Investments That Protect Participant Assets From Inflation

Defined benefit and defined contribution plan sponsors can help protect participants’ savings by offering exposure to commodities, real estate and Treasury inflation-protected securities, according to industry experts.

Julian Regan, senior vice president and public sector market leader at Segal Marco Advisors, advises that DC plan sponsors should consider including exposures to a mix of asset classes that provide inflation protection both within the suite of target-date funds, and on the investment menu.

Denver-based Michael Clark, managing director and consulting actuary at River and Mercantile (which is being renamed Agilis), agrees that commodities, real estate and TIPS are good investment options for plan sponsors because they are hedged against inflation risk. “Those are the big things that a plan sponsor will want to analyze to make sure that the inflation hedge protection is either embedded in the options that they’re already giving participants or, if not, that they’re at least providing opportunities for them to have that exposure,” he says.

Some DC plan sponsors—primarily larger ones—might consider an investment such as TIPS as a standalone asset category investment option, Regan says. 

Real estate can protect against inflation because as it rises, property prices also typically increase. DB plans often include real estate in investment portfolios, and real estate exposures in DC plan are often within TDFs, Regan explains. Many DB plans include an allocation between 7% and 12% to real estate, he says.

Regan and Clark agree that many of the same participant options for inflation protection are useful to protect assets from current geopolitical upheaval, oil price shocks, stock market volatility and downturns.

DC plan sponsors and retirement plan advisers can assist participants with selecting investment options through a deep examination of the investment menu, looking for inflation protection exposures, Regan adds.

He notes that inflation is particularly harmful to already-retired participants and those nearing retirement. Plan sponsors should “doublecheck under the hood of the target-date funds and make sure that those series of target-date funds that are designed for late-career employees and in-retirement employees have lower allocations of public equities and higher allocations to fixed income and cash that provide principal preservation,” Regan adds.

Clark cautions that if DC plan sponsors offer inflation-protection investments as standalone options on the fund menu, they should be wary of the possibility that participants will invest more than they should. “Anytime you’re giving participants a fund that they can invest in, sometimes they’ll invest a huge allocation into it, and in fact, more than what they maybe should,” he says.

Ultimately, plan sponsors must educate participants not to overreact, especially younger workers with time to save and invest, says Regan.

“Make sure participants are being reminded that timing the market is not effective; shifting assets from a high-risk investment to a low-risk investment when equity markets are falling is not an effective strategy,” he explains. “Staying in your diversified target-date fund, or your lower-risk capital preservation fund throughout the market cycle has been proven to be the best strategy for generating return. It’s also a very good time to be reminding participants that we have had historical declines in equities in the past, we will have historical declines in the future, but over time, a well-diversified portfolio has generated a return that’s sufficient to provide meaningful retirement income, which is the name of the game.”