Shorter-term assets get longer look

Your Money


Retirement money used to be the definition of long-term investing, with pension managers encouraged to think of their portfolios with time horizons even longer than a single lifetime in order to maximize investment results for the plan over time.

Amid the current U.S. pension-law overhaul and a rush to shorter-term fixed income strategies in other workplace savings plans, those horizons are looking shorter.

Many pension managers are alternatively turning to the safety of bonds at the same time they are expected to dabble more frequently in riskier investments to try to juice returns.

Employers "are trying to get their arms around what all the changes mean for asset allocation," said Jim Moore, a senior vice president with Pacific Investment Management Co., the bond giant known as Pimco.

On the pension side, changes in accounting standards and funding requirements are forcing employers to consider far less aggressive portfolios that will match shorter-term obligations.

Employers are showing more interest in stuffing their 401(k) plans with shorter-term bond offerings as yields stay at or near those of longer-term maturities.

"We've received increased requests for proposals from plan sponsors looking for a short-term component in their retirement plans," said Kimon Daifotis, chief fixed-income investment officer for Charles Schwab Investment Management.

Employers also are quick to yank underperforming assets from plans, said Pam Hess, a retirement plan expert with Hewitt Associates.

"Retirement is a marathon, but we've really seen the patience of plan sponsors get shorter," she said. "Funds get replaced much quicker today and usually get pulled just at the wrong time."

As for fixed income, less than 16 percent of assets in employer-sponsored plans are invested in bonds or stable value funds, said David Wray, president of the Profit Sharing/401(k) Council of America.

But through a back door, millions of investors are getting into shorter-duration bonds through their target-date retirement funds. Many of these funds include investments that track the Lehman Aggregate Bond Index, which is set at about 40 percent shorter-duration bonds.

Ultrashort bond funds have been gaining ground with retail investors, too. Since 2000, the number of bond funds in the ultrashort government and corporate category has grown 37 percent, to 52 funds with $32.7 billion in assets at midyear, according to data from Morningstar Inc. During the same time period, long-term corporate bond fund offerings declined 13 percent, to 26 funds with $12.9 billion in assets.

What does this several-fronted push toward a shorter-term investment horizon mean for investors?

For starters, it potentially means traditional pension plans won't be able to rely on frothy stock returns for funding, which could in turn force more plans to freeze or lower future payouts to younger employees, several industry experts said.

It also could mean pension plans might lower their stock allocations and increase investments in hedge funds, private equity and real estate. Because pension plans now account for a significant share of the equity markets, that could put further downward pressure on stocks in the future.

Investors should be aware of these changes and realize that shorter-term investment horizons come with higher volatility. In short, the message seems to be, get used to it.

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