In today’s volatile, dynamic world, organizations have experienced significant financial and operational challenges. As companies look ahead to 2022, CFOs and other corporate and institutional financial leaders need to take steps today to prepare for economic uncertainty and volatility.
Here are five strategies finance leaders can take to prepare for the coming year today.
Build a balanced and diversified investment portfolio
The financial markets have always tested U.S. investors. Managing risk, returns, and liquidity during volatile times, from the oil crisis in the 1970s to the pandemic of today, requires an investment portfolio that plans for the unexpected. While the past can help us prepare, we also need to consider new approaches to investing in a volatile world.
- Review resources and governance structure — Examine the roles of advisors, staff, and investment committee to understand how investment decisions are made. Balance a nimble investment approach with having appropriate risk controls.
- Rebalance with discipline — Organizations should consider their investment policy statement (IPS) to guide long-term asset allocation and rebalancing. During times of volatility, assets can quickly become out of your risk tolerance.
- Look toward market opportunities — Build flexibility into your investment policy with opportunity allocations, allowing you to move quickly with changing conditions.
- Evaluate active management approaches versus passive or factor-based investments, knowing that suitability is dependent on the organization.
Consider outsourced investment to manage volatility
Many institutional investors were opting for the outsourced chief investment officer (OCIO) model before the pandemic. Now, as many organizations are stretched thin coping with new forms of volatility, the option of hiring an outside expert to manage investments might become even more attractive.
In addition, as a result of the SECURE Act in the United States, organizations from all industries and sizes may band together to create a new type of retirement plan: the pooled employer plan (PEP). Employers may now participate in a PEP instead of sponsoring a traditional 401(k) plan. This allows them to “outsource” many 401 (k) management functions and focus on their core business needs.
- Disruption brings new opportunities — Even before the pandemic, assets managed by OCIOs were increasing. In 2019, worldwide OCIO assets reached $1.82 trillion — a 4.7 percent year-over-year jump. As executives grapple with the difficulty of managing investments in volatile markets, they are seeing more opportunities to partner with outsourced experts.
- Clearing outsourcing hurdles — A move to outsourced investment comes some hurdles organizations must confront. Among those challenges include resistance within the organization, the ability to consider hybrid outsourcing models, and the loss of key investment staff during downsizing events.
- Removing administrative burdens and reducing liability risk -- Today, U.S. employers sponsor over 500,000 individual 401(k) plans that can be complicated, risky, and costly to manage. PEPs and OCIO strategies allow for organizations to take on less risk by transferring fiduciary responsibility and liability for investments and administration to a third party. That’s become even more important in recent years as the risk of litigation with existing defined contribution plans has soared. In 2020 alone, there was a four-fold increase in excessive-fee lawsuits compared to three years ago, and in the last decade, more than $1 billion in settlements has been paid.
Leverage intellectual property and innovation
Intellectual property and innovation serve as an effective hedge against volatile economic conditions. Whether organizations are looking to conserve cash by leveraging the sale or licensing of IP or protecting their balance sheets, intellectual property plays a role. Innovation during this time can also lead to companies changing paths or increasing their pace and investment in innovation.
- Reimagine a new future for the organization — During times of volatility, organizations should consider evaluating key initiatives, changes to products and services, and look for opportunities in M&A or IP asset acquisitions.
“Intangible assets have historically performed very well in volatile economies. In fact, when economies become distressed, intellectual property has always retained and in fact, increased in value during that time.” — Lewis Lee, CEO, Global Head, Aon Intellectual Property Solutions
Help close the health and wealth gap for employees while reducing costs
In the U.S. in particular, there is a health and wealth gap that employers need to address as employees are currently overspending on healthcare and undersaving for retirement. This leads to increased costs for U.S.-based employers, in addition to financial insecurity for employees in the long-term. 401(k) and Pooled Employer Plans with retirement income solutions can help to close this gap.
- Consider a PEP —They can help lower fees, improve employee retirement outcomes, provide better governance, and streamline plan administration. They aren’t for everyone but they do offer a new, compelling option for some organizations.
“A pooled employer plan is basically a banding together of 401k arrangements amongst employers. They’ll produce cost savings through economies of scale. They’ll produce better outcomes for participants. There’s the chance to offload compliance and fiduciary risk to other organizations.” — Rick Jones, Senior Partner, Aon National Retirement Practice
Work with your organization’s risk manager to access new capital
Capital is the lifeblood of organizations, especially during times of volatility and uncertainty. With increasing risk and complexity, organizations need to be more creative and successful in the approach to access capital.
- Risk management plays an important role in retaining capital — In 2020, global economic losses from natural catastrophes totaled $268 billion in losses vs $97 billion of those losses covered by insurance. Forward-thinking risk management approaches ensure that assets that can be leveraged are protected.
Organizations need new strategies to address economic uncertainty and they need to start now to be ready for 2022 — and beyond. By considering these five strategies, organizations can become better equipped to address whatever is ahead for them and the world at large.
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