June 7, 2019

Experts Consider LDI for 401(k)s

How a strategy from the pension plan space speaks to retirement income

Reported by John Manganaro

When Aaron Meder first joined Legal & General Investment Management America (LGIMA) in 2010, as head of U.S. solutions, the liability-driven investing (LDI) marketplace was still undeveloped.

Now CEO of LGIMA, Meder says the company—and its competition—is assessing how LDI could be of service to defined contribution (DC) plans. He says the complement for defined benefit (DB) liability-driven investing on the DC plan side is the discussion of “in-plan guaranteed retirement income.”

“So, on the pension LDI side, the objective is to have the liquid assets in hand when you need them to pay your pension liabilities,” Meder says. “It’s really kind of the same idea on the DC side—a successful outcome is about having sufficient money available when you need it and for as long as you need it. Pension plans are managing this goal for a whole population of people, while DC plans are serving individual account holders.”

One important caveat, Meder points out, is that LDI strategies must be informed by a plan sponsor client’s goals for its DC plan. In other words, an LDI approach will look different based on whether the plan is designed to be the main source of retirees’ income or if it is supplemental.

“Full income replacement is not the goal of every DC plan,” Meder notes. “Many are designed to be more supplementary in nature. The defining of goals is an important discussion to have when thinking about LDI, both for DB and DC plans.”

Practically speaking, in the near term, Meder says, using LDI in defined contribution plans could mean doing a re-evaluation of the fixed-income investments offered. Just as DB plans have reconsidered holding a basic core fixed-income portfolio, which does not match their liability duration, and instead have embraced longer-duration fixed income, DC plan investors may consider doing the same, he says.

“Once you redefine what retirement income looks like, you start to redefine what the fixed-income portfolio looks like, including in target-date fund [TDF] glide paths,” he adds. “In my opinion, the next 10 years will bring a massive shift from core fixed income in DC plans to something that looks more like liability-driven investing, just like we saw in the DB plan market.”