Industry Voices

The Next Evolution in Indexing: DC Plans and Smart Beta

Smart beta seeks additional outperformance and is a flexible enhancement to traditional index. Here’s what you should consider as a defined contribution plan sponsor.

By PS | May 11, 2017
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You have to have a long memory or be a keen student of market history to remember that index strategies were once considered a radical idea. When the concept of indexing was first introduced in 1971, not only was index construction complicated, but the idea that investors would ‘settle’ for market returns instead of trying to pick a portfolio of winners seemed unlikely to catch on.

As it turned out, settling for market returns might have been a good idea during much of the 401(k) era, the nearly four decades since the 401(k) entered the tax code in 1978. Despite some notable bear markets, average equity returns were strong, and steadily declining interest rates drove historic bond market returns. As index funds became increasingly efficient and active alpha became harder to find, index strategies became an easy choice for plan sponsors to consider for defined contribution (DC) plans.

But, is index still the right choice? In a sense, the obvious answer is yes. Index remains an important tool for building investment menus. But markets, information and demographics have changed. Today, we are confronted with an aging population that’s also living longer. At the same time, long-term yields remain low and industry projections forecast an extended period of weaker market returns. Simply put, the challenges of retirement investing are changing.

NEXT: The next evolution of DC plans may be here