Rate Cuts and Retirement Saving

DC asset managers weigh in on what the Federal Reserve’s widely expected interest rate cut regime may portend for retirement plan investing.

The Federal Reserve’s interest rate cut finally came Wednesday with a one-half-percentage-point reduction.

The cut was on the larger side of the Fed’s expected options, showing its confidence that inflation is coming down but also its concern about the labor market, says Mark Hackett, chief of investment research for Nationwide.

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“Easing inflation conditions and a slowing labor market were the drivers of the decision, though current economic data remain healthy,” he says.

At first blush, markets responded well, Hackett notes, with the S&P 500 rising to a “record high before softening during [the Fed’s] press conference.” Markets eventually closed slightly down on Wednesday.

Meanwhile, the Fed’s Summary of Economic Projections, or “dot plot,” forecasts continued rate cuts this year into next, with “the median year-end funds rate embedding 100 basis points of cuts, suggesting a 0.25% cut in November and December,” Hackett says.

For defined contribution retirement investing, a rate cut regime is likely to have a few long-lasting effects, according to asset managers. These include more focus on capital preservation, a shift toward alternatives to find stronger returns, and a potential rise of stable value funds, with their low-risk returns no longer being outmatched by vehicles such as money market funds.

“DC participants near or in retirement are most likely to feel the most acute impact,” says Brad Long, chief investment officer at Fiducient Advisors. “Higher interest rates tend to favor those seeking income. If rates keep falling, retirement income programs or stable value options may become more attractive compared to traditional money market funds.”

More Expensive

On a broad scale, lower rates will make retirement investing “more expensive,” says David Blanchett, managing director, portfolio manager and head of retirement research for PGIM DC Solutions.

“Think of retirement as a liability: As rates fall, the cost of covering the liability rises,” he explains. “This means higher required savings rates.”

That may reignite conversations about diversifying assets, such as investing in alternatives, for long-term DC investors to generate higher returns.

“There has already been a shift toward alts; I think lower yields could accelerate things,” Blanchett says.

Tim Braude, head of multi-asset solutions for Goldman Sachs Asset Management, agrees with a likely shift toward alternative investment strategies, assuming rates continue to come down.

“Longer term, we continue to see increased adoption of alternatives, as private credit and private equity products that are suitable for retirement accounts come to market,” Braude says via email. “Given the long-term nature of DC assets, we believe there is strong alignment with the profile of private asset investment horizon.”

According to Nick Nefouse, head of retirement solutions at BlackRock, the signaling of lower interest rates to come has already created some benefit for long-term TDF investors, with potentially more to come.

“Target-date-fund investors are already reaping the benefits of the decline in interest rates,” Nefouse says via email. “This has led to a rally in the Aggregate Bond Index, which has seen a return of approximately 5% this year.”  

Nefouse says BlackRock, in recent years, disaggregated its fixed-income portfolios, “diversifying the fixed-income allocation by duration and credit to give our portfolio managers more precision around fixed-income investments.” Nefouse says the approach was “particularly advantageous for older investors who typically have larger allocations to bonds.”

Seeking Stability

In its recent 2024 DC Consultant Study, asset manager T. Rowe Price found that plan consultants and advisers are anticipating an increased focus on capital preservation for savers.

With interest rates no longer offering strong returns for investments such as money market funds, that could mean a return toward insurance-backed stable value funds, according to Jessica Sclafani, a senior defined contribution strategist at T. Rowe Price.

“We believe that the Federal Reserve’s policy shift will signal the beginning of the end for the prolonged period during which money market fund yields have exceeded stable value crediting rates,” she says.

Sclafani notes that recent discussions the firm has had with advisers and plan sponsors signal a desire to improve stable value crediting rates and performance, including “repositioning portfolios, transitioning from collective investment trusts to separate accounts, adding external managers, and incorporating stable value, plus sectors like equities and high-yield bonds.”

The lower-rate environment may also mean expanded and more creative use of stable value by retirement savers, such as “finding creative ways to utilize investment contracts (“wraps”) in products like TDFs and retirement income solutions, allowing us to take advantage of higher yields and lower volatility by wrapping both fixed income and equities,” Sclafani says.

Kelly Berry, the chief financial officer for Nationwide Retirement Solutions, agrees that lower rates may stem the tide of a “subset of retirees” who left stable value investments for money market accounts when rates went up.

“Retirement plans are often the most efficient way for participants to save,” she says via email. “Longer term, the stable value investment is true to the name, and we believe it’s a great option for retirees to keep their money in this kind of investment inside their workplace retirement plan.”

Blanchett, the DC retirement research head for Prudential’s asset management division, also notes the attractiveness of lifetime income strategies, such as annuities, as being attractive in a lower-yield savings environment.

“This isn’t necessarily super obvious, but there are two components that drive annuity payouts: the longevity component and bond yields,” he says. “The longevity component is effectively constant, which means lower yields make it relatively more attractive to buy an annuity versus self-insuring retirement with savings.”

Cybercriminals Pose Threat via Executive Accounts

Executives’ workplace retirement plan accounts provide the authority and access hackers need to attack other databases.

Frank Bitzer

Cybercriminals use computers to target the “top of the organizational pyramid” at workplaces, probing executives’ accounts for weak points, according to a cybersecurity expert focused on the employer-sponsored retirement plan market.

As news reports reinforce on an almost weekly basis, hackers can attack everything from internal databases to benefit plans. But while criminals may infiltrate a wide variety of corporate assets, defined contribution and pension plans are particularly attractive due to the significant sums of money involved, says Frank Bitzer, the national director of ERISA consulting at Marsh McLennan Agency.

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“They know that top executives have authority and access to other accounts, and then they burrow down from there,” Bitzer says. “Once they’re in, they can go after everything.”.

These vulnerabilities may arise from easy-to-guess passwords, poor IT security practices or outdated firewalls, he notes. Once hackers gain access to an executive’s account, they can infiltrate the corporation’s broader systems.

“They prefer pension plans over individual 401(k) plans for the simple reason that pension plans have fewer accounts to break into,” Bitzer notes. “Once those accounts are broken into, there are larger dollar amounts seen in those accounts.”

But 401(k) accounts are not immune either. A common vulnerability lies in incomplete participant profiles, Bitzer warns.

Many employees fail to fill out their online 401(k) profiles or neglect to create strong, secure passwords. Hackers exploit these gaps, filling in missing information and locking participants out of their own accounts before siphoning funds through transfers or in-service distributions.

Global Scale

One of the key challenges facing cybersecurity professionals is the global nature of these attacks, Bitzer says. Hackers from regions including Russia, Southeast Asia, Africa and the Middle East are increasingly targeting U.S. corporations. Given their international origins, local, state and federal authorities face significant challenges in pursuing and prosecuting these attackers.

“They’re practically on every continent,” Bitzer says. “There are bases of hackers attacking American corporations.”

Contrary to popular belief, hackers do not always target only the largest corporations. While high-profile firms, particularly Fortune 500 companies, often find themselves in the crosshairs, smaller companies are just as vulnerable, he says. As with larger companies, many hackers try to exploit security weaknesses in key executives’ accounts.

Total DC assets provide a tempting pool of money, representing about $10.4 trillion in total, according to the 2024 Recordkeeping Survey by PLANSPONSOR, a sister publication of PLANADVISER. Meanwhile, vulnerability persists, as only 27% of plan sponsors had implemented a formal cybersecurity policy, according to the most recent Plan Sponsor Council of America’s “65th Annual Survey of Profit Sharing and 401(k) Plans,” which includes data from the 2022 plan year.

To combat these threats, Bitzer stresses the importance of proactive measures. He encourages participants to regularly check and complete their online 401(k) profiles, select strong passwords and monitor their accounts at least quarterly, if not monthly.

“I cannot stress enough that plan sponsors and service providers just have to beat this drum with a lot of consistency,” he says. “If you are a participant and you have an online account, please fill it out completely and monitor it.”

It is clear that hackers are becoming increasingly sophisticated in their approach to breaching corporate defenses, and no organization is too big or too small to be immune.

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