The New ‘60/40’ Portfolio?

The traditional 60/40 portfolio allocation may no longer be effective for meeting retirement plan and plan participant needs, investment professionals have been suggesting. The balanced portfolio is intended to provide returns to help participants accumulate savings for retirement, while at the same time mitigating equity risk and preserving wealth, says Susan Czochara, head of retirement solutions, at Northern Trust Asset Management (NTAM).

In State Street Global Advisors insights report “Portfolio Construction In and Out of the Core for the Next Decade,” Matthew Bartolini, head of SPDR [S&P Depository Receipt] Americas Research, says scrutinizing the portfolio is warranted, “as recent returns have not been as strong as they were in prior decades.”

He says the new reality includes expectations of lower returns going forward. A lower return from the 60/40 portfolio means bonds would be expected to provide a greater return to make up for the loss, he says, something he calls “unlikely.”

The Mix for DC Plans

The 60/40, or balanced, portfolio is achieved differently by participants in defined contribution (DC) retirement plans than by institutional investors such as defined benefit (DB) plans, Czochara notes. While some participants like to choose their own investment mix, arguably the majority of plan participants get a balanced portfolio through target-date funds (TDFs) and white label funds.
With lower expected returns and increased volatility, participants have two options for achieving their retirement goals: saving more or taking on more risk in equities to try to get higher returns, Czochara says. “It’s been a challenge to get them to save more, so we believe they’ll take on more risk,” she says.

According to an NTAM report, “Equity Designed With Retirement in Mind,” by NTAM Retirement Solutions retirement strategist Paul Kubasiak, taking on more risk in equities is unattractive to retirement savers, especially those nearing retirement. It suggests that one way to mitigate risk and market volatility is through the use of a quality low-volatility (QLV) portfolio. Low-volatility stocks are shares of companies that tend to experience a narrower range of returns versus the market as a whole, such as the Russell 1000 Index, a large-cap stock index, the report explains.

For DC plans, investment choices available to participants who prefer building their own portfolio should be expanded to include private credit and real assets, to permit greater yield and protection from inflation; globally diversified equity choices should also be increased, says Jamie Lewin, head of BNY Mellon Investor Solutions.

For plan sponsors using a balanced fund as their DC plan’s qualified default investment alternative (QDIA), Lewin says, it is important to preserve the cost effectiveness of balanced funds, meaning passive strategies are still important, but “a bit more dynamism” can be considered. “In the next decade, those managing balanced portfolios will take an active view of selection for both equity and fixed income,” he says. “Active selection and choice, not necessarily active investing, will separate the winners from the losers and will help savers continue to accumulate.”

Lewin says, as participants grow older, particularly when there is an increasing role of fixed income to hedge against risk and protect wealth, another variable is needed in addition to age. “We think there should be one more input: How has the investor done? That is, has the participant accumulated above or below what is expected to adequately meet his needs in retirement? If the participant has under-accumulated and is just adding fixed income because he’s getting closer to retirement age, that may compound the problem,” Lewin says. “We’re projecting 0% to 2% returns for fixed income at best, so now may not be the best time to increase the fixed-income allocation.

“The underlying market conditions that have prevailed in the past 30 years have made the traditional 60/40 portfolio an effective strategy, but we don’t think it will continue in the next decade,” Lewin says.