Outlook for Retirement Plan Investments

The retirement industry took a beating last year. But 2009 still provides some opportunities for the public sector.

First, the Social Security and Medicare systems are largely unaffected by the capital markets meltdown. They have never invested in the stock market, so their swelling actuarial deficits are the result of economic weakness and failure to properly fund the systems, not the markets' failures. If anything, there could be an argument made to start investing the Social Security trust funds in the stock markets now, as prices are dirt cheap, but that seems unlikely in light of the current feelings about the market and its performance.

Last year was a brutal one for the retirement industry. The equity markets declined 42 percent during the year, and the broad U.S. averages fell a whopping 38 percent from their October 2007 peaks.

Pension plans have lost 20 to 30 percent of their asset values since the market's peak, and their average funding ratios have declined from 85 percent to less than 65 percent on a real-time basis. Their weaker funding ratios ultimately will compel them to charge employers a higher contribution rate to pay off their unfunded liabilities. These added costs will begin to surface late in 2009 and especially in 2010. Interest rates on Treasury bonds are likely to remain low in 2009, and inflation rates will remain benign.