Defined Contribution

Will Boring Still Be Beautiful?

Will Boring Still Be Beautiful?
1 min 36 sec

“Reports of my death have been greatly exaggerated.”

—Mark Twain

In setting the rules governing qualified default investment alternatives (QDIAs), the Department of Labor (DOL) mandated that a default option must contain a mix of “equity and fixed income exposures.” As a result, many target date funds (the most prevalent QDIA) have glidepaths with a diversified mix of asset classes. But judging by the past decade or so, diversification has proven a headwind for TDFs.

Instead, boring has been beautiful. To illustrate this, Callan constructed a hypothetical “most boring glidepath” containing only the S&P 500 and Bloomberg Barclays US Aggregate Bond Indices to meet the minimum diversification standard for a QDIA.

The result: Our boring glidepath performs better historically compared to peers, as well as to a glidepath containing the market average underlying exposure to 24 distinct asset classes. Below we show results for an age 45 allocation using both our boring glidepath and the 24 asset class glidepath. We imposed the index returns for these asset classes upon the glidepath, going back 10 years.

Boring vs. Diversified Glidepath for 10 Years Ending 6/30/20

Keep in mind that going “boring” would have resulted in lower fees, superior performance, and the perception of lower fiduciary risk. Over a 10-year period, contributions would have grown 17% more with the boring glidepath. This incorporates only asset allocation, not the impact (or lack) of alpha and the effect of fees.

Does this analysis point to an existential crisis for diversification, or at least a sad revisiting of investing orthodoxy? No. Buried in the small print is the usual caveat: “Past performance is not indicative of future results.” Perhaps we can take solace in the belief that the next 10 years will be unlike the past decade (that’s my belief!). But our analysis does help explain why few plans have embraced alternatives and other sources of non-correlated returns, and that their day may come in the future.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts
Defined Contribution

Lost but Not Forgotten: DOL Guidance on Missing Participants

Jana Steele
Jana Steele explains how new regulatory guidance on missing participants affects DC plan sponsors.
Defined Contribution

Department of Labor Provides Cybersecurity Guidance

Benjamin Taylor
An excerpt from an article by Ben Taylor on new cybersecurity guidance.
Defined Benefit

PCE and CPI: What’s the Difference?

Fanglue Zhou
Fanglue Zhou explains how CPI and PCE differ and why the Fed prefers the PCE.
Defined Benefit

Gains for Just About Every Asset Class in 2Q21

Kristin Bradbury
Kristin Bradbury assesses how U.S. and global stock, fixed income, and real assets markets performed in 2Q21.
Defined Benefit

Wall Street Bets on Transitory Bumps in Inflation

Kristin Bradbury
Kristin Bradbury analyzes how the U.S. and global economies and global markets performed in 2Q21, and assesses the outlook coming out of the pandemic...
Defined Benefit

Putting Values into Action: A Practical Guide for Institutional Investors

Brad Penter
Lauren Mathias and Brad Penter discuss how investors can incorporate racial equity into their investment programs.
Defined Benefit

A JOLT of Inflation from the Labor Market?

James W. Van Heuit
Jim Van Heuit discusses recent changes to the labor market and what impact they may have on inflation.
Defined Benefit

Tips on TIPS

Kristin Bradbury
Kristin Bradbury explains TIPS and their potential role in investment portfolios.
Defined Benefit

The U.S. Economy, Now Open for Business

Jay Kloepfer
The U.S. economy may be on track for a truly eye-opening expansion, with initial projections pointing to growth rates of 9% or even higher for 2Q.
Defined Benefit

When the Passive Index Is an Active Decision

Weston Lewis
Because of differences in passive indices, investors should understand how the one they choose will affect benchmarking.