“While you don’t need as many fixed income choices as you probably want with the equity side, you need to have enough,” Matt Sommer, vice president and director of defined contribution and wealth advisor services with Janus Capital, told ThinkAdvisor on Wednesday.
“There’s so much focus on the equity side and not enough focus given to whether there’s ample choice and availability on the fixed income side so different participants at different stages of their lives can build a portfolio accordingly.”
There are three fixed income “staples” for 401(k) lineups to cover the risk-return spectrum, Sommer said: “U.S. intermediate-term, some sort of international diversified option and if you like high-yield, in addition to your money market or stable value option.”
Sommer said that U.S. intermediate-term bonds are so common that even plans that only have a few fixed income options have them. “It’s sort of like large-cap U.S. equity on the stock side,” he said.
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Sommer said Janus has observed that plans adopt a “passive approach to fixed income, in all likelihood they’re using the U.S. Barclay’s Agg as the passive vehicle or the index option.” In those cases, advisors need to make sure plan sponsors understand that the duration for the U.S. Aggregate is 5.6, not three as it was before the crisis in 2008.
That’s important because the longer the duration, the more sensitive investments are to interest rates, he pointed out.
“We’re of the opinion that when interest rates do ultimately begin to creep back up, it’s not going to be a linear trend,” Sommer said. In fact, he added, “over the last several decades, we’ve been in a bull market for bonds when interest rates kept declining, but there were 22 periods since 1970 where interest rates actually picked up substantially.”