EBRI Issue Brief

Diversity of Pension Investments

Jul 1, 1991 18  pages


  • Defined contribution plan assets and defined benefit plan assets are generally invested by sophisticated investment managers hired by plan sponsors. However, defined contribution plan participants generally determine the mix among equities, bonds, money market funds, etc. Institutions and individuals may differ in their tolerance of risk, experience with and knowledge of investment markets, time horizons, and the overall size of their investments.
  • Tradeoffs between risk and return, which result in different investment mixes, will affect investment performance and, consequently, the benefits participants receive on leaving a job or at retirement.
  • To obtain and maintain their tax-favored status, private pension plans must follow the guidelines of the Employee Retirement Income Security Act of 1974 (ERISA). Public plans are exempt from most ERISA provisions and must follow guidelines passed by the sponsoring government.
  • A recent public policy issue concerns the takeover of the Executive Life Insurance Company by the California Insurance Commissioner. The guaranteed investment contracts (GICs) and annuities that pension plans purchased from this company may be worth only a fraction of their original value. Pending lawsuits in this case have raised the question of who should sustain the losses—the corporate plan sponsor or the individual participant.
  • Pension investments are not limited to stocks and bonds. ERISA does not directly prohibit any investment for private pension funds except those deemed imprudent. Alternative investments include real estate, corporate private placements, international investments, securities lending, and derivatives such as commodity futures.