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The Biggest Pension Fund Is Taking on More Risk: Is Your Pension Next?


The board of California Public Employees Retirement System (known as CalPERS) approved an investment policy change on November 15 to use borrowed money and alternative assets to reach its investment-return target. Valued at $495 billion with two million members, CalPERS is the largest pension fund in the nation. And this move could become more mainstream as other pension funds face similar investment-return target challenges. Let’s break down what this move could mean for your pension.

Whether you have a traditional pension or are looking to maximize your 401(k), a financial advisor could help you create a savings and investment plan for your retirement needs and goals.

Why Is CalPERS Taking More Risk?

CalPERS began 2021 with a 20-year return goal of 7%, which was later adjusted to 6.8%. With its current asset mix, though, the projected 20-year return would stand at just 6.2%, well short of both the original and adjusted goals.

The times have changed since this portfolio was put together,” said Sterling Gunn, CalPERS’ managing investment director, Trust Level Portfolio Management Implementation, to the Wall Street Journal.

What Is CalPERS Doing?

There are two major moves being made by the CalPERS board. The first is to borrow and invest $25 billion, equal to about 4% of the total fund. The second was to increase the funds exposure to riskier alternative investments. This includes raising private-equity investments from 8% to 13% of the portfolio and adding an investment equal to 5% of the fund to private debt.

Notably the board did not vote to lower the target growth again, choosing to keep it at 6.8% over 20 years.

These moves are designed to make it more likely for the fund to reach its target. That said, certain market conditions could result in higher losses, so the move is certainly not without risk for the pension’s beneficiaries.

What This Means and What Savers Can Do

Calpers retirement

CalPERS is the biggest pension fund in America, but it’s hardly the first to move into alternative investments. The Journal notes that this is because many funds are finding themselves hundreds of billion dollars short of the money they need to pay full benefits.

If CalPERS investment policy moves work out, there could be an even bigger push into these types of investments to make up for other fund shortfalls.

Even if you have a pension, the fact that CalPERS is making such seemingly drastic moves to cover their costs should lead you to look for alternative ways to fund your retirement.

For reference, the World Economic Forum says that there is currently a gap of $28 trillion between what Americans have saved for retirement and what they actually need. And this gap is expected to grow to $137 trillion by 2050.

If you have access to a workplace retirement plan like a 401(k), use it. If not, consider using an individual retirement account to supplement your pension.

Bottom Line

CalPERS, the biggest pension fund in America, is borrowing money and moving more funds to alternative investments with the aim of reaching its 20 year return goals of 6.8%. This is part of a wider pension plan trend that is taking more risks to make up for potential shortfalls in benefit payment money. And you could see similar changes in your pension plan next.

Retirement Planning Tips

  • No matter what retirement plan you have, a financial advisor can help you get ready for your golden years. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The first retirement planning challenge is knowing how much money you’ll need. Use SmartAssets free retirement calculator to see what you’ll need and if you’re on track to get there.

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