Traditionally, 401(k) investment menus have consisted of core asset classes such as U.S. stocks and investment-grade bonds. However, defined benefit plans have relied on a much broader range of asset classes and have historically outperformed defined contribution plans, says Bill McDermott, head of defined contribution services at Goldman Sachs Asset Management.
Defined contribution plan participants should have similar opportunities to broadly diversify their retirement savings, McDermott says. Defined benefit plans are already using non-correlative, non-traditional asset classes like commodities, emerging markets equity and emerging markets debt. The inclusion of these non-correlative asset classes in a defined contribution plan menu could help participants manage volatility, protect against inflation and provide new sources of return when traditional stock and bond markets underperform.
The key is making the right asset classes available without making an already crowded investment menu even more crowded, according to McDermott. He used an example of how bundling some of these nontraditional assets could provide broader diversification in a way that's comfortable to plan sponsors. The example compares the performance of an initial $10,000 investment over 10 years in a hypothetical bundle of alternative asset classes, called the Representative Diversified Alternatives Strategy, with the performance of the same investment in a proxy for a traditional participant 401(k) portfolio.
The measurement of compounded return, gross of fees, is meant to illustrate how a more diversified approach might benefit a participants' retirement savings over the recent 10-year period. Diversification, of course, doesn't eliminate risk entirely or guarantee a profit.
The example isn't a representation of any actual participant asset allocation and does not imply that an investor would be likely to achieve performance similar to what's shown. However, it is a starting point for understanding the role alternatives can play in a portfolio, McDermott says.
Reed writes for Financial Planning, a Source Media publication.
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