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With 401(k)s, 1 size fits all

By Jennie L. Phipps ·
Tuesday, September 17, 2013
Posted: 10 pm ET

The challenging economy over the last five years has changed the way money managers invest money in pension funds.

According to a report by Create Research for Principal Global Investors, nearly half of the managers of old-fashioned, defined benefit pension plans have money invested in each of these three asset classes:

  • Emerging markets bonds.
  • Alternative credit (senior loans and commercial credit).
  • Infrastructure investments.

Only 7 percent of defined benefit pension managers are investing in real estate, and just 13 percent are choosing high-yield bonds -- two asset classes that used to be at the top of the list.

"Market valuations have become distorted, with price-earnings ratios having no sensible anchor points," says Barb McKenzie, chief operating officer of Principal Global Investors, the asset management arm of the Principal Financial Group. "As a result, choosing real assets and alternative investment options has become a new way to navigate risky markets."

So where does that leave the rest of us who are saving in defined contribution plans like 401(k)s that don't rely on investment experts to ensure their profitability?

Principal's survey finds that 45 percent of people are putting their 401(k)s in diversified growth funds, while 63 percent are investing in target-date funds. McKenzie says that the reality is that, unlike managers of old-fashioned pensions, plan providers of 401(k)s have to satisfy all kinds of investors at varying ages with differing philosophies and savings goals.

Will savers in 401(k)s and other defined contribution plans ever have more of the fund management advantages that participants in defined benefit plans enjoy? "I think that isn't realistic," she says. "There's a lot of chatter about annuities, but I don't see that taking hold. There isn't enough room on the balance sheets anywhere in the world to write the kinds of annuities everyone wants."

Her tough advice for those of us locked into 401(k) plans is:

  • Be disciplined in your savings.
  • Plan for longevity.
  • Expect the unexpected.
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1 Comment
September 23, 2013 at 1:09 pm

Oops, forgot the last bullet point on the list. I'll add it. :)

* Save in your 401(k) for your nursing home, but don't expect to take a 20 year vacation at the end of your life on it. Most people worked until they died or couldn't until the WWII generation. The party is over for the moment.