Pension Funds Are Fleeing Stocks. Should You?
In trying to chart your own course to invest for your retirement, it's useful to look at what major companies are doing with their pension-fund money to try to achieve the same goal for tens of thousands of employees. Although each company's pension fund has its own unique set of circumstances to consider in making its investment decisions, pension funds nevertheless share the same need to invest both for current income and long-term growth that retirement savers and retirees have to satisfy in their personal finances.
Lately, as the stock market has pushed toward new highs, many individual investors who've been on the sidelines have finally seen the health of the market as a sign to get back into stocks. Yet among pension funds, the recent trend seems to be the opposite, as many major companies are cutting back on their stock allocations in favor of more conservative and predictable investments.
Playing it safer
Ford is the latest company to make changes to its pension-fund allocation. Ford officials told analysts last week that the automaker would slowly move more of its assets toward bonds and other fixed-income securities.
But you shouldn't conclude that Ford is basing its move on a bearish bet on stocks. Rather, the motivation for shifting more money to bonds has more to do with the complex calculations that determine whether a pension fund is adequately funded. Several companies, including Lockheed Martin and United Parcel Service , have followed suit in boosting their pension-fund bond portfolios.
Specifically, the problem that Ford and other pension funds have faced in recent years is that falling interest rates have increased the present value of their future obligations to workers and retirees, widening the deficits between what they owe and the assets they have on hand. Ford said that falling rates increased its pension deficit by $8.9 billion in 2012, dwarfing the $1.8 billion it earned in investment returns and the $3.8 billion it contributed to the fund. In the future, a move of just a single percentage point in the benchmark it tracks for pension-funding purposes would produce a change of between $2.3 billion and $2.8 billion in its funding status.
Why you're different from a pension fund
By moving more money into bonds, pension funds are able to match up assets with liabilities more effectively. Because bonds have fixed maturity dates, you can tailor bond purchases to provide exactly the cash flows you'll want in the future. In addition, because bond prices move with interest rate changes, bonds held in a pension-fund portfolio tend to offset the impact that rate changes have on funding requirements.
But the big difference you face in your investing is that pension funds can always go back to their parent companies and demand more money to meet shortfalls. Indeed, given the huge shortfall that Ford faces, it plans to contribute another $5 billion to its pension plan this year. General Electric and Boeing also have massive pension shortfalls and will likely have to follow suit with additional contributions of their own in the coming years.
By contrast, once you stop working, you won't be in a position to add any more contributions to your retirement savings. Given that most people can't save enough to provide for a secure retirement with ultra-safe bonds, taking a more aggressive stance toward retirement investing is pretty much a necessity.
Moreover, you don't benefit from the same accounting rules that pensions enjoy. A rise in interest rates may reduce pension-fund obligations, but it can also crush the value of a bond-rich portfolio. If you take on a lot of bonds in your portfolio, rising interest rates could create capital losses -- the opposite result of what you would have intended.
Follow your own path
Doing what pension funds do may make sense intuitively, but moves from Ford and others to sell stocks aren't an implicit call for an imminent stock-market crash. Rather, they reflect specific accounting rules that don't apply to you, and so following their lead could have much less attractive consequences for your retirement savings.
Pension woes aside, Ford has been performing incredibly well both as a company and as a stock. But are there hidden risks with the stock that investors need to know about? For in-depth analysis on whether Ford is a buy right now, and why, you're invited to check out The Motley Fool's premium research report on the company, authored by one of our top equity analysts. Simply click here now to claim your copy today.
The article Pension Funds Are Fleeing Stocks. Should You? originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Ford and United Parcel Service. The Motley Fool owns shares of Ford, General Electric, and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.