Fine-tuning Fixed Income in DC Investment Lineups
Defined contribution (DC) plan investment menus today commonly offer 22 options.1 Of these, fixed income typically accounts for only two or three menu choices, commonly core bond and stable value products. Given the real possibility of rising interest rates, the lack of fixed income options may be limiting DC plan participants’ yield potential, especially for those nearing retirement. We believe plan sponsors should expand their fixed income menus to help to provide all participants a potential hedge against downside risk, access to potentially higher yields with managed risk, and diversification to equities.
In our view, fine-tuning the fixed income offerings in a DC plan lineup is a relatively simple matter for most plan sponsors and should include the following:
- Cash, Fixed Interest or Stable Value
- U.S. Intermediate Term Bonds
- High Yield Bonds
- World/International Bonds
For DC plan sponsors seeking more diversification than the four basic components of fixed income, the following are satellite options that may provide higher income potential, but with greater risk and higher volatility:
- Corporate Bonds
- Senior Loans
- Emerging Market Debt
For a deeper dive on how DC plan sponsors can fine-tune and diversify their fixed income offerings, read our paper.
1 Source: Deloitte: Annual Defined Contribution Benchmarking Survey Ease of Use Drives Engagement in Saving for Retirement 2015 Edition.↩
OppenheimerFunds is not undertaking to provide investment advice or to provide advice in a fiduciary capacity.
This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.
Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future, will cause the values of a fund’s investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at or near historic lows. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing markets may be especially volatile. Diversification does not guarantee profit or protect against loss.
This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Clients should contact their own legal or tax advisors to learn more about the rules that may affect individual situations.