Pension Fund Asset Allocations You Can Use

Written by The Dividend Guy on March 27, 2008

Pension Plan Asset Allocation

If you are trying to figure out an asset allocation to use in your own portfolio, pension funds are good places to look for ideas. In fact, some experts suggest that individual investors would be wise to follow the lead of the pension plans. The reasons are pretty simple if you think about it.

First, pension plans are invested for the best balance between risk and reward. The cannot be too risk adverse, or they run the risk of not being able to meet the future withdrawal requirements of the fund that it’s participants will require when they retire. They also cannot take on too much risk, or they run the risk of the portfolio blowing up and once again, not being able to meet the needs of future withdrawals from the fund. Thus, pension plans have invested a great amount of resources in determining what the best asset allocation is given their requirements, which leads us to the second reason investors would be wise to follow the pension plans as a guide - some of the best minds in finance work for pension plans.

The second reason for understanding what the pension plans are doing is that they employ some of the best minds in finance and their strategies are typically deeply routed in theory and best practices. These people are not the mutual fund managers that you are used to seeing - they are not sales people. Instead they are doctorates and other highly educated academics that have done complex research on what works best in investing. Since I don’t have this background or expertise, I like to look at what they are doing to learn best practices.

The Asset Allocation Research

I did some looking around the web and identified an interesting study completed by the folks at Mercer, who are a large advisory firm to human resources departments. Mercer advises on things such as compensation, benefit plans, and in our case pension plans. In one particular report (pdf) they provided a breakdown of the pension plans utilized by companies within the S&P 500. Here is what that asset allocation looks like:

Pension Plan Asset AllocationClick to Enlarge

As you can see, there is not an overwhelming portion of this portfolio in equities. Fixed income makes up a large component. I would like to see how these funds breakdown their equity components - domestic, global, emerging, etc. I was unable to find that detail in this report but will keep looking.

Is this a good guide for most investors? I would suggest that it is a great place to start. There are good reasons these pension plans have chosen this target asset allocation. If you are looking for additional readings on choosing the right asset allocation, be sure to take a look at William Bernstein’s books on the topic.

(Photo Credit: Steve Woods)


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13 Comments so far

  1. Dividends4Life March 27, 2008 7:30 am

    Very interesting read, thanks for sharing it!

    Best Wishes,
    D4L

  2. Leslie March 27, 2008 9:00 am

    The only I would caution is that pension funds may have a longer investment horizon than a given reader. Ensure whatever asset allocation you select is suitable for your specific situation.

  3. Leslie March 27, 2008 9:00 am

    The only thing I would caution is that pension funds may have a longer investment horizon than a given reader. Ensure whatever asset allocation you select is suitable for your specific situation.

  4. 45free.com March 27, 2008 11:07 am

    There are literally 100’s of asset allocation models on the net. Most bank/investment sites have something that you can key in a few data points and it will kick out an allocation. Probably a great place for the average investor to start and at least get the breakdown of foreign/domestic/sector equity components you mention is lacking from the pension slide.

    You can try the “Investor Profiler” here…shows BMO specific funds but the output can be used anywhere.
    http://www4.bmo.com/investments/0,4629,35649_24103457,00.html?pChannelId=24103457

  5. http://dividenddollar.wordpress.com/ March 27, 2008 1:16 pm

    I have to agree that pension plans make a great model for people starting out and they have no idea what their asset allocation should look like.

  6. Dave March 27, 2008 1:50 pm

    I think pension plans are a good model for retired investors. Bear in mind that pension plans are paying out current benefits so they must keep their volatility down. A working individual who is contributing to an investment account can maintain a higher equity exposure, if it is consistent with their risk tolerance.

  7. Dividend Dollar Daily Round Up « Dividend Dollar March 27, 2008 2:51 pm

    […] For those of you who don’t know what your asset allocation should look like, The Dividend Guy has a good post about possibly modelling your asset allocation after pension plans. […]

  8. Around the PF Blogosphere: March 27, 2008 | The Suns Financial Diary | A Personal Finance Blog on Saving and Investing March 27, 2008 8:55 pm

    […] how to determine the asset allocation of your portfolio? The Dividend Guy says you probably can get some ideas from asset allocations of pension funds. Another place I can suggest is the portfolios of lifecycle funds (or target-date funds) which […]

  9. Carnival of Personal Finance #146 - Online Broker Tips Edition | Stock Trading To Go March 31, 2008 6:53 am

    […] Dividend Guy from The Dividend Guy presents Pension Fund Asset Allocations You Can Use, and says, “If you are researching what your portfolio’s asset allocation should be, a […]

  10. The Yale Endowment Fund Asset Allocation » The Dividend Guy Blog April 1, 2008 5:56 am

    […] of that portfolio and the combination of assets you hold. Like last weeks article which looked at asset allocation of pension funds I had a look at some other big-time money managers for how they structured their asset allocations. […]

  11. Listed in Carnival of Personal Finance #146 - Online Broker Tips Edition April 1, 2008 8:16 am

    […] the heading of Investing, there is an interesting article from The Dividend Guy titled, “Pension Fund Asset Allocations You Can Use.” I am at the point where I am not willing to take on the risks I did last decade. The […]

  12. Sara - PensionComparison.com April 2, 2008 12:50 pm

    People can’t rely on employers for their retirement, pensions should be a priority and the earlier you start contributing, the better off you will be in retirement.

  13. Enhancing My Asset Allocation » The Dividend Guy Blog April 3, 2008 6:36 am

    […] have been doing a lot of thinking recently about asset allocation and subsequently a great deal of research and investigation into what makes up a good asset allocation model for a portfolio. During this […]

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