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.
