Performance Disparities between DB and DC Plans due to Real Assets, Emerging Market Equity, and Alternatives Exposures

Performance Disparities between DB and DC Plans due to Real Assets, Emerging Market Equity, and Alternatives Exposures

BNY Mellon’s Investment Strategy and Solutions Group conducted research resulting in a report that provides detailed analysis on the performance disparities between Defined Benefit and Defined Contribution Plans.   A few excerpts:

• Broadening the DC universe to include the kinds of allocations to include the kinds of allocations that institutional-quality pension plans have used for years, we believe, provides the potential for DC plans to improve their risk-adjusted return while managing volatility and providing greater inflation protection compared with traditional DC options.
• According to Callan, the average DB plan outperformed the average DC Plan by 180 basis points from 2006-2012.
• Nearly all assets in target date funds have been invested in traditional style-box strategies, with more than 70% invested in tradition style box equities in particular.  With target date funds, we found that there has been no meaningful increase in diversification; rather style box investing “in disguise”.
• Genuine diversification and asset allocation are still key to achieving appropriate asset accumulation and retirement income.
• There is a compelling opportunity for DC Plans to apply institutional DB best practices when it comes to reducing equity risk and home-country bias as well as incorporating alternative investments to increase diversification, return potential, and downside risk management.
• DB Plans have broadened their exposure to assets like non-US equities, including emerging market equities, because they understand the global economy is changing and that some of the most attractive opportunities are found outside the U.S. as the emerging world continues to grow and evolve.  Similarly, they are aware of the need to  protect against inflation with allocations to real assets as well as the enhanced diversification and downside risk management benefits that alternatives can provide

It is for many of these exact reasons why we created the Endowment Multi-Asset ETF Collective Fund, which applies many of these same concepts within a turnkey investment selection that can typically be seamlessly added as an investment selection to most retirement plans through the execution of a participation agreement.

You can access the full BNY Mellon report on their website.