Defined contribution plan sponsors allocate less time and attention to fixed income relative to other asset classes, but that may be changing, according to a new survey.
T. Rowe Price recently conducted a survey of plan sponsors to better understand their views on the use of fixed income assets in defined contribution plans and how the governance and structuring of these offerings could evolve moving forward.
The T. Rowe Price “Future of Fixed Income in DC Plans” survey included responses from plan sponsors responsible for the oversight of fixed income decisions in defined contribution plans with assets of over $500 million. The survey received responses from 54 individuals who work in finance/treasury/investments (41), human resources/benefits (8) or both/other (5).
The survey found that equity and target date strategies currently receive the highest allocation of time and attention. On average, fixed income receives a little more than half of the sponsor governance capacity devoted to equity (18% versus 31%), and less time is devoted to capital preservation (13%).
“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,” Lorie Latham, senior defined contribution strategist, said in a statement.
Survey results show DC plan sponsors are looking to incorporate several fixed income characteristics when constructing plans to meet the needs of participants, including diversification (59%) and preservation of capital (51%).
When considering how to best integrate these characteristics into plan offerings, plan sponsors are closely monitoring concerns such as rising interest rates, low yields, and inflation. According to the survey, 93% included rising rates in their top three risks for fixed income investing, 69% included low yields and 56% also included inflation in their top three risks.
Plan sponsors will likely face increased pressure to address these issues, according to T. Rowe Price, and findings show that broadening opportunities with their fixed income allocation is a possible solution.
“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,” Latham said in a statement. “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.”
Here are three more trends where plan sponsors are starting to rethink fixed income in DC plans.
Anticipated investment trends in the next 12 months
Fixed income plays an important role when saving for retirement, but “each participant has unique risk tolerance and investment goals,” according to T. Rowe Price.