Adjusting Risk As Workers Age: Oregon Investment Council Approves Strategic Shift for Individual Account Program

TIGARD, Ore., Sept. 22 -- Oregon State Treasurer Tobias Read issued the following news release:

To reduce investment risk for older public employees, the Oregon Investment Council has approved a shift to a custom Target Date Fund framework for the Individual Account Program, part of the state's "hybrid" retirement plan for Oregon public workers.

The adjustment, approved Wednesday, will end the current one-size-fits-all investment approach for the Individual Account Program (IAP) -- which today has combined assets of $8 billion and is managed within the existing Oregon Public Employees Retirement Fund structure.

"This is the right thing to do and a common sense change," said State Treasurer Tobias Read, a member of the Oregon Investment Council. The Council serves in a fiduciary capacity for IAP and other Oregon trust funds, and is responsible for setting investment policies for all state-managed accounts.

"Going forward, participants will be better protected in the event of a market downturn in the years as they approach retirement," Treasurer Read said.

This switch conforms with "investment best practices" by adjusting each participant's asset allocations, based on their ages and corresponding risk tolerance.

With the new custom Target Date Fund framework, older workers will be better insulated from market volatility as they approach retirement, while younger workers will benefit from a more aggressive, growth-oriented investment mix.

Participants will be invested in one of 10 Target-Date Funds, based on their birth year.

IAP accounts are different than the pension part of retirement benefits, because there is no formula or guarantee attached to IAP accounts. The investment performance of IAP accounts is tied to the markets, which means they accounts can lose money.

Rukaiyah Adams, chair of the Oregon Investment Council and chief investment officer at Meyer Memorial Trust, said: "The Oregon Investment Council is committed to providing an effective investment program for all PERS members, and this reform honors our fiduciary duty to both IAP participants as well as the long-term sustainability of the Oregon Public Employees Retirement Fund."

As part of its 2003[JDS1] PERS reform package, the Legislature created a "hybrid" retirement plan by introducing IAP to complement the defined benefit payments public employees receive from the Public Employees Retirement Fund during retirement. Officially launched in 2004, IAP receives 6 percent of workers' salaries from either the individual employee or his/her employer.

Participants have never directed how their personal IAP assets are invested. That responsibility falls to the OIC, as fiduciaries for the beneficiaries of state trust investments.

Since inception, IAP balances have been invested exclusively in the Oregon Public Employees Retirement Fund (OPERF). While OPERF is broadly diversified and has performed well compared to its public fund peers, its asset allocation does not vary in response to risk/return profile changes among the more than 350,000 public workers it supports. Accordingly, OPERF is "age invariant" in consideration to individual PERS members, and the fund can and does lose value in bear market cycles.

The Oregon retirement trust fund had total assets of $74.8 billion on July 31 and is managed by the Oregon State Treasury to pay contractual pension benefits.

The glide path design of the new custom target date funds will be administered by AllianceBernstein L.P. and will maintain some exposure in OPERF for every investor. Participants' individual IAP accounts will also include allocations to funds managed by State Street Global Advisors in order to raise or lower participants' investment risk, relative to their respective ages and retirement horizon.

The bottom line: Within their IAP accounts, participants will soon enjoy better alignment between their individual risk tolerance and unique retirement horizon.

Moreover, the change will be automatic and participants don't need to take any action. A new web link (www.Oregon.gov/IAP) was recently launched by Treasury for workers who have questions. Treasury is also accepting comments about its IAP evolution efforts at [email protected].

Treasurer Read said the switchover will culminate a years-long effort to construct a more intuitive and better risk-adjusted program on behalf of system participants, and recognized OST and PERS staff for their work on this important initiative.

The Oregon State Treasury protects public assets, saves money, and helps Oregonians to invest in themselves and their families through empowerment programs like the Oregon 529 Savings Network and OregonSaves. Treasury oversees public investment, banking, and debt management services. State investment policies are set by the Oregon Investment Council. Treasury also promotes public outreach and education to help Oregonians learn strategies to save money and make smart financial choices.