What Do Rising Prices Mean for Retirement Saving?

John Iekel

We all know what rising prices mean for the pocketbook and balances now, but what do they portend for retirement plans and saving?

“They say it’s only temporary, but we’ve seen the highest rise in inflation in quite some time,” writes Chris Carosa in the Fiduciary News entry, “401k Plans and Inflation–What Can (And Should) a Plan Sponsor Fiduciary Do?” He asks what a plan sponsor can “do within its fiduciary capacity to help plan participants incorporate inflation into their retirement planning calculus?” 

Carosa suggests that plan sponsors “stick to the simple” and let the service providers deal with the complexities that can arise in inflationary times. Derek S. Taddei of HoyleCohen, LLC, told Carosa, “Plan sponsors should not be in the business of making ‘timing’ decisions regarding menu choices, and being forced to be reactionary to participant inquiries.”

Another possible response, Carosa suggests, is to act in the spirit of the Pension Protection Act of 2006, whose intent was in part to encourage making more than just “safe,” that is, “low-return,” investments. “The most important rule in beating inflation over the long term is to continually grow the assets in the account,” writes Carosa, adding that “retirement savers practically define what is meant by ‘long term.’”

The problem with such conservative investments, Bankrate.com Chief Financial Analyst Greg McBride tells Carosa, is that inflation can have a “corrosive” effect on them. “Even a modest 2.5%-3% rate of inflation will cut your buying power in half in 25 years,” he warns. 

And determinations regarding investments can be complex, Carosa suggests, noting that there are a multitude of views about what strategy would be best. In addition, the strategy for one investor may not be the best for another. Further, he argues that a strategy that is on “autopilot” may work well in times of low inflation but can leave savers ill-prepared during inflationary times. 

Helping Participants

So what can be done to help retirement savers counter the effect of inflation on their nest eggs? Carosa reports that American Trust Chief Investment Officer Kevin Freehardt suggests that plan sponsors work with an investment fiduciary to help in making informed decisions about how to manage inflation within the plan.

Tiffany Lam-Balfour suggested to Carosa that plan sponsors and fiduciaries could better help participants by: (1) providing them with more resources so they can better understand retirement investments; and (2) guidance concerning individual participants’ financial situations and how best they can allocate their assets. Brad Houle, Executive Vice President, Fixed Income Research and Portfolio Management at Ferguson Wellman Capital Management, expressed a similar sentiment, emphasizing the importance of plan sponsors helping participants to determine proper asset allocations.

“Retirement savers need to be reintroduced to what that corrosive effect of inflation actually is and what it can mean to their portfolios,” argues Carosa. He continues that it is important that retirement savers “realize how different investments behave when inflation rears its bloated head, and which kinds of assets offer the safest harbor in times of higher inflation.” Not only that, he says, rising prices heighten the risk that interest rates will affect fixed-income instruments.

And Carosa suggested that it could be helpful to return to “investing basics” in educating plan sponsors and participants. “It’s been such a long time since we’ve had to worry about inflation that people may have forgotten how to deal with it in terms of their retirement investments. Let’s remind them,” he suggests.