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‘Skilled Active Management’ the Solution to Volatility

Designing the optimal investment lineup in a 401(k) plan is a lot like working out: without having a strong core, it’s nearly impossible to achieve the best possible results, Ryan Mullen of MFS Investments believes.

And while taking some risks is good, without a solid foundation, everything can come crashing down, whether it’s those too-heavy weights at the gym, or an entire retirement portfolio, he notes.

In an article in the special Outcomes issue of NAPA Net the Magazine, Mullen cites the last two major bubbles in American finance — the tech bust of the late 1990s and the housing sector crisis in 2008 — as proof that a strong DC plan needs to be not just actively managed, but managed with a balance of investments that protects the participant in the event of a widespread financial calamity.

He calls this “skilled active management,” and it involves thoughtfully considering securities with long-term value in mind, and then taking calculated risks in the short-term that can further grow the plan without putting too much at risk to volatility.

Even in the short term, Mullen writes, volatility can hinder a retiree’s ability to earn compounded returns. For example, a 15% drop in a $100,000 portfolio would then require an 18% rebound in order to just get back to zero. He makes it clear that the solution to volatility isn’t passive management. While a passively managed core is lower in fees, Mullen writes, it’s just as dangerous in the event of a downturn as a hyper-aggressive fund.

“While an entirely passive core — whether at the plan lineup or participant portfolio level — may hold up well in continuously rising, efficient markets, it can actually weaken a participant’s outcome as volatility grows,” Mullen says. “Passive strategies take full market risk and thus follow the market’s short-term trends, upward or downward.”

To read Mullen’s article, click here.The Outcomes issue features industry thought leaders including Sheri Fitts, PAi’s Michael Kiley, Fiduciary Benchmarks’ Tom Kmak, Thornburg’s Rocco DiBruno, Retirement Resources’ Jim Phillips and Patrick McGinn, BlackRock’s Chip Castile, Richard Davies of AB Institutional Investments and execs from Newberger Nerman, American Funds, Pentegra and Transamerica. You can browse content from the issue in the “Focus: Participant Outcomes” section, in the Industry Intel tab.

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