The U.S. and Canadian defined contribution systems are failing 401(k) retirement savers on a number of counts, including a lack of diversification and an overdependence on the “style box” investment design, warns a defined contribution industry report from Clear Path Analysis released Thursday.
The North American DC marketplace may be maturing, but its continued reliance on U.S. securities shows a lack of diversification that is harming investors, especially as the U.S. markets struggle against the current low-interest rate environment, concludes the “DC Retirement Plan, North America 2013” report from London-based Clear Path Analysis.
According to Robert G. Capone, executive vice president of BNY Mellon Retirement, who is quoted in the report, great disparities continue between investment opportunities and resulting performance of both DC and defined benefit (DB) plans—and the underlying asset class exposures “factor prominently” in the results.
“DB plans have significantly more exposure to nontraditional, out-of-the-style-box investment categories,” says Capone in the report. The paper examines the evolution of target-date fund structures as they move away from traditional, U.S.-reliant investments into “out-of-the-box” investment categories.
Style Boxes a Disadvantage: BNY Mellon Retirement’s Capone
“We believe the limitations placed upon DC investors by the ‘style box’ investment design so prevalent in DC plans puts the DC investors at a significant disadvantage to the more broadly diversified DB plan,” Capone says.
Clear Path publishes reports on industry issues written by a cross-section of experts in the financial services, investments and pensions sector. The second annual online DC Retirement Plan report offers thoughts from U.S. and Canadian DC plan managers and finance directors, including Capone, Klinger Cos. CFO Robert DeSmidt, Thomson Reuters employee benefits vice president Marco Diaz and Transamerica Center for Retirement Studies President Catherine Collinson.