A white paper from OppenheimerFunds notes that while the perceived low cost (a hot-button issue due to fee disclosure regulations) and ease of use of index funds and target-date funds (TDFs) have spurred a significant presence in DC plan lineups, a big-picture view is necessary given the potential limitations of both of those approaches. The paper authors believe a strategic view toward plan lineups should feature a “global core” of investments that allows participants to benefit from true worldwide exposure to an increasingly global economy.
While lowering costs may be a desirable goal, choosing funds exclusively on the basis of cost limits a plan’s ability to select the best available investment options, the paper contends. The authors say the opportunity cost of forgoing the potential to outperform a passive benchmark may outweigh the higher fees associated with actively managed mutual funds.
According to the paper, TDFs face growing skepticism, and they are not ideal in every situation. Due to their underlying investments and the many variations and inconsistencies of various providers’ glide paths, these funds are difficult to benchmark and compare—and may make it more difficult to manage fiduciary responsibilities.
The authors say many plan sponsors ignore the fact that global investing is an important component of a well-diversified retirement portfolio, and place a few stray international funds on plan investment menus without considering the larger picture. To help ensure better participant outcomes, sponsors should consider creating what the authors call a “global core,” which would include domestic and international equity, and fixed-income funds. “This fundamentally outward-looking orientation—taking into account all asset classes in and outside U.S. borders—could provide true worldwide exposure,” the authors conclude. The OppenheimerFunds Retirement Perspectives paper, written By Kathleen Beichert, senior vice president, Retirement Marketing and Brian Levitt, senior economist, is available here.