Yield of Dreams

Rising Rates Could Blow Up Boomers' Retirement

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Baby boomers are expected to face major losses in their 401(k) plans and IRAs in the next few years as interest rates climb, according to a new study released Thursday by Casey, Quirk & Associates.

About $1.2 trillion of defined contribution plan assets are invested in fixed income, the study found. But when interest rates rise to even half their historical average, these plans will likely lose up to $180 billion, the Casey Quirk reported.

“Higher interest rates would disproportionately impact individuals and defined contribution plan participants,” the firm says. Currently, plan participants and individual investors hold $5 trillion in bonds, a majority of U.S. investor exposure to fixed income.

“Even a partial return to long-term nominal interest rates will trigger substantial losses to investors in traditional fixed income products,” Casey Quirk’s study found. “These clients, mostly retail fund shareholders and defined contribution plan participants, are unprepared for fixed income losses.”

But investors’ overall exposure to fixed income should remain steady. Instead Casey Quirk predicts the types of fixed income instruments used and demanded will change. Thursday’s study shows U.S. investors will dump $1 trillion in traditional fixed income products — core, core-plus, government, and benchmark-oriented fixed income strategies — into next generation fixed income products including global and emerging market bonds, high-yield and loan portfolios, alternative fixed income strategies, inflation and rising-rate defense strategies, and opportunistic mandates, particularly dynamic and multi-sector varieties.

“Winning fixed income firms will retool to diversify their revenue away from these legacy strategies, and communicate why it’s necessary to do so to their constituents, to clients, and to the broader market regardless of the timing and magnitude of interest rate shifts,” says Casey Quirk partner Yariv Itah. 

Many have already done so. In fact, some fund managers are rolling out new long/short bond strategies to hedge against rising rates.

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