PLANADVISER - September/October 2019 - 49

and return of high-yield corporate
or emerging market bonds.
" Generally, we've found that active
managers in fixed income can extract
greater value net of fees, versus equities, "
notes David O'Meara, head of
defined contribution (DC) strategy at
consultants Willis Towers Watson in
New York City.
Advisers also report considering
global bond funds-or not-to
round out the opportunity set. " We
have some plans with global bond
funds, but with $15 trillion of bonds
around the world with negative
yields, that doesn't strike me as a
fantastic
environment, "
Swanson
says. Likewise, he sees stand-alone
high-yield corporate bond funds as a
10-Year U.S. Treasury Note Yield, Monthly Average
(1967 - 2019)
16%
14%
12%
10%
8%
6%
4%
2%
" sharp option, " having a level of risk
many participants might not grasp.
Granted, few observers are calling for higher interest
rates anytime soon or offering a plausible scenario for how
rates would rise. But in the event that they do a few years
out, how should advisers guide sponsors in stocking the
shelves in the fixed-income aisle?
" The market today is not the only one we'll see over five
years, so it's a good time for fiduciaries and their advisers to
evaluate whether the menu offers the breadth and choice to
weather all sorts of markets, " O'Meara says. " We may need
to offer investments that might not look so attractive today-
five years ago, sponsors were offering money market funds
that were yielding zero. But today, many are paying 2% and
serving as a store of wealth while keeping pace with inflation. "
" If rates are rising, there is likely some inflation driving
that, so you would want some inflation protection, too,
through TIPS
[Treasury
inflation-protected securities], "
notes Chris Dillon, investment specialist in the multi-asset
division of T. Rowe Price Group Inc., in Baltimore. " But they
should be short in duration-it's our view that TIPS, beyond
five years, bring interest rate sensitivity that you don't want. "
" [Plans] want
to offer enough flexibility in the fixedincome
menu to allow participants to capture higher rates
and keep capital preservation a priority, " observes Ed McIlveen,
director of research at Francis Investment Counsel
LLC, in the Milwaukee suburb of Brookfield. " First, a stable
value option is key. Second, include an option that is very
safe-we have a lot of clients that use TIPS. Then you should
have an intermediate-term core bond fund and one for
emerging-market debt. With those four categories, participants
can build a fixed-income portfolio that has sensitivity
to rising rates and inflation, and there will be enough income
to compensate for the credit risks they are assuming in the
corporate and emerging markets. "
McIlveen thinks the best preparation sponsors can make
for higher rates is to line up retirement income opportunities:
" They are in their infancy, but there are marketplaces
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Source: Federal Reserve Bank of St. Louis
for annuities, where a participant can get a quote from five
or six insurance companies at institutional prices. Participants
should be able to pull that lever when rates are higher
and annuity pricing makes sense. "
A more complex fixed-income lineup requires education
enabling participants to understand what suits them
best. " I have yet to go to a cocktail party where fixed income
is the prime topic-equities get all the airtime, " observes
David Zee, a specialist on fixed income at consulting firm
Callan LLC in San Francisco. " It's about giving participants
an appreciation of the benefits. Older participants
might be looking for a counterbalance to equity volatility,
while younger workers might be looking for the additional
expected return from core-plus strategies. People also need
to know how they can use the different options to achieve
their retirement income. "
" We tell participants that bonds are like stocks, in that
they are all different, and have a purpose in a diversified
portfolio, " says James Battmer, chief investment officer at
Resources Investment Advisors, in Overland Park, Kansas.
" They have to think of fixed income as an anchor and
accept that, over the long run, it will probably be the worstperforming
component of the portfolio but that it operates
as insurance.
" And people should not be disappointed when it earns 0%,
as bonds did in 2018, " he adds. " Many got rid of their bonds
at the exact moment they shouldn't have. "
Until that sunny day that interest rates are high enough
to pay a generous income to DC retirees, Battmer sees
further trouble. " Our industry is on the brink of a retirement
crisis, because so many target-date funds are built on the
assumption that fixed income can still generate significant
real returns. When we don't have the 60% of the portfolio
creating returns of 6% or 7%, fixed income is no longer the
buttress it used to be, and, for those people who are in and
near retirement, that's a danger. " -John Keefe
planadviser.com September-October 2019 | 49
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