Plan Sponsors Looking to Enhance Fixed Income Strategies

Even though several plan sponsors are concerned about helping participants preserve capital especially as they near retirement, a study by T. Rowe Price show many can use improvement when it comes to executing fixed-income strategies.

The firm finds that fixed income on average receives only 18% of the allocation of time that plan sponsors spend on their plans. That figure is even lower for capital preservation (13%). When asked to name their top three concerns for fixed income investing, 93% named rising interest rates at the top followed by low yields (69%), and inflation (56%).

Today, most sponsors offer stable value (80%) and core bond strategies (85%), but few offer global income strategies. Less than half (44%) offer a TIPS strategy or some other type of inflation-hedging strategy. Furthermore, 22% include global bond strategies or other inflation-hedging options, and only 4% offer unconstrained and/or absolute return strategies.

However, T. Rowe Price finds that plan sponsors are looking at the next 12 months as a period of change characterized by a widening focus on fixed income strategies. Fifteen percent intend to implement a multi-strategy/white label fixed income offering, 11% look to offer inflation-linked bonds or Treasury Inflation Protected Securities (TIPS), and 9% are eying unconstrained and/or absolute return fixed income offerings.

And while fixed income strategies can help any participant by offering diversification and protecting against market losses, it is especially important for older participants nearing or in retirement. According to T. Rowe Price, this population of the workforce is quickly expanding, raising the concern that many participants may be facing longevity risk.

Almost half (44%) of respondents to this T. Rowe Price survey reported a shift toward an older participant base compared to 10 years ago. A separate study of the plans that T. Rowe Price services as recordkeeper found that in the past decade, the percentage of participants at least 50 years old rose from 34% to 38%.

“The role of fixed income in defined contribution plans is becoming more complex because of shifting participant demographics, market and interest rate uncertainties, and the limitations of core bond strategies,” says Lorie Latham, senior defined contribution strategist. “The U.S. and global bond markets have developed over the past two decades to the point where they now offer investors many attractive opportunities to enhance portfolio diversification, improve returns while maintaining an eye on risk. While some of these levers have been underutilized in defined contribution plans, it appears that plan sponsors are growing more receptive to them, based on their stated intentions over the next 12 months. This could help plan sponsors address the longevity and inflation risks their participants face.”