Plan Sponsors and Service Providers share the burden of keeping plan participants informed concerning their 401(k) Plan and 403(b) Plan but Plan Sponsor Fiduciaries retain all of the responsibility for failing to do so. Unexpected fixed income losses in retirement plans will gain the attention of participants quicker than losses among other asset classes. Once a retirement plan portfolio reports a loss the ability to adequately alert plan participants has passed. Fixed Income is normally added to a retirement portfolio to stabilize the portfolio.
Taking stock of exogenous variables leads one to believe that interest rates would not be the target of an interest rate hike: Pro-business Administration and less than robust economic conditions. The Federal Reserve Board of Governors are split on the question of “What to do?” Many experts feel there is too much risk in raising interest rates too early. The question is a familiar one – Is the economy growing too rapidly or is there sufficient room to let the economy continue to expand?
How do Interest Rates Impact your Retirement Plan?
A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. This phenomenon is known as interest rate risk.
If your participants hold their bond investments until maturity there would likely be no realized loss. However, the overwhelming majority of retirement plan assets are held in a collective or common asset structure – such as Mutual Funds, Collective Investment Trusts or Pooled Funds – where “holding bonds until maturity“ may not be an option.
Worker Productivity also an Issue
Watching retirement plan assets evaporate can be unsettling for your workers. Not only can asset balances erode, but worker productivity can also suffer as employees gather in the break room to collectively commiserate over the losses in their 401(k) plan.
It makes sense to have your plan Education Policy reflect periodic education which contains references and examples of the risks of investing in fixed income when in a low-rate environment.
