Hedging Against Volatility


The S&P 500 was flat for the year but what a ride…The extreme volatility makes me wonder about plan participants close to retirement – how do they hedge against extreme volatility?

One strategy is to park assets in their plan’s stable value option where – depending on the stable value product used – it should be generating somewhere between 1.5 – 2.5 percent. The rationale is simple: at least it stays current with inflation and the principal is protected. The problem with this approach is that it: (1) assumes that a participant has access to a stable value option; (2) assumes that a participant has a sufficient amount in their retirement account to allow for a monthly/quarterly distribution to retirement needs; and (3) doesn’t allow much room for portfolio growth just before and during retirement.

Another option is to use each plan’s “2010” or “Retirement” income sleeve in order to protect the portfolio from significant downside risk but at the same time allow for some growth. But even the relatively conservative “to” off-the-shelf target date funds have equity exposure of between 20 and 50 percent at and through retirement, which can invite excessive volatility.

The other solution is to start looking for a legitimate retirement income solution like an in-plan annuity (basically, a guaranteed withdrawal minimum amount that participants can budget around like Social Security) or at a very minimum, an annuity marketplace. This is Blue Prairie Group’s focus going into 2012. With the completion of the first generation stable value database (more on first vs. second generation in a later blog posting) we are working on a BPG “retirement income d-base.” I will be writing much more on this topic in the coming weeks and months and we have an aggressive internal deadline for completion.