Is your retirement strategy out of date? Top investment actions in 2023

This will be a good year for retirement plan sponsors to re-evaluate their strategies and adjust to a changing regulatory environment, a new report from WTW, Top investment actions in 2023, has found.

The report said the investment market has fundamentally changed, as the slow winding down of the COVID pandemic, concerns about inflation, and workplace changes such as the “great resignation” continue to disrupt the market.

“These recent developments are having a dramatic impact on the way retirement plans need to be designed, to be managed, and to engage participants in order to remain effective in this new era,” the report said. “Plan sponsors and their fiduciary committees should take note of these changes and reevaluate whether their historical objectives and strategy remain relevant in this new environment.”

Reevaluate and reinvest

As defined contribution (DC) plans become the primary source of savings, replacing pensions and defined benefit (DB) plans, a new emphasis on management of employee savings and investment is becoming critical, the report said.

Rules around retirement plans are evolving due to regulatory changes, and the passage of the Secure 2.0 plan could change the landscape even more. “With new legislation and big changes to pension funding rules, DB sponsors should evaluate a “hibernation” strategy that seeks to minimize risk while still leveraging asset returns to reduce the cost of exiting the plan over the long term,” the report said.

Related: 2023: The dawn of a new era in retirement planning for small businesses

With the trend toward higher interest rates, DC plans are seeing account balances shrink, and pension assets will be challenged to keep pace with ongoing costs, the report added. Companies may want to look at the use of derivatives, an area that many investors have traditionally avoided due to volatility. The report said that when properly managed, derivatives can reduce risk while freeing up capital.

The recent focus on sustainability, climate concerns, and diversity are also things plan sponsors should be aware of, the report noted.

Emphasizing income and flexibility

The analysis suggested moving portfolios toward income-generating assets—saying that exploring new asset classes may be an appropriate move. “Having a reliable source of income today — especially from a broadly diversified mix of high-quality and reliable cash flow sources available through real assets and diversified credit portfolios — can provide greater stability and predictability while helping to buffer against the volatility of other growth-oriented asset classes,” the WTW report said.

The analysis overall called for building a more diversified portfolio, one that would require a close eye on the market and a sophisticated understanding of evolving approaches and strategies. Outsourcing the day-to-day management of assets can bring good results, the WTW analysts said, with some data suggesting better management could result in 2% of additional return per year.

The WTW report concluded with a recommendation that DC plan sponsors consider pooled employer plans (PEPS). “Facilitated by provisions of the SECURE Act, PEPs are designed and managed by industry specialists who can reduce the administrative burden on employers and seek cost savings through their scale while staying on the cutting edge of retirement trends, regulatory developments, cybersecurity and technological innovation,” the report said.