A Balancing Act: Managing Cash-Balance Liabilities in a Higher-Rates Regime

2023 | By Ryan Miller and Max Guimond Defined Contribution Insights

Many corporate plans with cash-balance liabilities may benefit from short-duration or securitized strategies that can keep pace with high crediting rates while minimizing duration risk.

While defined-benefit plan sponsors typically manage annuity-based liabilities with long-duration hedging strategies, non-traditional cash-balance liability plans involve far more complexity.

Companies typically offer cash-balance plans to new employees while current employees can draw benefits from both traditional and cash-balance plans. As a result, many corporate sponsors need to manage both plan types.

We believe that managing two distinct asset portfolios, each with a different ojective, can more precisely help manage the risks inherent in each liability profile.

Introduction
Liability-Driven Investing (LDI) has become standard practice for most US defined-benefit plans. Improvements in techniques mean that liabilities can often be efficiently and accurately hedged with a blend of long-duration fixed-income strategies. Well, traditional liabilities, that is. As it turns out, many corporate plans maintain both a traditional and cash-balance plan liability. The latter is often underserved by traditional LDI approaches, leaving sponsors to either ignore the unique risk profile of these plans or simply manage them in the same way as the larger traditional liability on their books.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall.

All information provided is for informational and educational purposes only and is not intended to provide investment, tax, accounting, or legal advice. As with all matters of an investment, tax, or legal nature, you should consult with a qualified tax or legal professional regarding your specific legal or tax situation, as applicable. The preceding is not intended to be a recommendation or advice. Tax laws and regulations are complex and subject to change.

The views expressed here are those of the authors and should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers, may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

The views expressed herein are those of Schroders Investment Management (Schroders), are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. The opinions stated in this document include some forecasted views. Schroders believes that they are basing their expectations and beliefs on reasonable assumptions within the bounds of what they currently know. The views and information discussed should not be construed as research, a recommendation, or investment advice, nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Schroders or Hartford Funds.

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Insight from sub-adviser Schroders Investment Management

Ryan Miller, CFA, ASA

Solutions Manager

Max Guimond, CFA

Solutions Manager