October 24, 2012
plan sponsors should consider a broader approach to their defined contribution
(DC) plan investment menus, a paper suggests. ---
A white paper from OppenheimerFunds notes that while the
perceived low cost (a hot-button issue because of fee disclosure regulations)
and ease of use of index funds and target-date funds (TDFs) have spurred a
significant presence in DC plan lineups, a big-picture view is necessary given
the potential limitations of both of those approaches. The paper’s
authors believe a strategic view toward plan lineups should feature a “global
core” of investments that allows participants to benefit from true worldwide
exposure to an increasingly global economy.
While lowering costs may be a desirable goal, choosing funds
exclusively on the basis of cost limits a plan’s ability to select the best
available investment options, the paper contends. The authors say the
opportunity cost of forgoing the potential to outperform a passive benchmark
may outweigh the higher fees associated with actively managed mutual
According to the paper, TDFs face growing skepticism, and
they are not ideal in every situation. Because of their underlying investments and
the many variations and inconsistencies of various providers’ glide paths,
these funds are difficult to benchmark and compare—and may make it more
difficult to manage fiduciary responsibilities.
The authors say many plan sponsors ignore the fact that
global investing is an important component of a well-diversified retirement
portfolio, and place a few stray international funds on plan investment menus
without considering the larger picture. To help ensure better participant
outcomes, sponsors should consider creating what the authors call a “global
core,” which would include domestic and international equity, and fixed-income
funds. “This fundamentally outward-looking orientation—taking into account all
asset classes in and outside U.S. borders—could provide true worldwide
exposure,” the authors conclude.
The OppenheimerFunds Retirement Perspectives paper, by Kathleen Beichert, senior vice president, Retirement Marketing and Brian
Levitt, senior economist, is available here.