A Guide for Globalizing DC Core Menus

Alison Martier

By Alison Martier and Seth J. Masters

At a time when plans are seeking to control risk and enhance returns, hedged global bonds can help improve outcomes for US defined contribution (DC) investors. Hedged global bonds have delivered better risk-adjusted results over time than US bonds. So how do we recommend plan sponsors incorporate global bonds, and what is the ideal allocation in core menus?

Strategies for Incorporating Global Bonds into the Core Menu

When it comes to core options, we’ve seen a growing trend toward multimanager design—a trend that began with large plans, but that is now making its way into midsize and smaller plans, too.

This means that smaller plan sponsors have the ability to add a Global Bond offering as a complement to their US Bond offering, and to guide participants toward increased allocations to it.

And larger plan sponsors have the flexibility to incorporate global bonds directly into their Core Bond option. This allows plan sponsors to design their Core Bond option to better meet participants’ risk and return objectives, without creating disruption for plan participants.

How Much Is Just Right?

As a plan sponsor or participant begins to migrate some of their core bond allocation into hedged global bonds, what happens to the core option’s risk-adjusted return? What do incremental changes achieve?

The display below shows that, as we shift from a fully US portfolio on the left to a fully global (hedged) portfolio on the right, not a lot happens to return. However, because of the increased diversification of the global portfolio, the volatility declines quite significantly. As the US holdings decrease from 100% to 90% of the portfolio, the risk begins a steady decline.Adding Global May Improve Core Bond Risk-Adjusted ReturnsAs a result, any increased allocation to global improves potential risk-adjusted return. There is no “sweet spot,” nor does a sponsor or participant need to move to 100% hedged global in order to see results: a 10%, 20% or 50% allocation will show improvement in potential risk-adjusted reward, based on our analysis.

To explore our supporting research in greater depth, we invite you to read our white paper, Global Bonds: A Better Solution for DC Investors. In our next and final post of this series, we’ll address adding global to DC plans as a component of the default option such as a target-date fund.

“Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested—including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Alison Martier is Senior Portfolio Manager—Fixed Income at AllianceBernstein, and Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.   

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