July 17, 2023


While DC plan sponsors aren’t likely to change the menu, macro issues are spurring them to diversify investments, boost engagement and add benefits

Evolution of DC Investment Menus Webinar

Our panel of industry experts shares the latest thinking on the DC investment menu and plan enhancements aimed at bolstering retirement security.
Mathew Brenner
Managing Vice President,
Investment Product Management
MissionSquare Retirement
Daniel Cahill
Member of Management
Partners Group
Joe Szalay
Senior Vice President
Vikrant Arya
Managing Director,
Consultant Relations
Nuveen Retirement Investing
Wednesday, July 19, 2023
2:00 p.m. ET

Should the current macroeconomic environment prompt defined contribution plans to reconsider their investment menus?

Seems like a reasonable question. After all, the combination of market volatility, persistent inflation, hawkish monetary policy and a seemingly inevitable recession — coupled with still-painful memories of plunging asset prices in 2022 — could cause even seasoned plan sponsors to think about revising their menu options.

Yet many experts advocate that DC plans, which are designed as diversified, long-term portfolios, should not significantly change their investment lineups in response to macro conditions. Instead, the experts say, they should make only minor adjustments, such as broadening diversification and reevaluating the asset mix within menus. They should also take steps to improve communications that boost engagement, add benefits to help retain and recruit employees, offer programs that help improve participants’ financial security and, in turn, reinforce their plans’ resilience.

What macro?

Brendan McCarthy, head of retirement investing at Nuveen, believes that changes in retirement plan menus should be fairly agnostic to short-term market environments. “DC time horizons are designed to span decades across a person’s career and to encounter and withstand the numerous market cycles along the way to retirement,” he said. “We’ve seen the number of funds in investment menus stay relatively flat. Other than adding ESG options, we haven’t seen menus go either way. They’ve stayed fairly static over the last several years.”

Matthew Brenner, managing vice president of investment product management at MissionSquare Retirement, agreed. “The current macro environment hasn’t necessarily impacted how DC plan sponsors are approaching their investment menus,” he said. “When building a DC menu, you should aim for something that’s robust and appropriate for participants saving for retirement over a longer horizon. While today’s environment is one of higher inflation and various knock-on impacts from that higher inflation, we’ve also just come out of a period of lower inflation.” He noted that there’s no guarantee what inflation or other macro factors will look like in the future: “To try and respond to current macro factors in a plan lineup is very difficult and doesn’t necessarily build for the longer term.”

Read: Coming Next to DC Plans: Personalized Target Date Funds

Engaging and keeping participants

Even though plan sponsors tend not to respond to a challenging macro environment by remaking their investment menus, they are now taking other steps to strengthen participants’ connection to their plans.

One step is to emphasize education and communication. According to Bransby Whitton, executive vice president of DC solutions at PIMCO, participant education is critical as DC plans continue to evolve. “Historically, mass emails or paper-based types of communication had little participant engagement and are largely in the past,” he said. “It’s essential for sponsors to build out multifaceted communication programs that can provide basic financial education and tactically address participant concerns. They need to get out in front of those concerns and reassure participants to stay the course when conditions are volatile.”

Using CITs has enabled us to work with all of the parties that are involved in our stable-value fund to integrate a stable-value allocation into our target-date funds.
Matthew Brenner
MissionSquare Retirement

For DC providers, Whitton continued, “it’s really table stakes to provide content and support, in multiple languages and across different platforms and formats. Everything must be designed to align with the sponsor’s objectives and maximize participant engagement.”

Sponsors also are doing more to keep participants in their plans. Until recently, the consensus view was that once participants separated from service because of retirement or they moved to another employer, the assets should go with them.

The thinking on participant retention is evolving, Brenner said. “Plan investment options are designed for the whole journey to and through retirement. In many cases, they offer access and pricing that’s not available for participants who leave the plan. For sponsors now, it may not be as much about the menu as it is that plan sponsors are looking at the value they can add for participants and promoting staying with the plan, even after separation of service.”

Personalized TDFs Go Beyond Age to Construct Individual Glidepaths
Source: PIMCO, 2023. For illustrative purposes only. No engagement is required on behalf of the participant when TDFs are the QDIA and auto-enrollment is utilized.

Attracting and retaining employees

Companies increasingly realize that their DC plans are more than a vehicle for retirement savings: Plans also can be used as a strategic tool to attract and retain employees in a strong job market.

“Employers are still dealing with the effects of the great resignation, and those companies have to compete aggressively for talent,” said Dan Cahill, member of management, U.S. defined contribution at Partners Group. Recruiting and retention are top of mind among employers, and benefits such as a 401(k) plan are a way to attract and retain employees. “Setting employees up for a successful retirement should be considered an A-plus benefit and something to differentiate companies from other employers. Sponsors must make it a priority to give participants confidence in the strength of their retirement plan and its ability to help them save.”

Vidur Mehra, senior vice president at PIMCO, noted several ways in which companies are making their plans more appealing to participants. The first is by providing employees with more services, such as student loan repayments and emergency savings programs. Next is an increased focus on personalization. “We’ve seen advancements in technology that enable sponsors to utilize default funds that go beyond a participant’s age and automatically take into account additional factors, like salary, account balance and savings behavior,” he said.

People overcomplicate the implementation of private markets. A private equity CIT can fit into a target-date fund without any major changes.
Dan Cahill
Partners Group

Mehra also cited a much bigger focus on the needs of retirees. “Over the last eight to 10 years, we’ve seen a steady increase in sponsors’ desire to keep assets in-plan and provide more tools and services to better meet retirees’ needs,” he said.

Read: Are We Approaching The Tipping Point For Private Equity & 401(k) Plans?



Plans are pursuing better participant outcomes through greater investment diversification

As DC plan sponsors assess the investment menu, they are looking at making subtle changes — both structural and investment-related — that can help improve participant outcomes.

Many sponsors are reluctant to increase the number of menu options, which is typically between 15 and 20. “If they want to add diversification, they prefer to insert noncore investments into existing options,” said Nuveen’s McCarthy.

For example, “let’s say a sponsor wants to incorporate a noncore investment into a custom portfolio, usually a target-date portfolio or a managed account offering,” he said. A sponsor may feel that the investment will help the plan’s overall risk-return profile, but they may not want to increase the menu or make these investments directly available to participants. “We’re seeing some sponsors handle this by incorporating noncore options into asset allocation vehicles like target dates or managed accounts.”

Different vehicles

Another structural change gaining momentum is the use of managed accounts and collective investment trusts in conjunction with target-date funds and mutual funds, a solution known as a dual or dynamic QDIA, or qualified default investment alternative.

“More plans are offering both target-date funds and managed accounts,” said McCarthy. “We’re even seeing some sponsors tie the two of them together, where the participant starts off defaulted into a target-date and, at a certain age or threshold, automatically moves into the plan’s managed account offering. We find these two solutions very complementary.”

Some sponsors tie [target-date funds and managed accounts] together, where the participant starts off defaulted into a target-date and, at a certain age or threshold, automatically moves into the plan’s managed account offering.
Brendan McCarthy

According to McCarthy, the popularity of dual and dynamic QDIA solutions comes from technological improvements that enable the use of data to customize individual portfolios as well as the significant growth of million-dollar account balances inside 401(k) plans. “A lot of these more affluent participants would like their plan portfolios to be managed like their wealth portfolios,” he said.

MissionSquare’s Brenner explained why his firm has chosen to use CITs exclusively. “The conventional wisdom is that CITs only provide a cost advantage over mutual funds, but that’s a very limited way to look at them.” He added that if CITs are used properly and creatively, they allow more flexibility than mutual funds, which are designed for a broader investor base than the retirement market. “To the extent that plan sponsors are looking at both vehicles, we don’t see them offering the same investment strategy by the same manager in both CIT and mutual fund formats. They tend to select one over the other,” he said.


The target-date fund is PIMCO’s DC vehicle of choice, but regardless of the vehicle that sponsors favor, Whitton believes that DC portfolios should be personalized to achieve best results. “Record keepers have participant-specific data that can be used to create a much more precise asset allocation than one based on age alone,” he said. “This gives sponsors much more flexibility when it comes to selecting the QDIA.”

Often, he added, sponsors must choose a QDIA based on the median, most conservative or most aggressive participant. “By offering customized, personalized solutions, they can not only cover all three of those cases, but everything in between,” Whitton said. He explained that personalized target-date glidepaths can draw on the entirety of the target-date market in terms of every conceivable glidepath, including to and through retirement setups. “Ultimately, that should lead to much better outcomes for participants.”

Rethinking asset classes

In addition to making structural adjustments to their plans, DC sponsors are reexamining the asset class mix in the investment menu. They aim to improve participant outcomes by reconfiguring allocations to broaden diversification.

Exhibit A for this trend is the integration of alternative investments, notably private equity, hedge funds, private debt, real estate, infrastructure and commodities. Defined benefit plans have invested in private equity for decades, while DC plans have found it difficult to do so. “From an inclusion perspective, is this fair to today’s 401(k) participant who maybe missed out on having access to DB plans?” asked Partners Group’s Cahill. “Private equity should not just be reserved for wealthy individuals or institutional investors. And to make it more broadly available to individuals, it must be included in savings structures like a 401(k), which today serves as the only retirement vehicle for most Americans.”

Cahill cited fear of litigation and additional operational considerations as the biggest obstacles that have kept private equity out of most DC plans. But he noted that a 2020 information letter from the Department of Labor has helped to open the door more widely.

Partners Group, with another asset manager, approached the DOL in 2020 to seek guidance on the appropriate use of private markets in DC plans. In June of that year, the DOL responded that the inclusion of private equity in a DC plan is not inappropriate and could be utilized in a professionally managed portfolio, such as a target-date fund, managed account or other QDIA. In addition, in December 2021, the DOL issued a supplemental statement that said, among other things, sponsors must have a clear understanding of the liquidity constraints involved with managing a private-markets portfolio.

Another development that has opened the way was a legal decision involving Intel’s 401(k) plan. In January 2022, a U.S. district judge ruled that Intel did not breach its fiduciary duty of prudence by allocating a share of plan assets to “nontraditional investments,” such as hedge funds, private equity and commodities.

In recent years, there’s been more interest in multisector, credit-oriented [fixed-income] options, specifically income-oriented multisector funds. These can provide diversification and risk mitigation.
Vidur Mehra

The operational constraints of illiquid and infrequently valued assets — such as private equity in vehicles like target-date funds — have largely been overcome, Cahill said. “Improving DC participant outcomes does not require sweeping legislative or plan design changes,” he said. “People overcomplicate the implementation of private markets. A private equity CIT can fit into a target-date fund without any major changes.”

Partners Group, he added, has tackled all of the larger operational hurdles, such as the need for daily liquidity and daily valuation. “Having private equity available to retail investors requires that it’s in a transparent, highly regulated structure in which multiple parties are involved in overseeing management.”

Fixed income

Fixed income usually accounts for only two of the 10 or more investment options in a typical 401(k) plan. The first, most often, is a core or core-plus portfolio, and the second is a higher risk-return exposure, such as high yield. The options can be active, passive or one of each.

Mehra at PIMCO noted a trend toward broadening fixed-income exposure through multisector options rather than by adding another stand-alone option. “In recent years, there’s been more interest in multisector, credit-oriented options, specifically income-oriented multisector funds. These can provide diversification and risk mitigation. But also, since they tend to have low duration and high income, they can do a nice job of serving the needs of retirees,” he said. Some sponsors are considering these options to help address the needs of savers during the accumulation phase and the needs of retirees during the spending phase, he added.

Capital preservation

Given how much interest rates and yields have risen in the past 18 months, some sponsors are reexamining — rather than replacing — their capital preservation menu options, particularly stable value. “A lot of plan sponsors and consultants are making sure to look under the hood of their stable-value options, drilling down on duration and quality, and looking at how these funds performed and held up when rates jumped,” said McCarthy at Nuveen. He added that there’s been no real change in their need for stable value, but they’re performing the same level of due diligence on what they have in that menu slot as they do on their equity and fixed-income options.

Demand remains strong for stable-value options as a cornerstone of retirement plans, noted Brenner at MissionSquare, but there are times in a market cycle when it doesn’t perform as well as a money market fund. “We’re in one of those times right now, where the Fed has significantly hiked interest rates,” he said. “It’s one of the few environments where money market funds should outperform stable value. Yet, anecdotally, plans have only modest interest in adding money market funds.”

MissionSquare uses a CIT structure to integrate asset classes like stable value that previously weren’t found in commingled, daily valued target-date funds. “Using CITs has enabled us to work with all of the parties that are involved in our stable-value fund to integrate a stable-value allocation into our target-date funds,” he said. “It’s an important innovation in terms of the stability it provides and the return generation that may be possible relative to some lower-volatility fixed-income strategies.”



As retirement income becomes increasingly essential for participants, sponsors are exploring creative ways to provide it

One of the most popular buzz phrases among DC sponsors and providers these days is “income is the new outcome.” With a big boost from Congress in the form of the two SECURE acts — which have made it much easier for 401(k) plans to include annuities — the ability to provide retirement income has morphed from an aspiration to a must-have.

“A lot of plan sponsors are looking at different options out there that dampen volatility and reduce risk for those closest to retirement,” said McCarthy, who added that Nuveen is seeing much more interest in fixed annuities. A fixed annuity can “provide the portfolio with bond-like returns, but without the volatility.” Replacing a portion of a bond portfolio with a fixed annuity can dramatically reduce the risk and severity of losses for those close to retirement during declining markets, he said. Also, fixed annuities offer participants the option of converting to guaranteed income at retirement.

Nuveen’s approach, McCarthy continued, is to embed the annuity inside either a target-date fund or a managed account. “It replaces a portion of the portfolio’s fixed-income sleeve and can provide Bloomberg Agg-like returns during the accumulation period without the volatility,” he said, referring to the Bloomberg U.S. Aggregate Bond index. “At retirement, it provides an option for guaranteed lifetime income.”

Read: The Next Evolution of Retirement Plans: Securing Lifetime Income

Variety of solutions

“We’ve seen a number of new products covering a range of annuity types, from variable to fixed, with various ways to implement them into plans,” said PIMCO’s Mehra. “Generally, what we’re hearing is that the products have different considerations around cost, complexity, portability and the amount of fiduciary risk a plan sponsor is willing to assume.”

In contrast to annuities, PIMCO has focused on a nonguaranteed retirement-income solution, which has attracted considerable interest from clients. Mehra noted that nonguaranteed solutions offer substantial benefits, notably their simplicity, portability and yields, currently between 5% and 6%. In addition, he said, “participants can meet a big part of their spending needs by spending the income and holding on to principal. It’s also an effective strategy for minimizing longevity risk. In some cases, simply spending down income without touching principal can enable participants to protect themselves from outliving their assets.”

Plan sponsors should consider making guaranteed-income products available to participants. “These products should be constructed in a way that is cost-effective because an embedded guarantee is going to be more expensive than a typical asset allocation fund,” said Brenner at MissionSquare. “To the extent that sponsors see a benefit for participants to stay in-plan even after separation from service, having an income guarantee provides a very attractive option that helps participants to remain in-plan and satisfy their income requirements through retirement.”

Plan sponsor view on retaining retiree assets in plan
*Note: Institutional consultants were asked ‘Approximately what percent of your plan sponsor clients take the below view on retaining retired participants’ assets in their plan?’ Source: DC Consultants Survey, PIMCO.


Providers see legislation and industry innovations supporting DC investment menus

When industry providers look to the future, they see a number of DC investment menu developments that — individually and collectively — will have a positive impact for sponsors and participants.

The first SECURE Act provided broader allowances to encourage pooled employer plans as an alternative to single-employer plans. PEPs allow multiple companies to pool plan participants and assets with those of other plans and delegate most fiduciary responsibility to a third-party pooled-plan provider. The companies don’t have to be affiliated or even in the same industry.

Partners Group’s Cahill believes that PEPs are a great solution for DC plans of all sizes. PEPs can help companies that don’t have the scale to achieve better pricing for administration and investments or that may not have the ability to hire an investment staff or consultant to offer a robust menu of options. “These plans’ participants tend to suffer accordingly,” he said.

“The PEP framework enables companies to access scalable, customized solutions previously available only to large and mega-sized plans,” Cahill added. In the process, the sponsor’s human resources and finance departments are relieved of the plan responsibilities that can save the sponsor significant time and costs. “In addition to gaining scale and the ability to offer a more robust plan, the PEP structure’s most attractive benefit is that it offloads most of the fiduciary liability associated with offering a 401(k) plan to the pooled-plan provider. It’s because of this fiduciary offload that larger plans are pursuing a PEP in lieu of the traditional plan offering.”

Read: Auto-Personalization and Plan Sponsor Suitability: Benefits for Sponsors and Participants Alike

Record keepers catch up

The passage of the two SECURE acts has mixed implications for DC record keepers. On one hand, both acts should prompt the formation of more plans, which would boost revenues for record keepers. On the other, the legislation essentially requires record keepers to upgrade their tech stacks to handle asset classes beyond traditional mutual funds — particularly annuities.

McCarthy at Nuveen sees the changed environment as favorable not only for record keepers, but also for the DC plan industry as a whole. “Most record keepers didn’t have the technology to offer third-party annuities,” he explained. “What I think you will see happen in 2023 is that the top record keepers will start to add some of the top annuity solutions, followed by broader product proliferation across record keepers over the next couple of years.” This will fuel the evolution of the 401(k) plan from a tax-preferential savings plan today to a through-retirement investment vehicle that incorporates guaranteed lifetime income, he said.

Active-passive hybrid

Most plan sponsors with customized target-date funds are blending active and passive components. In recent years, according to PIMCO’s Whitton, this hybrid approach has gained traction in the off-the-shelf market and is nearing a 10% market share.

In Whitton’s view, “You really want to go active where there are consistent sources of excess returns that can be reliable and are untapped, and fixed income is the most natural place for that. It’s going to be much more challenging to find that consistency and reliability in equities. We think the right blend is to combine active fixed income with passive equity exposure.”

Read: A fiduciary’s guide to offering lifetime income

Adding alternatives

Brenner is optimistic that asset managers will follow MissionSquare’s lead and include alternatives in their asset allocation products, but doing so will require big shifts in mindsets and operating models. “The DC industry needs to reorganize itself to properly evaluate and add alternatives into target-date funds. Most consultants and many managers aren’t yet set up to do this, even if they think it’s a good idea. I’m optimistic because I’ve already seen more interest in it from the industry. We’ll ultimately get to a point where many others are adding alts as well.”