Pension Roulette: Have You Bet Too Much on Equities? Harvard Business Review (06/03) Vol. 81, No. 6 p.104; Stewart III, G. Bennett
When it comes to maintaining pension portfolios, companies would do better investing in bonds rather than stocks. Many companies prefer to fill their pension funds with stocks instead of bonds because of the high return on investment they stand to collect over the long term. But experts note that the only reason stocks carry a high rate of return is because the risk is great--a chief reason why so many of the defined-benefit pension plans at Fortune 500 companies are severely underfunded. Companies also like stocks because investing in stocks means the companies can lower the amount of their contribution to cover future pension obligations. However, bonds offer several advantages that stocks do not. Bond funds are less expensive to operate than are equity funds; transaction costs and management fees are orders of magnitude lower; and most importantly, a bond portfolio can be modified to match the risk profile of pension liability, thus minimizing prospects of a funding gap. Another attribute of bond investments is their predictability, which stabilizes reported earnings and cash flow, and in turn, expands corporate debt capacity.