August 27, 2007 14:16 ET

PIMCO Introduces Innovative Approach to Enhancing Asset Allocation Within Defined Contribution Investment Strategies

New Research and Analysis Supports Next-Generation of Target Date Glidepaths Designed to Reduce Investors' Risks and Increase Probability of Meeting Retirement Income Goals

NEWPORT BEACH, CA--(Marketwire - August 27, 2007) - PIMCO announced today the release of new PIMCO research and analysis supporting an innovative approach to asset allocation within defined contribution (DC) investment strategies that are designed to increase the likelihood of DC participants achieving their retirement savings objectives. The authors outline the PIMCO next-generation approach to DC asset allocation, offering the following key insights:

--  A DC plan's primary savings objective should be to maximize each
    individual's level of sustainable future spending power, net of inflation;
--  An expanded opportunity set that includes "real" assets can provide
    greater diversification benefits and inflation protection than can one that
    is limited to stocks and bonds only;
--  A liability-driven investment (LDI) approach toward optimizing asset
    allocation aims to reduce the risk of shortfall in future purchasing power,
    as well as reduce the disparity of future outcomes for all individuals,
    while potentially increasing the median return.
Seth Ruthen, CFA and PIMCO executive vice president, and Ryan Murphy, authors of the PIMCO paper "Creating the Next-Generation Glidepaths for Defined Contribution Plans," examined the effectiveness of asset allocation strategies within first-generation DC plans. "Existing target date strategies are very reliant on strong equity returns, regardless of time period, in order to generate acceptable returns for future retirees," says Ruthen. "The problem is that equity returns are volatile -- they can vary greatly from period to period, and there are many examples in which long-term stock returns even underperform inflation. That's simply not a risk that individuals can bear within their primary retirement savings vehicle."

In response, Ruthen says that using a liability-driven investment approach that features a diverse set of asset classes offers more potential advantages for risk management. "LDI is an asset allocation approach used by many sophisticated pension plans to tailor their investments to their specific plan objectives. This approach is equally valid in a DC context, and it can produce meaningful improvements over traditional stock/bond blends."

In PIMCO's analysis, TIPS, not cash, are used as the "risk-free" investment for plan participants. This is important because participants' savings objective grows with inflation, and TIPS are U.S. Treasury securities that explicitly offer a rate of return above inflation. Commodities and real estate are also used, in addition to U.S. and international stocks and bonds.

PIMCO's research shows that a second-generation glidepath, which blends these asset classes in a LDI framework, generally produces significantly fewer losers than do glidepaths that concentrate risk in a single asset class, such as U.S. equities. "This approach is designed to reduce individuals' risk of having a shortfall in purchasing power upon retirement, while also enabling them to realize investment gains across the range of macroeconomic environments that could materialize over the next 10 to 40 years." Importantly, PIMCO's research also shows that the median return modestly increases when the LDI-optimized glidepath is used.

PIMCO DC Strategist, Stacy Schaus, adds, "DC plans have moved from being a secondary retirement-income program to the primary one provided by most companies. We've also seen rapid introduction of target date strategies as the default investment option for DC plans. Therefore, the asset allocation within these target date strategies has become the critical factor in determining whether DC participants are likely to achieve or fall short of their retirement savings goal. We feel the innovative, asset allocation approach represents a significant advancement for DC plans, whether used within a default target date strategy or custom investment option."

Target date strategies adjust the asset allocation for DC plan participants based on an expected retirement date such as 2020, 2030, and so on. Typically, the asset allocation or glidepath for each strategy is modified over time and becomes more conservative as the retirement date approaches.

The PIMCO research debuts amid a flurry of new target date fund offerings and as the federal government moves to finalize its list of qualified default investment alternatives. Target date strategies have grown rapidly in popularity in recent years. According to a recent Hewitt Associates survey, 57 percent of DC plans offered these vehicles in 2006, and 56 percent of those who didn't at the time of the survey plan to offer them in the near future. What's more, the majority of consulting firms anticipate target date strategies to be the most prevalent default investment for DC plans (PIMCO DC Consulting Survey, 2007). Since these strategies are likely to dominate as the default of choice, it is critical to manage their asset allocations to maximize the probability of meeting a DC plan's investment objective.

Personal-income shortfall in retirement is a major cause of concern. The Employee Benefit Research Institute® (EBRI) projects that in 2030, millions of retired Americans will lack adequate income from retirement plans, with a cumulative shortfall conservatively estimated to exceed $40 billion annually.

To learn more about PIMCO's Defined Contribution practice, including the entire study and executive study, please visit


EBRI, Issue Brief No. 266, February 2004, Americans’ Future Retirement Security: Implications of the EBRI-ERF Retirement Security Projection Model, page 4; Hewitt Associates, SURVEY FINDINGS: Hot Topics in Retirement 2007, page 12


With more than $693 billion in fixed-income assets under management (as of 06/30/07), PIMCO is one of the world's leading fixed-income fund-management companies. Founded in 1971 and based in Newport Beach, California, the company is majority owned by Munich-based Allianz Group, a leading global insurance company with nearly $1 trillion in assets and represented in 70 countries around the globe.

This press release contains the current opinions of the manager and such opinions are subject to change without notice. This press release has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Past performance is no guarantee of future results. Each sector of the bond market entails risk. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of downturn in the market. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown.

Commodities are assets that have tangible properties, such as oil, metals, and agricultural products. An investment in commodities may not be suitable for all investors. Commodities and commodity-linked securities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, and international economic and political developments, as well as the trading activity of speculators and arbitrageurs in the underlying commodities. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. Inflation-indexed bonds issued by the U.S. Government, also known as TIPS, are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. Repayment upon maturity of the original principal as adjusted for inflation is guaranteed by the U.S. Government. Neither the current market value of inflation-indexed bonds nor the value a portfolio that invests in inflation-indexed bonds is guaranteed, and either or both may fluctuate.

Except for the historical information and discussions contained herein, statements contained in this news release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the performance of financial markets, the investment performance of PIMCO-sponsored investment products and separately managed accounts, general economic conditions, future acquisitions, competitive conditions and government regulations, including changes in tax laws. Readers should carefully consider such factors. Further, such forward-looking statements speak only on the date at which such statements are made. PIMCO undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Contact Information

  • Contact:
    Mark Porterfield
    Phone: (949) 720-NEWS (6397)