Defined Contribution plan participants live a harsh reality: Despite the choices they are given in line with the plan sponsor’s fiduciary responsibility and policy statements, they are not allocating their assets in a diversified way.

Robert Capone, Executive Vice-President with BNY Mellon Retirement, in a whitepaper, Investment choice with Defined Contribution plans: style box consistency dilemma, discusses a new paradigm for DC investors that differs from what he calls “style-box” investing. “If you look at Defined Benefit plans, they are definitely invested in non-traditional style strategies,” he explains. “Our focus on the DC side would be to take away some of those DB allocation approaches in non-traditional type strategies.”

From that, Capone discusses four potential allocation models: real assets, emerging markets, liquid alternatives and a combination of all three. “My belief is that you can’t look at DC plans as just maximizing return anymore. Participants in these markets are looking at a much different capital markets environment.” Participants need income paying components, stability of returns and the ability to manage volatility down, adds Capone.

While Capone agrees these types of funds also require education and a certain level of knowledge of funds and investing, he says it can be done – slowly. “The best opportunity is to start looking at components of the target-date within these types of strategy. So could we look at a basket of non-traditional strategies within a target date? I think the answer is ‘yes’ and it’s probably the easiest way for a plan participant to start getting their feet wet with these types of strategies than introducing one as a stand alone inside a plan.”

Much like the conventional wisdom in the DB environment, which has moved from modern portfolio theory to a more liability driven investment world, Capone says the goal should also be to get to those protection-type oriented investments in the DC plans.

“I believe that’s the direction we need to go in for this industry. However, I do think we’re talking about a multi-year evolution. I think it’s going to take time. It’s going to take a lot of education and a lot of convincing that these plans need to incorporate non-traditional type strategies to add this kind of protection and certainly to add more diversification,” he stresses.

Even though this exercise amounts to an education and re-education of participants, Capone says education of plan sponsors must take place first. By looking at their fiduciary responsibilities and their policy statements, sponsors are the first line of defense in making change happen. “That’s where the first step is because really it’s the sponsors making the decision for the plan participant.”

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community.


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