The Role of LifeStage in a Long-Term, Disciplined Investment Strategy

The article posted last week stressed the importance of adhering to a long-term, disciplined investment strategy. It pointed out that successful investors consider various possible outcomes when deciding how to allocate account balances among a portfolio of diversified investments. It mentioned that in addition to known factors, such as the cost of maintaining one’s current lifestyle and one’s accumulated savings, there are a number of unknown factors that should be considered in managing investments. These unknown factors include future inflation rates, the interest rates at the time of retirement and one’s lifespan.

This article focuses on the LifeStage Investment Management Service (LifeStage) and its role in helping manage General Board of Pension and Health Benefits (General Board) participants’ retirement account balances.

LifeStage is used to manage nearly all participant balances in the Ministerial Pension Plan (MPP) and is available as an option for managing participant defined contribution (DC) balances in the Clergy Retirement Security Program, Horizon 401(k) Plan, Retirement Security Program for General Agencies and United Methodist Personal Investment Plan. At the end of June 2008, approximately 60% of DC plan participants were using LifeStage to manage their accounts.

During the past several months, participants have seen a reduction in their account balances as a result of significant declines in U.S. and world stock markets. Several participants have inquired about the role of LifeStage and why it did not prevent losses in their accounts.

In considering LifeStage’s role in managing account balances, it is important to understand that it is designed to manage many different kinds of risk. A declining stock market is just one of many risks that must be considered in developing and following an effective, long-term, disciplined investment strategy.

A number of investors, including a small number of participants in the General Board’s DC plans, have responded to the current credit crisis and falling stock markets by transferring all of their assets to low-risk funds, such as the Stable Value Fund. As a long-term strategy, this might be appropriate if one believed that there would be no inflation for the remainder of his or her lifetime. However, an extended inflation-free period is unlikely.

Just as the current market environment has eroded the value of accounts with significant exposure to stocks, an extended period of high inflation will erode accounts’ purchasing power. For example, an eight-year period with an average inflation rate of 9% would decrease the purchasing power of a dollar by 50%. While 9% is a very high inflation rate, the U.S. experienced such an inflation rate for the eight-year period ending in 1981.

LifeStage is designed to consider many different factors in developing the allocation for an account among five of the General Board’s funds. In addition to short-term market volatility, it considers inflation risk, longevity risk (the risk of outliving retirement assets) and the risk of higher or lower interest rates and their impact on the value of a participant’s MPP annuity. It is impossible to completely eliminate all of these risks, however. And attempting to remove any one of the risks could expose a participant to a different—and perhaps more significant—risk. LifeStage attempts to balance and effectively manage the impact of all of these risks, but it cannot eliminate any single risk.

LifeStage also looks at a participant’s known expected retirement benefits. In addition to participant MPP and DC balances, LifeStage considers accumulated benefits from General Board-sponsored defined benefit plans, such as the Pre-82 Plan. LifeStage also considers Social Security benefits for a participant who is eligible to receive them. As a participant ages, LifeStage automatically adjusts its fund allocations. As one gets closer to retirement, LifeStage will increase the allocation to lower-risk investments.

Finally, a key element of a disciplined, long-term investment strategy is setting targets for each different type of investment and ensuring that balances are allocated consistent with the targets. Disciplined investors adhere to a strategy known as rebalancing to ensure that funds are allocated according to the targets. LifeStage is no different. In periods of strong stock markets, LifeStage will sell a portion of stock holdings at higher prices to rebalance back to established targets. Likewise, in periods of weak stock markets, LifeStage adds to its stock holdings to again maintain established targets. Such a strategy follows the time-tested rule of buying low and selling high.

There are many risks that must be considered in allocating balances in a diversified retirement portfolio. LifeStage is an excellent tool for helping participants manage these risks and reach their retirement goals.

David Zellner
Chief Investment Officer
General Board of Pension and Health Benefits