Fixed Income in DC Plans: What’s on the Menu?

The fixed-income offerings in a typical defined contribution (DC) menu can sometimes seem uninspired, but it doesn’t take much to improve the selection. The right combination can enhance core fixed-income allocations, providing diversification and reducing risk.

Most DC plans are limited to a couple of fixed-income options—usually a US aggregate and/or a stable value fund. Equities, in contrast, are generally represented by 10–12 different funds diversified across market capitalizations, styles and regions. We think it’s outdated to have so few fixed-income choices.

The Optimal Fixed-Income Allocation

A DC plan that restricts its fixed-income allocation to a few basic options may unintentionally see investors come up short in their retirement goals. A US aggregate bond fund may help offset equity market volatility, but it lacks diversification and higher return potential. It may also expose investors to the risk of rising US interest rates. The right mix of bond funds in a menu of core options can help participants make the most of their fixed-income allocation.

Our ideal DC fixed-income menu follows a four-point strategy: go global, add high yield, access inflation protection and anchor with US bonds.

Here’s how we suggest offering participants a more diversified approach—through “multi-manager white label” allocations. These are single investment options that use multiple managers to add greater diversity among investment-management styles (Display). They use a broad naming convention that describes the plan and leaves out fund managers’ names.