But the standard path to retirement planning – the standard stock and bond portfolio – is not any longer as effective because it once was. Weaker diversification, falling real returns and rising inflation pose major challenges for each defined profit and defined contribution (DC) pension funds. As funds struggle to fulfill their return targets, investors are demanding that they be given access to latest and potentially riskier products is made possible. Fund managers must weigh these requirements throughout the context of their fiduciary duty.
Given these challenges, for higher or for worse – or at the least until regulators think along – many pension funds are considering allocations to cryptoassets.
So what does this mean for the long run of trust within the financial services industry?
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This signifies that profit cuts should not off the table. 60% of corporate and government-sponsored defined profit plans say it is probably going or very likely that they are going to need to regulate their advantages downward inside the following decade.
Plan participants are depending on payments from the pension fund. That pension funds could reduce their expected expenditure creates a deferred trust deficit that might undermine confidence in all the pension funding system.
To address potential shortfalls in returns and canopy unfunded liabilities, Pension funds concentrate on digital assets and the associated infrastructure. According to the trust survey 94% of state and federal pension plan sponsors said they put money into cryptocurrencies, together with 62% of corporate defined profit plans and 48% of corporate DC plans.
The crypto market has had a turbulent history, especially recently. Volatility was the norm, with rapid spikes resulting in extreme declines and vice versa.
As the cryptocurrency neared its all-time high, studies showed that a low allocation to digital assets as a part of a diversified portfolio could increase returns, improve the Sharpe ratio and reduce the portfolio’s maximum drawdown. Of course, given the recent crypto downturn, such conclusions may now not be applicable.
Taking into consideration the chance of direct investments in digital assets, corresponding to B. Fund CalPERS And CDPQ have invested capital in crypto-related assets to capitalize on the general momentum surrounding cryptocurrencies and the potential of blockchain technology, while avoiding the day-to-day volatility of direct crypto investments.
DC plans have also dipped their toes into the space. Fidelity Investments Plan participants can invest as much as 20% of their portfolio in cryptocurrencies.
So what does crypto demand appear like? The focus is on younger investors: 59% of 25-34 yr olds say they currently own cryptocurrencies. As digital natives make up a bigger share of plan participants and have more assets, the pressure on plan sponsors to offer access to digital products will only increase.
Percentage of those investing in cryptocurrencies by age group
But skepticism about expanding access to cryptocurrencies and derivative products is widespread. The US Department of Labor expressed ambivalence in response to Fidelity’s inclusion of cryptocurrencies in its 401(k) offerings, stating:
“The assets held in retirement plans like 401(k) plans are critical to financial security as we age – covering living expenses, medical bills and more – and must be carefully protected. “For this reason, plan fiduciaries, including plan sponsors and investment managers, have a strong legal obligation under the Employee Retirement Income Security Act to protect retirement savings.”
Warren BuffettMeanwhile, has described cryptocurrencies as speculative assets and predicted that “cryptocurrencies will end badly.”
Pension funds face an unenviable selection: pursue higher returns (and more volatility) or underperform. Cash inflows should not matching projected outflows and plan participants have a growing appetite for brand spanking new, alternative investment products. So how can the industry reply to these challenges and maintain customer trust?
Pension plan sponsors need to introduce latest products early. In fact, 88% of respondents said this within the trust survey. However, when these products are unregulated and their long-term performance is unknown, plan sponsors must consider whether or not they will be safely integrated into portfolios without jeopardizing the trust of plan participants or the profitability of their retirement savings.
As fiduciaries, pension plans must take a long-term view of investment growth and thoroughly consider and responsibly manage any allocation to latest asset classes. They must communicate to plan participants the risks related to these latest asset classes, including cryptocurrencies, to make sure investments align with clients’ goals.
To further increase investor confidence in financial services, retirement planning should be supported by solid due diligence. Pension funds and their participants must understand and consider within the products during which they invest. Without this standard, the trust deficit will only widen.
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