Fixed income is supposed to be a safe haven, a place to which investors can “fly” in times of market turmoil, but it’s far less so due to a number of concerning factors that are currently confusing advisors and investors alike.
And now a new survey reveals major gaps in focus—and perception—about the role of fixed-income investments in a fully diversified 401k menu.
“Plan fiduciaries have long understood the need for a diversified portfolio,” Nevin Adams, Chief Content Officer of the American Retirement Association, said in a statement. “However, survey data consistently show that fixed income options have received neither the attention nor prominence of equity alternatives in most defined contribution plan menus.”
Sponsored by Janus Henderson Investors, and conducted jointly by the Plan Sponsor Council of America (PSCA) and the National Association of Plan Advisors (NAPA), the latest survey found that equity options outnumber fixed income by approximately three to one on plan menus, regardless of plan size.
Moreover, while nearly three-quarters (71.9%) of financial professionals incorporate a style box in their core equity recommendations, less than four-in-10 (39.9%) do so for fixed-income investments.
“As plan sponsors and participants are confronted with extreme market volatility in the wake of concerns about the COVID-19 pandemic, it is more important than ever that plan sponsors provide a well-diversified subset of fixed income options to help participants meet their goals,” Russ Shipman, Head of Retirement Strategy and Sales at Janus Henderson Investors, added.
Key findings
- Plan sponsors offer an average of 3.7 fixed income options compared to an average of 10.3 equity options.
- When selecting fixed income options, plan sponsors and financial professionals frequently prioritize the same demographic criteria—risk tolerance (44.3% among sponsors, 56.3% among financial professionals) and retirement age (34.6% among sponsors, 40.8% among financial professionals)—but largely ignore key aspects such as gender, education, and the existence of a defined benefit plan.
- Risk/reward (94.6%), performance (98.5%), and fees (95.1%) dominate the focus of financial professionals as “essential” or “preferred” factors in recommending fixed income options.
- Stable value (67.4%) and index (61.1%) funds dominate plan sponsors’ core fixed-income investments.
- While a third (34%) of financial professionals said the education and support they receive from asset managers on fixed-income investments is “outstanding,” 14.4% said it needs improvement—more than twice the percentage (6.2%) cited regarding equity investments.
“A truly diversified portfolio can only be developed from a fully diversified plan menu,” Matt Sommer, Senior Managing Director of Defined Contribution and Wealth Advisor Services from Janus Henderson, concluded. “Better choices flow from better information, more complete demographic data, and a heightened sensitivity to the options available in the marketplace. The insights from this survey highlight both the need and the opportunity to do so at a critical time, particularly as so many Americans approach and enter retirement.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.