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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
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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.
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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