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November 30, 2012
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From left: Robert Tipp, Michael J. Collins and Michael Rosenberg
Fixed Income Can Help Enhance Retirement Menus -- Part 1
Prudential Investments Mutual Funds, part of Prudential Financial, spends a lot of time providing thought leadership with input from Prudential Financial's affiliated institutional managers. A topic it has recently given much attention to is fixed-income choices in defined-contribution (DC) plans. Earlier this year it published the white paper, Insights on Investing: Fixed Income Options within DC Plans, for the purpose of initiating dialogue with advisors and consultants.

In this two-part Special Report, Jerilyn Klein Bier, a contributing editor for Financial Advisor magazine, engages in a roundtable discussion with key professionals at Prudential to discuss this topic. The participants included Michael Rosenberg, senior vice president and director of IODC Distribution for Prudential Investments; Robert Tipp, managing director and chief investment strategist for Prudential Fixed Income; and Michael J. Collins, senior investment officer and portfolio manager for Core Plus Fixed Income Strategies at Prudential Fixed Income.

In today's Part 1, the experts explain why offering a wider selection and variety of fixed-income choices to DC plan menus can potentially provide higher returns, greater diversification and less volatility to retirement portfolios.

Part 2 of the interview, set to hit your inbox tomorrow, will explain how financial advisors can help in this effort.
  Q & A 
  • What trends and evolving needs of plan participants suggest that fixed income needs to become a bigger focus in defined-contribution plans?
    Mike Rosenberg: First, there's an aging workforce and its participants tend to want to invest more conservatively, safeguard their assets and turn the assets they've accumulated into a stream of retirement income. Second, there's been unprecedented market volatility due to the financial crisis of 2008 and the markets in general, so people are looking to become more conservative. The third trend has to do with the move away from off-the-shelf qualified default investment alternatives (QDIAs) to custom QDIAs. The vast majority of plans that are using custom QDIAs or custom target date funds use the core funds within the plan to create those QDIAs. So having a broader mix of fixed-income alternatives may provide potential to build better portfolios.
  • How underrepresented are fixed-income investments in DC plans, and why do you think plan sponsors currently offer relatively few options?
    Rosenberg: The average plan has 18 investment choices and 15 to 16 of those are equity choices, according to a 2010 study from the Plan Sponsor Council of America. Since DC plans were originally intended to be accumulation vehicles, the natural choice was to offer more and more equity funds. The intent wasn't to underweight fixed income; it was to build broadly diversified portfolios. But I think that over time, it got very skewed.

    When advisors and consultants are looking to take over a book of business or a plan, they're often saying let's see what you have today and refining or tweaking it. I think it's a great time, given the new rules and regulations on fee disclosure and fee transparency, for them to step back, think about what they want to accomplish and build menus from the ground up. They'll probably avoid a lot of the duplication that's in there today and give participants the opportunity to build a truly diversified set of portfolios.

    Mike Collins: There are always 15 to 20 different flavors of equity -- large cap, small cap, mid cap, value, growth, international, U.S. -- and then there's one bucket that says bonds. That's how fixed income has been thought of historically.

    Rosenberg: That's not the way it happens in the defined-benefit world or the institutional world. It's truly just like the equity marketplace -- there are types of fixed income that you can put together to either help enhance your opportunities for returns or help lower your opportunities for risk.
  • Should fixed income be playing a larger role in every DC plan, or is it only important for certain types of plan participants?
    Rosenberg: Certainly fixed income should be represented in every plan menu. Like with equities, it's a plan-by-plan decision. This is not a one-size-fits-all type of market. That's where advisors and consultants need to have really interesting and thoughtful conversations to find out a plan sponsor's goals and objectives for offering the plan, and what their participant base is looking to do.
  • What factors should be considered when selecting fixed-income options for DC plans?
    Rosenberg: Retirement plan menus aren't created for a point in time; they're created for long-term investing. Think about the long term and include investment alternatives that will react in different economic environments, different interest rate environments. The first thing you have to do when you add any investment product is to make sure it has a sound investment rationale: Why are you adding this and is it going to help participants construct better portfolios? You don't want to just add funds to add funds. Too many choices paralyze participants. Advisors and consultants need to consider a well-diversified core/core plus fixed-income fund and maybe one or two other fixed-income satellites.
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  • Barclays U.S. Aggregate Bond Index covers the U.S. dollar-denominated, investment-grade, fixed rate, taxable bond market of SEC-registered securities. Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Barclays U.S. Government Index covers the total universe of investment-grade fixed income securities issued by the United States government or its agencies. Barclays Global Aggregate Bond Index is an index of global investment grade fixed-rate debt markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency, and corporate securities. FTSE NAREIT Equity REITs Index measures the performance of all real estate investment trusts listed on the New York Stock Exchange, the NASDAQ National Market, and the American Stock Exchange. JP Morgan EMBI Global Diversified Index is an index of emerging market debt including USD denominated Brady bonds, Eurobonds, and traded loans issued by sovereign and quasi-sovereign entities and limits the weights of those index countries with larger debt stocks by only including a specified portion of these countries' eligible current face amounts of debt outstanding. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. S&P 500 Index is a market capitalization-weighted index of 500 companies primarily traded on the New York Stock Exchange. 10-Year Treasury Note is widely recognized as the benchmark bond in determining interest rate trends.

    Past performance is not a guarantee of future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. Indices are unmanaged. An investment cannot be made directly in an index.

    Mutual fund investing involves risks. Some funds are riskier than others. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. High yield bonds, commonly known as junk bonds, are subject to a high level of credit and market risk. Mortgage-backed securities are subject to prepayment and extension risks. Foreign investing involves the risk of currency fluctuation and the impact of social, political and economic change. Emerging markets are considered risky because they carry additional political, economic and currency risks.

    Consider a fund's investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and summary prospectus. Read them carefully before investing.

    Views and opinions are expressed for informational purposes only and do not constitute a recommendation to buy, sell or hold any security. Views and opinions are current as of this presentation and may be subject to change, they should not be construed as investment advice.

    Mutual funds are distributed by Prudential Investment Management Services LLC, a Prudential Financial company and member SIPC. Prudential Fixed Income is a unit of Prudential Investment Management, a registered investment adviser and Prudential Financial company. Prudential Investments, Prudential, the Prudential logo, Bring Your Challenges and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

  Editor's Note 
  • This interview was originally published in the November 2012 issue of Financial Advisor Magazine
  • THIS IS A PAID PRODUCT ANNOUNCEMENT. Product announcements appearing in SmartBrief are paid advertisements and do not reflect actual SIFMA endorsements. The news reported in SmartBrief does not necessarily reflect the official position of SIFMA.

Product announcements appearing in SmartBrief are paid advertisements and do not reflect actual SIFMA endorsements. The news reported in SmartBrief does not necessarily reflect the official position of SIFMA.
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