DC Perspectives: Expanding Fixed Income Menus in DC Plans
- 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