Conducting Strategic Allocation Reviews

Having a defined benefit plan is just the beginning, as any employer that offers one knows. There are many considerations that flow from that — and how assets are invested is one of them. After all, that does have a direct impact on the financial health of the plan and its ability to provide promised benefits.

In “Strategic Asset Allocation Reviews for DB Plan Sponsors,” Justin Owens, Senior Asset Allocation Strategist for Russell Investments, argues that “one of the most important choices DB plan investment committees will make” is choosing how the plan assets will be invested, and how those assets will be allocated in those investments. “Few other choices will have a greater impact on plan sponsors achieving their goals, and this it constitutes a crucial element of a well-designed investment policy statement,” he writes.

Owens calls strategic allocation reviews “an essential tool” in making those investment and allocation choices. And this is a process in which not only plan sponsors have an interest, but also administrators, consultants and service providers — and even participants. He writes, “When executed properly, a strategic review can offer the sponsor valuable insights into the mechanics of the plan, and lead to the making of sound investment choices for the benefit of plan participants and the organization as well.”

Following are key principles regarding strategic asset allocation reviews, according to Owens:

• the plan’s specific capital market outlook, goals, liabilities, policies and risk tolerance all have a role in the review;

• strategic asset allocation reviews should be completed every three years, or more often if there has been a significant change to the plan or the sponsors’ circumstances; and

• the split of liability-hedging and return-seeking assets, and the allocations within those categories, are critical matters to be decided.

Owens says that the most common reasons a new strategic review is conducted include freezing a plan as well as significant changes to a plan’s:

• size;

• demographics;

• design;

• objectives;

• risk tolerance; and

• funded status.

The review, according to Owen, can take months and should consider:

• the split between liability-hedging and return-seeking assets;

• the composition and duration of asset allocations;

• dynamic asset strategies;

• multi-asset strategies; and

• risk tolerance.

But simply conducting such a review is not enough, Owens argues — it must be acted upon. Says Owens, “Following through on a well-thought-out and well-designed investment strategy will help the sponsor to satisfy its fiduciary responsibilities while seeking to reach long-term goals.”