Investment Management

DC Perspectives: Expanding Fixed Income Menus in DC Plans

Introduction

  • While defined contribution plans typically offer participants an array of equity investment options across styles, capitalizations and geographies, they seldom offer similar diversity within their fixed income lineups.
  • As such, plans fail to capture the wide variety of available fixed income opportunities and leave participants exposed to risks that could be diversified away.
  • An ideal “world market portfolio” would always include foreign bonds, high yield bonds and senior loans, to name just a few of the asset classes generally overlooked by DC plans.
  • The wide range of returns generated by debt instruments from year to year show that fixed income is not a homogeneous category and suggests the benefits of diversification.
  • Historical returns show the significant advantages of supplementing a domestic investment grade debt portfolio with such complementary assets as high yield bonds, emerging market debt, global bonds and senior loans.
  • To address the fixed income deficiencies in their plans, we believe plan sponsors should consider:
    • Judiciously expanding standalone fixed income asset class options
    • Adding an unconstrained fixed income strategy option
    • Adopting a multi-tiered “white-label” menu structure
    • Inspecting the fixed income exposures in target date offerings
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