Prudential Investments Mutual Funds, part of Prudential Financial, spends a lot of time providing thought leadership with input from Prudential Financial’s affiliated institutional managers. A topic it has recently given much attention to is fixed-income choices in defined-contribution (DC) plans. In 2012, Prudential Investments Mutual Funds published the white paper, Insights on Investing: Fixed Income Options within DC Plans, for the purpose of initiating dialogue with advisors and consultants.
In this three-part blog series sponsored by Prudential, we will examine how fixed income can enhance retirement menus. This interview was originally published in the November 2012 issue of Financial Advisor magazine.
In today’s Part 1, the experts explain why offering a wider selection and variety of fixed-income choices to DC plan menus can potentially provide higher returns, greater diversification and less volatility to retirement portfolios.
Part 2 of the interview will look at ways to construct a better portfolio.
Part 3 of the interview will explain how financial advisors can help in this effort.
Jerilyn Klein Beir, a contributing editor for Financial Advisor magazine, held a roundtable discussion on the topic of fixed-income choices with participants including Michael Rosenberg, senior vice president and director of IODC Distribution for Prudential Investments; Robert Tipp, managing director and chief investment strategist for Prudential Fixed Income; and Michael J. Collins, senior investment officer and portfolio manager for Absolute Return Bond and Core Plus Fixed Income Strategies at Prudential Fixed Income.
Through the course of the discussion, the subject of trends and the evolving needs of plan participants came up. Michael Rosenberg notes, “First, there’s an aging workforce and its participants tend to want to invest more conservatively, safeguard their assets and turn the assets they’ve accumulated into a stream of retirement income. Second, there’s been unprecedented market volatility due to the financial crisis of 2008 and the markets in general, so people are looking to become more conservative. The third trend has to do with the move away from off-the-shelf qualified default investment alternatives (QDIAs) to custom QDIAs. The vast majority of plans that are using custom QDIAs or custom target date funds use the core funds within the plan to create those QDIAs. So having a broader mix of fixed-income alternatives may provide potential to build better portfolios.”
Fixed income should be “represented in every plan menu,” Rosenberg says. “Like with equities, it’s a plan-by-plan decision. This is not a one-size-fits-all type of market. That’s where advisors and consultants need to have really interesting and thoughtful conversations to find out a plan sponsor’s goals and objectives for offering the plan, and what their participant base is looking to do,” Rosenberg says.
When asked about the underrepresentation of fixed-income investments in DC plans, and why the roundtable thinks plan sponsors currently offer relatively few options, Michael Collins says, historically, Defined Contributions plans have been thought of as always having “15 to 20 different flavors of equity — large cap, small cap, mid cap, value, growth, international, U.S. — and then there’s one bucket that says bonds.”
However, Rosenberg notes, “That’s not the way it happens in the defined-benefit world or the institutional world. It’s truly just like the equity marketplace — there are types of fixed income that you can put together to either help enhance your opportunities for returns or help lower your potential for risk.”
Be sure to check back for the next installment of this blog series to be published DATE HERE when the experts give their thoughts on how to construct a better portfolio, and learn more from this video by Rosenberg. Additional information may be found in this white paper.
Mutual fund investing involves risk. Some mutual funds have more risk than others. The investment return and principal value will fluctuate, and shares, when sold may be worth more or less than the original cost, and it is possible to lose money. There is no guarantee a Fund’s objectives will be achieved. The risks associated with each fund are explained more fully in each fund’s respective prospectus.
Fixed income investments are subject to interest rate risk, where their value will decline as interest rates rise. Diversification does not guarantee a profit or protect against a loss in declining markets.
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