According to a white paper released by OppenheimerFunds, “Globalization: A New Era for Defined Contribution Plans,” many plan participants tend to overweight their investment portfolios with investments from U.S. markets, which can be hurting their chance to generate enough income for their retirement. The paper, which is co-written by Kathleen Beichert, senior vice president of retirement solutions; and Brian Levitt, senior economist at OppenheimerFunds, looks at the importance of a global perspective in asset allocation.
The research shows that many DC plan participants do not understand the big picture of participating globally as investors, nor are they likely to realize the potential they could miss if they fail to do so. Thirty-five percent of survey respondents prefer to invest in U.S.-based funds. The white paper’s authors say this suggests a home bias against overseas investing.
The survey also found 60% of plan participants do not understand the basic difference between international investments and global investments, which is the key to evaluating investment opportunities beyond the U.S.
Approximately 57% of respondents stated they believe the U.S. equity market has been the world’s top performer more than twice between 1970 and 2000, while 96% of them did not know that Peruvian equities outperformed U.S. equities in 2010.
Respondents also mistakenly assume that investing overseas means taking on disproportionate risk. More than half of the respondents (52%) cited political and market risks as their primary concerns when investing in international markets, while 17% cited currency risk.
PLANADVISER spoke with Levitt, who said he thinks investors generally have a home bias.
“There is a general sense that investments outside the U.S. are riskier,” he said.
Levitt added that it is important for plan participants to realize they need to look beyond where a company is headquartered when it comes to investing, it is far more important to be more aware of how business is for that particular company.
Despite the fact that participants should be investing in global funds, many are not, because they do not understand the need for global exposure. Also, according to the paper’s authors, plan sponsors are not conveying the growing importance of investing globally to participants.
Next Steps for Sponsors and Advisers
Levitt told PLANADVISER that plan sponsors are making global equities and global fixed income available in their investment lineups to plan participants; however, it is hard to get participants to think about these types of investments.
It is important for plan sponsors to make sure their DC advice programs include sections and components that cover investing in both global and international funds. This also sets up the opportunity for advisers to help set the tone for these programs as they are created and rolled out to participants.
According to the white paper, the way to go about doing this is through basic education on the difference between global and international investing and the growing importance of emerging markets. Another option is to offer an in-depth explanation or even one-on-one advice with participants. Advisers can emphasize websites, apps, online tools, videos and other resources designed to educate consumers about global investing.
Participants Want Education
According to the survey conducted by OppenheimerFunds, 21% of respondents believe that changing their asset allocation, a likely outcome of learning about global investing, would help them achieve their retirement savings goals. Twelve percent of respondents indicated they want to invest in global/international investments on their own, and 88% would consider investing in global/international investments if they received assistance.
One-third (33%) of respondents state that learning about investing through advice (25%) and with educational programs from their employer (8%) would help them meet their retirement goals.
Levitt added, “It comes down to education. It comes down to understanding why as an investor you want to think about companies not countries.” Plan sponsors and plan advisers need to educate participants and get them to see how the world is changing, and how they need to change with it accordingly.