n FOCUS ON FINANCE
Spread out, reduce risk
Why diversification
matters to pension
managers—as well as
your retirement funds
M
ark Schmid, Boeing chief investment officer, and his 15-person investment team have a significant
responsibility. The team manages more
than $45 billion in defined benefit pension
plans and more than $27 billion in defined
contribution savings plans.
“We’re very aware that a lot of retirements are riding on these,” Schmid said.
Under the defined benefit plans, eligible participants receive monthly payments
that are determined by formulas outlined
in their plans. Boeing funds the plans and
manages the assets.
Conversely, under the defined contribution plans, commonly known as the 401(k)
or savings plans, employees set aside a portion of their annual compensation, with
Boeing making matching contributions in
most cases. The employee decides in which
of the available options to invest the money.
For both plans, two fundamental principles apply: having a long-term view and
spreading money among several different investment choices—known as diversifying—
to reduce risk. Schmid, Corporate Treasurer
Paul Kinscherff and others remind fund participants about the benefits of diversification
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whenever they can. Yet, the data shows that
nearly 40 percent of participants in Boeing’s
savings plans invest in no more than two of
the available investment options.
“People should be very careful and ensure their investments are appropriately diversified,” Kinscherff said. “Diversification
is the best way to minimize the potential
risk to your investments while building the
personal wealth you’ll need for retirement.”
Kinscherff noted that employees can
assemble a well-diversified portfolio from
the 15 options Boeing offers in the savings
plans. Investment decisions should be made
in consultation with a professional investment advisor if possible, he added.
Employees who prefer a simpler way of
managing their investments can choose the
savings plans’ lifecycle funds, which are
well-diversified funds geared toward estimated retirement dates.
To ensure diversification within the defined benefit pension funds, Schmid’s team
invests with outside professional portfolio
managers across seven asset types, including U.S. and non-U.S. stocks, bonds and other fixed-income vehicles, and real estate.
During the past three years, those investments achieved 12 percent annualized
returns, reversing poorer results after this
decade’s dot-com boom went bust.
Boeing in recent years has contributed
more than $8 billion to the defined benefit
plans—which, measured by assets, are the
fourth-largest group of qualified retirement
plans in the corporate sector, topped only by
General Motors, IBM and General Electric.
Schmid’s team is taking steps to further
diversify what those plans invest in to make
them even less susceptible to the ups and
downs of the stock market. “We want to be
able to withstand the negative moves of major
stock markets,” he explained. “Diversification is as important to the pension plans’ investments as it is to a person’s investments.”
Funded status is a widely watched assessment of pension plan strength. To determine that status, the company compares
the asset amounts currently in the plans
with the value, in today’s dollars, of projected future benefits.
Boeing measures its plans’ status as of
Sept. 30. Based on this year’s valuation,
the defined benefit plans are fully funded.
“These plans are healthy, and we’d like to
remain fully funded,” Schmid said.
Many things influence the funded status,
including terms of the plans, actuarial assumptions about how long retirees will collect benefits, the discount rate used to determine present value of future payments, and
the value of the pension assets, which are
held in a separate trust.
Collectively, Schmid’s team has more
than 150 years of investment experience.
They’re often asked for investment picks,
which they’re not allowed to provide. But
they do offer some advice.
“I tell everybody the same thing,”
Schmid said. “You should put the most that
you can afford into your 401(k) plans. Boeing’s plans can help fund a good retirement
lifestyle, but you’ve got to plan today to
make that happen for your retirement.” n