Revisiting Corporate Pension Fund Allocation

By McCarthy, Ed | Journal of Accountancy, February 1999 | Go to article overview

Revisiting Corporate Pension Fund Allocation


McCarthy, Ed, Journal of Accountancy


Make calm, defensible strategy decisions--even when markets are stormy.

The party ended with a bang last summer. Financial executives in charge of corporate pension plans had looked like heroes without much effort for several years. But after three consecutive years in which even the S&P 500 index registered 20%-plus returns, the index dropped 10% in third-quarter 1998, with the trough almost 20% below peak. The market falloff signaled a need to look at corporate-level financial planning. Other market indices, especially foreign markets, fared worse than the S&P index, casting doubt on the conventional wisdom that diversification offers a safe harbor in troubled markets. Nor did the indices fully reflect the breadth and depth of the damage. Over 75% of NASDAQ-traded stocks fell more than 30% from their highs for the year. At times only long-term U.S. Treasury bills offered any shelter, and even their yields dipped below 5%. For many pension plan sponsors and their management committees, the 1998 third quarter could not end too soon.

Pension plan sponsors and others with fiduciary responsibility for corporate pension money now need to consider their investment strategies with extra care. Don Trone, president of the Investment Management Council (IMC) in Lafayette, California, a consultant to investment advisers, is coauthor of the best-seller The Management of Investment Decisions. He suggests that investment committees follow a well-defined sequence whether they are starting new plans or managing existing ones (see exhibit 1, page 41) and that they stick to their written policy. The Big 5 accounting firms have made use of this sequence and have used other components of IMC's services in their investment consulting practices, Trone says.

Exhibit 1: Steps in the Investment MAnagement Process

1. Analyze the current position.

2. Design optimal portfolio.

3. Formulate investment policy.

4. Implement policy.

5. Monitor and supervise.

Source: Adapted from materials issued by the Investment Management Council, Lafayette, California. Copyright [C] 1993; printed with permission.

EVALUATE THE PLAN'S CURRENT POSITION

Investment committee members should look into all aspects of the plan, covering its investment strategies, current holdings, the company's anticipated contributions and the plan's disbursements. Because each plan has a unique set of participants, the most appropriate investment strategy may vary widely between plans. Trone cites the example of a company where most employees are relatively young. Because the pension plan at a young company will not incur large distributions for many years, the committee can prudently consider less-liquid, long-term investments. In contrast, a mature company's plan faces more constraints. "At a steel mill, where the likelihood is that you have more money going out of the plan than coming in because your workers are older and many may already be retired, you clearly have a time horizon of less than five years," Trone says. "Your choice of asset classes will be significantly hamstrung. The most appropriate classes will be fixed income and cash."

At this point, the investment committee can compare the plan's existing investment allocations with projections appropriate for its requirements. If the steel mill's pension funds are entirely invested in technology stocks, or the funds from a high-tech start-up with no participants over 30 are entirely in Treasury bills, a fiduciary has a responsibility to act.

Once the investment committee has identified the appropriate asset classes, it should determine allocations among those classes. In this stage, actuarial assumptions and projected investment results all but determine the investment mix that the fund managers must adhere to.

Actuarial reviews are available from several sources. The larger consulting firms advising investment committees frequently "bundle" actuarial and other services (investment consulting, record keeping, etc. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Revisiting Corporate Pension Fund Allocation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.