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Cookie cutter or custom? Rethinking fixed income in DC plans

A custom, multi-manager solution may provide some compelling benefits and enable DC plan sponsors to take their fixed income offering to the next level for plan participants.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only. Please refer to the risks section in the PDF available below.

Key points

  • In the DC plan space, we have historically seen heavy use of core bond and core-plus strategies that may be expected to pursue too many objectives simultaneously.
  • As DC plans have grown in size, plan sponsors have increasingly been open to adopting a more customized approach in the form of a multi-manager fixed income option.
  • This type of custom solution may provide some compelling benefits and enable many plans to take their fixed income offering to the next level for their participants.

In typical defined contribution (DC) plan menus, participants often have multiple equity choices (large-cap US, small-cap US, international equity, etc.). Fixed income options have tended to be fewer and not as well understood by participants. As a result, many plan sponsors have chosen a single core bond or “core-plus” strategy as a way to provide their participants exposure to both high-quality fixed income assets and some diversifying agents, such as high yield and emerging markets debt (EMD). Historically, these strategies have largely served most participants well.

However, as DC plans have grown in size, we have begun to see plan sponsors turn to a more customized approach and create a multi-manager fixed income option that can potentially deliver important benefits above and beyond those provided by a single-manager solution. Here we explore the pros and cons of utilizing a custom, multi-manager approach as the fixed income solution in a DC plan’s core investment menu.

Potential benefits of a custom, multi-manager approach

Fixed income allocations can pursue a wide range of objectives, including liquidity, diversification, capital preservation, income, and total return. For a plan sponsor designing a DC plan lineup, it is challenging and somewhat impractical to have distinct fixed income options pursuing those objectives separately. Consequently, we have seen heavy use of core bond and core-plus strategies that attempt to balance the pursuit of various objectives simultaneously.

However, an alternative approach that we believe is worth exploring involves packaging together distinct specialized strategies, from multiple investment managers, into a…

To read more, please click the download link below.

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