Largely driven by global supply-chain disruptions and surplus cash in the hands of consumers, inflation rose 7% in 2021, a four-decade high.1

And the outset of war in Ukraine has created a major disruption to global commodities, including gasoline and food supplies, sending prices even higher.

The annual inflation rate reached 8.6% in May 2022,2 raising immediate concerns regarding retirement plans. With inflation eating into returns, especially for fixed-income instruments, what can participants and sponsors do to protect their retirement income?

Don’t overreact to inflation and retirement

As difficult as high inflation is to stomach, it’s important to maintain perspective: The long-term average inflation rate has been 3.26% since 1914, which includes years of double-digit price hikes. U.S. annual inflation was less than 4% every calendar year from 1991 through 2020.3

Also consider the factors, mentioned above, that combined to create a spike in the inflation rate over the past couple of years. These are unique events that are unlikely to create a permanent state of high inflation but may contribute to elevated levels for the foreseeable future.

It’s important for plan sponsors to communicate with plan participants, providing the type of perspective outlined above. This is the same approach that plan sponsors often take when there’s a stock market correction.

Time for portfolio review

Encourage participants to review their portfolios and determine their risk sensitivity, including short-term volatility as well as protection against inflation. Participants should check their current asset allocation relative to their long-term allocation targets and rebalance as necessary. 

Plan sponsors can communicate the types of assets that tend to outperform inflation: Stocks, for instance, are among the best long-term inflation-beating assets. Another option are Treasury Inflation-Protected Securities (TIPS), which are indexed to inflation and are expected to protect investors from a decline in the purchasing power of their money.

Review the plan line-up and modify it as needed

A well-constructed defined contribution plan offers participants the tools to construct a suitable, well-balanced, age-appropriate portfolio. For plan sponsors, it makes sense to review investment options and make improvements and adjustments as needed.

Plan sponsors should review their target-date funds. Both plan sponsors and participants may assume that their target date fund is appropriately diversified, but that’s not always the case, as seen in the 2008 market crisis, when many retirees and pre-retirees found themselves with a portfolio overly weighted towards equities. Sponsors should regularly review with their plan advisor the appropriateness of their target-date funds.

Work with providers: plan advisor, recordkeeper

In communicating with participants and reevaluating funds, plan sponsors should work with co-fiduciaries, including the plan advisor and recordkeeper.

Towards that end, an overriding sponsor concern is to help participants become more financially savvy and more financially secure. Helping employees become more financially aware and establish healthier personal financial habits could go a long way to securing their current and future financial security, in spite of swings in inflation, the economy or the stock market.

This content is for general information only and is not intended to provide investment, tax or legal advice or recommendations for any particular situation or type of retirement plan. Please consult with a financial, tax or legal advisor on your own particular circumstances before acting on anything referenced in this blog.

HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate.

HUB Retirement Services provide ongoing guidance on your plan’s structure and management to ensure it meets regulatory compliance guidelines and the interests of your employees.

1Bloomberg, “U.S. Inflation Hits 39-Year High of 7%, Sets Stage for Fed Hike,” January 12, 2022.
2Trading Economics, “United States Inflation Rate,” accessed June 23, 2022.
3Macrotrends, “U.S. Inflation Rate, 1960-2022,” accessed June 23, 2022.