Despite strong gains in retirement assets last year, investors should expect historically low returns over the next decade, according to J.P. Morgan Asset Management.

In a new report, “2018 Long-Term Capital Market Assumptions,” the $1.6 trillion asset manager explains that the long-term return of a traditional 60/40 stock/bond portfolio, which is “a reasonable proxy for the average asset allocation over a typical participant’s life span,” has declined to 5.25% annually from 5.50% last year.

“With modest global economic growth estimates broadly unchanged and return assumptions for many major asset classes lower than last year’s, participants face an undiminished challenge as they look to ensure a financially secure retirement,” according to the report.

It expects bond returns will improve due to an “anticipated slow road to normalization,” but “elevated valuations … [will] constrain equity returns.”

Given this outlook, J.P. Morgan recommends three “concrete steps” that plan sponsors can take to improve outcomes for participants in retirement plans — steps that advisors working with defined contribution plans can accommodate.

1. Encourage more savings.

“Saving more is the most obvious and effective way to improve retirement outcomes,” the report states. With that in mind it recommends that plan options include automatic enrollment and automatic escalation of contributions.

Most plan participants support such measures, according to J.P. Morgan Asset Management, and its research indicates a majority of DC plans implemented auto enrollment and half include automatic escalation of contributions.

2. Make portfolio diversification easier.

Despite its outlook for modest long-term returns, J.P. Morgan notes there are a number of asset classes that can potentially enhance returns, including international equities and bonds other than government securities.

The best way for plan participants to diversify into those assets is through target date funds that are themselves well-diversified and constructed by skilled asset allocation professionals, according to the report.

“When such TDFs are chosen as qualified default investment alternatives (QDIAs), the impact may be even greater.”

The report notes that nearly three-quarters of retirement plans with QDIAs choose TDFs for that purpose.

(J.P. Morgan provides target date funds.)

3. Employ active management.

The lower returns J.P. Morgan Asset Management is expecting long term are based on asset index returns, which are just one component, or beta, of asset returns. Alpha is the other component and that is achieved from active management, according to the report.

“With a lower outlook for beta returns across most asset classes, alpha becomes an even more critical component for achieving required returns.” Active managers can opportunistically shift assets across sectors, asset classes and regions, and can tactically “position portfolios through late-cycle challenges” and help diversify portfolio risk, according to the return.

“The outlook for long-term capital market returns has dimmed, but these plan design and investment options can strengthen plans and help more participants reach their investment goals.”

— Check out Workers Regret Not Saving More for Retirement: Study on ThinkAdvisor.