Pension plan investment returns: Some thoughts and observations

With market volatility of stocks very apparent these days and interest rates on fixed income investments at historic lows, what can a plan sponsor, or the investment committee, of a defined benefit pension plan do to manage portfolio returns?

Asset allocation
We’ve all heard that asset allocation is one of the most important drivers in the return of an investment portfolio. One of the often overlooked aspects of this is setting a rebalancing policy, too. When equities gain value, pushing that side of the portfolio outside of preset allocation ranges, having a rebalancing policy allows the portfolio to capture some of the gains and bring the expected risk/return profile of the plan back into the defined targets. This can be as simple as noting in the policy that if an asset category moves more than 5% above its stated target weight in the portfolio, some will be trimmed and reinvested among the other assets that are presumably under-weighted.

Look at plan expenses
If the plan allocates expenses related to plan administration to the investment portfolio, it is good fiduciary practice to look at those expenses and determine if they are reasonable and fair.

Where are some areas to look?

  • Trust/custody services
    • You may have a good relationship with your trustee/custodian and they may do great work. But are the fees fair for the services provided?
    • Have assets grown since you switched providers? Your fee may be based on asset size and may have gone up as well.
    • Take a look at other providers, or consider asking your current provider for a discount.
  • Investment management fees (this has a lot of avenues to look at!)
    • Are you in the right vehicle? Based on the plan size, what is a good investment: mutual fund, ETF, separate account?
    • For the investment, is the expense fair compared to other managers in the category?
    • Is your manager or consultant getting “soft dollars” for sending assets or trades to a certain manager/brokerage?

Asset allocation is important; it does drive the return and level of risk of the portfolio. Keep an eye on this and set a policy for monitoring and for when rebalancing occurs. Much scrutiny has been placed on defined contribution (DC) plan expenses as of late and little emphasis on defined benefit plans. As a fiduciary, you need to keep an eye on expenses for your defined benefit plan as well. This is especially true if they are being passed through and paid from the investment trust, because they are directly affecting the return of the portfolio. I’ve written a number of DC plan fiduciary-related articles, and now it’s on to DB this year, so stay tuned.

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