of 2007-2009, when pension America saw its funded status plummet and contribution expense dramatically escalate. Have we made positive strides?

Unfortunately, with regard to the private sector, we continued to witness an incredible exodus from defined benefit plans and the continued greater reliance on defined contribution plans, which is proving to be a failed model. That activity appears to have benefited corporate America, but how did that action work for plan participants, who are now forced to fund, manage, and then disburse a “retirement” benefit through their own actions, which is asking a lot from untrained individuals, who in many cases don’t have the discretionary income to fund these programs in the first place.

With regard to public pension systems, we saw a lot of “action”. There were steps to reduce the return on asset assumption (ROA) for many systems – fine. But, that forced contributions to rise rapidly, creating a greater burden on state and municipal budgets that resulted in the siphoning off of precious financial resources needed to fund other social issues. In addition, there was great activity in creating additional benefit “tiers” (tears?), in which newer plan participants, and some existing members, were asked to fund more of their benefit through new or greater employee contributions, longer tenures before retirement, and more modest benefits to be paid out at retirement. Again, I would argue are not pension lessons learned, but are in fact benefit cuts for plan participants.

Fortunately, for multiemployer plans, ARPA pension legislation has gone a long way to securing the funded status and benefits for 110 plans that were once labeled as Critical or worse, Critical and Declining. There are another 90 pension plans or so to go through the application process in the hopes of securing special financial assistance. But have we seen true pension reform within these funds and the balance of plans that had not fallen into critical status?

It seems to me that most of the “lessons learned” have nothing to do with how DB pension plans are managed, but rather asks that plan participants bear the consequences of a failed pension model. A model that has focused on the ROA as if it were the Holy Grail. Pension plans should have been focused on the promise (benefit) that was made to their participants, and not on how much return they could generate. The focusing on a return target has certainly created a lot more uncertainty and volatility. As we’ve been reporting, equity and equity-like exposure within multiemployer and public pension systems was greater coming into 2025 then the levels that they were in 2007. What lesson was learned?

Pension America is once again suffering under the weight of declining asset values and falling interest rates. When will we truly learn that continuing to manage DB plans with a focus on return is NOT correct? The primary objective needs to be the securing of the promised benefits at a reasonable cost and with prudent risk. Shifting wads of money into private equity or private credit and thinking that you’ve diversified away equity exposure is just silly. I don’t know what the new administration’s policies will do for growth, inflation, interest rates, etc. I do know that they are currently creating a lot of angst among the investment community. Bring some certainty to the management of pensions through a focus on the promise is superior to continuing to ride the rollercoaster of performance.

03.07.25
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Reminder: Pension Liabilities are Bond-like

By: Russ Kamp, CEO, Ryan ALM, Inc.

Milliman has released the results for their corporate pension index. The Milliman 100 Pension Funding Index (PFI), which tracks the 100 largest U.S. corporate pension plans showed deterioration in the funded ratio dropping from 106.0% to the 104.8% as of month-end. This was the first decline following four consecutive months of improvement. It was the fall in the discount rate from 5.60% to 5.36% during the month that lead to growth in the combined liabilities for the index constituents. As a reminder, pension liabilities (benefit payments) are just like bonds in terms of their interest rate sensitivity. As yields fall, the present value of those future promises escalate.

Milliman reported an asset gain of $18 billion during the month, but that wasn’t nearly enough to offset the growth in liabilities creating a $13 billion decline in funded status. “Gains in fixed income investments helped shore up the Milliman 100 pension assets, but were not strong enough to counter the sharp discount rate decline,” said Zorast Wadia, author of the PFI. Given the uncertain economic and capital markets environments, it is prudent to engage at this time in a strategy to effectively match asset and liability cash flows to reduce the volatility in the funded ratio. Great strides have been made by America’s private pensions. Allowing the assets and liabilities to move independently could result in significant volatility of the funded status leading to greater contribution expenses.

You can view the complete pension funding report here.

03.06.25
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Markets Hate Uncertainty

By: Russ Kamp, CEO, Ryan ALM, Inc.

I’ve published many posts on the impact of uncertainty on the well-being of individuals and our capital markets. In neither case are the outcomes positive.

What we are witnessing in the last several trading days is the direct result of policy flip-flopping that is creating abundant uncertainty. As a result, the business environment is deteriorating. One can argue the merits of tariffs, but it is the flip-flopping of these policy decisions that is wreaking havoc. How can a business react to these policies when they change daily, if not hourly.

The impact so far has been to create an environment in which both investment and employment have suffered. Economic uncertainty is currently at record levels only witness during the pandemic. Rarely have we witnessed an environment in which capital expenditures are falling while prices are increasing, but that is exactly what we have today. Regrettably, we are now witnessing expectations for rising input prices, which track consumer goods inflation. It has been more than four decades since we were impacted by stagflation, but we are on the cusp of a repeat last seen in the ’70s. How comfortable are you?

We just got a glimpse of how bad things might become for our economy when the Atlanta Fed published a series of updates driving GDP growth expectations down from a high of +3.9% earlier in the quarter to the current -2.4% published today. The key drivers of this recalibration were trade and consumer spending. The uncertainty isn’t just impacting the economy. As mentioned above, our capital markets don’t like uncertainty either.

I had the opportunity to speak on a panel last week at Opal/LATEC discussing Risk On or Risk Off. At that point I concluded that little had been done to reduce risk within public pension plans, as traditional asset allocation frameworks had not been adjusted in any meaningful way. It isn’t too late to start the process today. Action should be taken to reconfigure the plan’s asset allocation into two buckets – liquidity and growth. The liquidity bucket will provide the necessary cash flow in the near future, while buying time for the growth assets to wade through these troubled waters. Doing nothing subjects the entire asset base to the whims of the markets, and we know how that can turn out.

03.04.25
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A Retirement is Out of the Question for Many – Unfortunately!

By: Russ Kamp, CEO, Ryan ALM, Inc.

Is there such a thing as a retirement anymore? According to Fidelity’s Q4 2024 Retirement Analysis, 41% of “retirees” are working, have worked, or are currently seeking work. I would guess that the need to work is strongly correlated to the demise of the DB pension plan.

In other Fidelity news, a big deal was made out of the fact that 527k participants had account balances >$1 million (2.2% of their account holders), but despite those attractive balances, the “average” balance was still only 131k at year-end following two incredible years of growth for the S&P 500 specifically, and equities generally, especially if you rode the tech sector.

Regrettably, there was once again NO mention of the median account balance, which we know is rather anemic. Can the providers of 401(k)s, IRAs, and 403(b)s, please stop highlighting average accounts which are clearly skewed by the much larger balances of a few participants? According to an analysis provided earlier this year by Investopedia, median account balances at Vanguard were dramatically lower than average accounts. As the chart below highlights, there was not a median balance within 40% of the average balance. In fact, those 65-years-old and up had an account balance at 32% of the average balance. I can’t imagine that this ratio would be much different at Fidelity or any other provider of defined contribution accounts.

It is truly unfortunate that a significant percentage of the American workforce will never enjoy the rewards of a dignified retirement. My Dad, who just recently passed at age 95, enjoyed a 34-year retirement as a result of receiving a modest DB pension benefit. That monthly payment coupled with my parents Social Security enabled them to enjoy their golden years. Providing this opportunity for everyone needs to be the goal of our retirement industry.


Note: Fidelity’s 401(k) analysis covers 26,700 corporate DC plans and 24.5 million participants.

03.04.25
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What’s Your Duration?

By: Russ Kamp, CEO, Ryan ALM, Inc.

The recent rise in U.S. Treasuries had us redoubling our effort to encourage plan sponsors of U.S. pension plans to take some risk off the table by using cash flow matching (CFM) to defease a portion of the plan’s liabilities, given all the uncertainties in the markets and our economy. We were successful in some instances, but for a majority of Pension America, the use of CFM is still not the norm. Instead, many sponsors and their advisors have elected to continue to use highly interest rate sensitive “core” fixed income offerings most likely benchmarked to the Bloomberg Barclays Aggregate Index (Agg).

For those plan sponsors that maintained the let-it-ride mentality, they are probably celebrating the fact that Treasury rates have fallen rather significantly in the last week or so as a result of all of the uncertainties cited above – including inflation, tariffs, geopolitical risk, stretched equity valuations, etc. Their “core” fixed income allocation will have benefited from the decline in rates, but by how much? The Bloomberg Barclays Aggregate Index (Agg) has a duration of 6.1 years and a YTW of 4.58%, as of yesterday. YTD performance had the Agg up 2.78%. Not bad for fixed income 2+ months into the new year, but again, equities have been spanked in the last week, and the S&P 500 is down -3.1% in the last 5 days. So, maintaining that exposure sure hasn’t been beneficial.

Also, remember that the duration of the average DB pension plan is around 12 years. Given the 12-year duration, the price movement of pension liabilities, which are bond-like in nature, is currently twice that of the Aggregate index. A decline in rates might help your core fixed income exposure, but it is doing little to protect your plan’s funded status/funded ratio. The use of CFM would have insulated your plan from the interest rate risk associated with your pension liabilities. As rates fell, both assets and the present value of those liabilities would have appreciated, but in lockstep! The funded status for that segment of your asset allocation would have been insulated.

Why wait to protect your hard work in getting funded ratios to levels not seen in recent years? A CFM strategy provides numerous benefits, including providing liquidity on a monthly basis to ensure that benefits and expenses are met when due, reducing the cost to fund liabilities by 20% to 40% extending the investing horizon allowing for choppy markets to come and go with little impact on the plan, and protecting your funded status which helps mitigate volatility in contributions. Seems pretty compelling to me.

02.26.25
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Risk On or Risk Off?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I have the pleasure of speaking at the Opal/LATEC conference on Thursday. My panel has been given the topic of Risk On or Risk Off: How Are You Adjusting Your Portfolio, and Which Investment Risks Concern You Most? I think it is an incredibly timely discussion given the many cross-currents in the markets today.

Generally speaking, what is risk? At Ryan ALM, Inc. we would say that risk is the failure to achieve the objective. What is the objective in managing a defined benefit pension plan? We believe that the primary objective is to secure the promised benefits at a reasonable cost and with prudent risk. We don’t believe that it is a return objective.

However, most DB pension systems are NOT focused on securing the promised benefits, but they are engaged in developing an asset allocation framework that cobbles together diversified (overly perhaps) asset classes and investment strategies designed to achieve an annual return (ROA) target that has been established through the contributions of the asset consultant, actuary, board of trustees, and perhaps internal staff, if the plan is of sufficient size to warrant (afford) an internal management capability.

Once that objective has been defined, the goal(s) will be carefully addressed in the plan’s investment policy statement (IPS), which is a road map for the trustees and their advisors to follow. It should be reviewed often to ensure that those goals still reflect the trustees’ wishes. The review should also incorporate an assessment of the current market environment to make sure that the exposures to the various asset classes reflect today’s best thinking.

There are numerous potential risks that must be assessed from an investment standpoint. Some of those include market (beta), credit, liquidity, interest rates, and inflation. For your international managers, currency and geopolitical risk must be addressed. From the pension management standpoint, one must deal with both operational and regulatory risk. Some of these risks carry greater weight, such as market risk, but each can have an impact on the performance of your pension plan.

However, there are going to be times when a risk such as inflation will dominate the investing landscape (see 2022). Understanding where inflation MAY be headed and its potential impact on interest rates and corporate earnings is a critical input into how both bonds and stocks will likely perform in the near-term. Being able to assess these potential risks as a tool to adjust your funds asset allocation could reduce risk and help mitigate the negative impact of significant drawdowns that will impact the plan’s funded status and contribution expenses. Of course, the ability to reduce or increase exposures will depend on the ranges that have been established around asset class exposures (refer to your IPS).

So, where are we today? Is it risk on or risk off as far as the investing community is concerned? It certainly appears to me that most investors continue to take on risk despite extreme equity valuations, sticky, and perhaps worsening inflation, leading to an uncertain path for U.S. interest rates, and geopolitical risk that can be observed in multiple locations from the Middle East, to Ukraine/Russia, and China/Taiwan. The recent change in the administration and policy changes related to the use of tariffs has created uncertainty, if not anxiety, among the investment community.

So, how are you adjusting your portfolio? If your plan is managed similarly to most where all the assets are focused on the ROA, the ability to adjust allocations based on the current environment is likely limited to those ranges that I described above. Also, who can market time? I would suggest that the best way to adjust your portfolio given today’s uncertainty is to adopt an entirely different asset allocation framework. Instead of having all of the assets focused on that ROA objective, bifurcate your asset allocation into liquidity and growth buckets.

By adopting this strategy, liquidity is guaranteed to be available when needed to make those pesky monthly benefit payments. In addition, you’ve just bought time, an extremely important investment tenet, for the remainder of the assets (growth/alpha) to now grow unencumbered. The liquidity bucket will provide a bridge over choppy waters churned up by underperforming markets. Yes, there appears to be significant uncertainty in today’s investment environment. Instead of throwing up your hands and accepting the risks because you have limited means to act, adopt the new asset allocation structure before it is too late to protect your plan’s funded status.