Insights

Reinventing the Defined Contribution Core Investment Menu With Pre-Retirees In Mind

Over 70% of existing Defined Contribution (DC) plan assets still reside in the core menu.1 Many of the participants invested in the core are age 50 and older, and therefore may be constructing portfolios to more suitably address their specific, and increasingly complex, financial needs. Here, we will explore three asset classes that merit inclusion in DC investment menus, each of which can serve a specific purpose to meet the
demands of pre-retirees:

Downside protection
Growth opportunity
Inflation dampening

Brendan Curran

Managing Director, Head of US Defined Contribution Investment Strategy

Gregory Porteous

Head of DC Intermediary Strategy

April 1, 2020

Because those closest to retirement are those with the greatest concentration of assets in the core, the investment approach to menu management must be deft. Instead of feverishly chasing alpha — which could introduce more risk than a near-retiree could absorb — managers must take a more measured approach, stalking returns strategically.

Active management can play an important role in providing participants with meaningful levels of income replacement in retirement. But not all asset classes merit an active approach, and not all active approaches are alike. Sponsors must be prudent in choosing where to implement active management, and carefully evaluate the types of alpha-seeking behavior that the chosen managers employ.

For more insight into the solutions that support downside protection, growth and inflation dampening specific to the pre-retiree demographic, contact us for the full article.

Footnotes

¹ Employee Benefit Research Institute, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2016, September 2018

² Assumes a starting salary of $69,460 at 55 years old with 2.5% annual growth (ending wage $88,915) and a beginning balance of $250,000. Total annual contribution rate of 11%, beta return of 5%, alpha return of 1%. 73% represents the savings from investment returns divided by total savings at 65. For illustrative purposes only.

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The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All the performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Diversification does not ensure a profit or guarantee against loss. The use of leverage, as part of the investment process, can multiply market movements into greater changes in an investment’s value, thus resulting in increased volatility of returns.

Investing involves risk including the risk of loss of principal.

The views expressed in this material are the views of the State Street Defined Contribution Team through the period ended February 28, 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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