Investors — and those who manage their funds — are no strangers to risk. But acceptance of risk does not equate to helplessness, nor to inevitable loss. “Using Tactical Asset Allocation to Manage Participant Risk,” (free; login required) a recent webinar by F-Squared Investments moderated by NAPA Net Editor-in-Chief Fred Barstein, offered ideas on how to meet risk head on and mitigate it, if not head it off.
To the average individual, risk management boils down to, “Don’t lose my money,” F-Squared President and CEO Howard Present said, based on what his counterparts in the field have found. Part of the problem, Present said, is that most of the industry is centered on beating a benchmark. That’s appropriate when the market is going up, he said, but not when there is a downturn — which is when clients need to know that their money managers are protecting them.
Another problem, said Present, is that the investment industry has been commoditized, and the advisor that comes in with the lowest bid often ends up getting the client. One way to address that, he suggested, is to offer potential clients a better solution and the capacity to de-risk.
Bradford Campbell, of Drinker Biddle & Reath LLP, pointed out another important consideration: although what constitutes fiduciary duties under ERISA is relatively unchanged in the 40 years since ERISA was enacted, the things that fiduciaries do to meet their ERISA obligations has. Campbell identified four considerations for adding risk management options:
• ERISA fiduciary standards require adaptation to changing circumstances;
• fiduciaries must take participant needs into account as part of the decision-making process;
• participant risk tolerance should be part of an assessment of participant needs; and
• investment options not available in the past may be prudent and desirable now.
Campbell said the fiduciary process for adding risk-managed products requires:
• evaluating the products that are available;
• assessing how those products meet participants' needs;
• understanding the investment process of chosen products;
• assessing how reasonable fees are; and
• reviewing the investment policy statement and modifying it if necessary.
Present identified three ways to incorporate risk management into a plan investment menu design:
1. Core funds. This involves indexing relative to performance in a healthy market and managing risk in a declining market.
2. “Sleeve” within a model portfolio. This involves market-responsive risk management, reducing volatility.
3. Standalone qualified default investment alternatives. This involves two layers of risk management: asset class diversification and active downside risk management.
“As the professional at the table,” Present said, “you have the best understanding of what’s available.”
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
