Portfolio Manager and Head of Target Date Strategies
The future of defined contribution plans is being shaped by three key emerging trends, each offering unique benefits to plan participants and sponsors.
As we look toward 2025 and beyond, three pivotal trends are set to redefine the DC plan space:
- the dual focus on low-cost options and active fixed income
- the integration of alternative and real assets in target date funds (TDFs)
- the rise of hybrid default solutions that combine target date funds with guaranteed income
1. Balancing low-cost options with active fixed income management
The pursuit of low-cost investment options has been a dominant theme in the DC plan industry, driven by the desire to maximize returns by minimizing fees. Index funds have become possibly the most popular choice for their cost-effectiveness and perception of “safety.” However, the fixed income landscape presents unique challenges that passive strategies may not fully address. As interest rates fluctuate, active fixed income management offers the potential to navigate these complexities, providing opportunities for excess returns and risk mitigation.
Passive fixed income strategies often miss opportunities that active managers can exploit. With 80% of core and core plus managers outperforming the Bloomberg U.S. Aggregate Index over the past five years, the value of active management in fixed income becomes increasingly apparent, prompting plan sponsors to reconsider their fund selections, especially as interest rates remain elevated.
Why active in fixed income: Indexing is a very different proposition in fixed income than equities
Source: Bloomberg, SIFMA, J.P. Morgan Asset Management. Figures reflect the most recently available data as of December 31, 2023. Some figures may be lagged.
2. The growing role of alternative and real assets in target date funds
Traditionally focused on a mix of equities and fixed income, TDFs are now incorporating alternative and real assets to enhance returns and diversification. These assets—including private equity, real estate and commodities—provide unique return profiles and inflation protection, making them attractive additions to TDFs.
Benefits of alternatives to portfolio diversification
Correlations, returns and yields 10-year correlations and 10-year annualized total returns, 2Q14 – 1Q24
Source: Burgiss, Cliffwater, Gilberto-Levy, HFRI, MSCI, NCREIF, FactSet, J.P. Morgan Asset Management. Correlations are based on quarterly returns over the past 10 years from 2Q14–1Q24. A 60/40 portfolio is composed of 60% stocks and 40% bonds. Stocks are represented by the S&P 500 Total Return Index. Bonds are represented by the Bloomberg U.S. Aggregate Total Return Index. 10-year annualized returns are calculated from 2Q14-1Q24. Indices and data used for alternative asset class returns and yields are as described on pages 12, 13, and 16 of the Guide to Alternatives. Yields are based on latest available data as described on page 10 of the Guide to Alternatives. *CML is commercial mortgage loans.
Data are based on availability as of November 30, 2024.
For example, J.P. Morgan’s research underscores the benefits of including real estate in TDFs, noting that portfolios with direct real estate exposure have historically delivered higher returns with lower volatility. As the macroeconomic environment shifts, the strategic inclusion of alternative assets can help participants seek smoother return patterns and better long-term outcomes.
By incorporating real estate, target date funds may be able to achieve smoother return patterns
We believe we’ll see further innovation in this area, especially when one considers the potential for improved investment results that becomes increasingly important for a participant’s retirement readiness.
3. The emergence of hybrid default solutions—aka TDFs with guaranteed income
As retirees face the challenge of transitioning from saving to spending, the demand for retirement income solutions is growing. Hybrid default solutions, which combine target date funds with guaranteed income products, are gaining traction as a way to address this need. These solutions offer a seamless transition from accumulation to decumulation, providing participants with a steady income stream in retirement.
These hybrid solutions allow participants to allocate a portion of their savings to secure an annuity-backed paycheck for life, addressing concerns about longevity and market risks. However, these products are not a one-size-fits-all solution and must emphasize personalization, cost transparency, flexibility and control in order to be effective solutions for participants.
Comparing retirement income strategies
Source: J.P. Morgan Asset Management. For illustrative purposes only. While this grid includes broad groupings of retirement income options, it is not meant to be exhaustive.
Conclusions: A new era for DC plans
The future of defined contribution plans is being shaped by these emerging trends, each offering unique benefits to plan participants and sponsors. By embracing low-cost options with active fixed income, incorporating alternative and real assets into target date funds, and adopting hybrid default solutions, the DC plan industry can better meet the evolving needs of participants.
As we move into 2025 and beyond, these trends will continue to influence the design and delivery of retirement savings solutions, ultimately enhancing the financial security of millions of individuals.
As plan sponsors and participants navigate this evolving landscape, our focus will remain on providing innovative solutions that address the complexities of retirement planning. By staying ahead of these trends, DC plans can continue to play a vital role in helping individuals achieve their retirement goals.