Employers looking to reap more reward toward their employees’ retirement plans are beginning to seek advice from brokers about new ways to invest, and some industry experts suggest a new mindset may be needed toward fixed income absolute return investing.

For employers that sponsor 401(k) retirement plans, up to 25% of traditional U.S. aggregate bond assets should be switched to absolute return assets, as part of a diversified portfolio structure, according to the global employee benefits firm Towers Watson in a new paper.

Benefit advisers need to reframe the exposures that an employer might attempt to achieve for a defined contribution plan, says Lorie Latham, a DC investment consultant at Towers Watson.

“What we’re trying to do is push the envelope, push the exposure to arrive at better endpoints for plan participants,” she says.

Most employers approach defined contribution plans “with an institutional mindset” and “many of the ideas that get applied to other asset pools don’t get applied in DC plans because of the complexity,” Latham tells EBA.

She says Towers Watson is not suggesting employers add a standalone, unconstrained bond investment to their line-up of 401(k) plan investment options.

“We’re not supposing that these be standalone, it’s thinking holistically about a portfolio,” she says.

Instead, the paper suggests employers could create a white label “diversified fixed income fund” option where a portion of the assets would be allocated to a traditional aggregate strategy, and a portion to absolute return including unconstrained bond assets.

Towers Watson consultants believe this strategy can increase the value proposition for plan participants, broaden diversification and in a total portfolio context, provide potentially better outcomes for participants.

Absolute return investment techniques include using short selling, futures, options, derivatives, arbitrage, leverage and unconventional assets.

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