J.P. Morgan Asset Management is out with a new paper that outlines suggested strategies that defined contribution (DC) plans should implement in response to the investment giant’s Long-Term Capital Market Assumptions.
“The rise of defined contribution (DC) plans in the U.S. over the past four decades occurred in an environment of secular disinflation and falling interest rates,” authors Jared Gross and Emily Cao write. “That environment has come to an end. Strategies that worked for DC plans in the past may be less successful in the future. More than ever, the ability to incorporate forward-looking views on markets will be critical to keeping participants on the path to a secure retirement.”
Some of the steps they plan sponsors should consider include:
Target-date funds
- Replace static passive target date funds with hybrid or active strategies that incorporate flexibility in glide path implementation and active management.
- Evaluate equity exposure in target date funds designed for older participants who are closer to retirement, while diversifying fixed income and embracing active management to increase yield and avoid unattractive risks.
- Seek diversification in active equity across cap-weighted market benchmarks (e.g., international, emerging markets) as well as sectors with high concentration (e.g., growth).
- Where possible, introduce exposure to additional asset classes that provide higher return expectations, such as real estate.
Core Menu
- Offer active options across key market sectors within the core menu to provide participants with choices beyond passive cap-weighted strategies.
- Within white label options, explore:
- Equity: Adding EM strategies to international equity sleeves.
- Fixed income: Diversifying away from traditional core and toward active core-plus, multi-sector and unconstrained strategies.
- Inflation protection: Shift away from TIPS and diversify toward real assets, given the risk from rising rates.
- Add environmental, social and governance (ESG)-focused strategies to serve participants who want to be purpose-driven in their investments.
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.
