Publication Date: April 2019
Publisher: Center for Retirement Research at Boston College
Author(s): Jean-Pierre Aubry; Kevin Wandrei
Research Area: Banking and finance
Keywords: Financing Retirement
Coverage: United States
State and local government pension funds currently manage about $4 trillion in assets for the nearly 20
million plan members. Generally, a plan’s board of directors establishes the fund’s target asset allocation,
and the allowable ranges around those targets, based on input from outside investment consultants as well as the plan’s own investment staff. But managing the asset allocation is the complex task given to the chief investment officer (CIO).
When investment performance causes the asset allocation to diverge from the targets, the CIO shifts money across various asset classes to bring the allocation back to the target – a practice known as rebalancing. Additionally, a CIO must navigate changes to target allocations that occur when plans periodically review and update their investment strategy – all the while keeping in mind the incoming contributions and upcoming benefit payouts for the plan. This brief describes the trends in target allocations for public plans, models their annual cash flows across major asset classes, and considers how different allocation styles within the target ranges might affect overall plan performance.
The brief proceeds as follows. The first section discusses target allocation policies for traditional stocks
and bonds, as well as more illiquid assets such as private equity and real estate. The second section examines annual cash flows by asset class between 2001 and 2017. It finds that, due to shifting target allocations, many plans were net sellers of equities during the financial crisis, which locked in losses and partially excluded them from the subsequent rebound. The third section investigates the potential impact of allocation style on plan performance. The final section concludes that, during the period studied, target
allocations mattered a lot for plan performance, and the adjustments available to CIOs had only a modest