Defined Contribution Insights | Capital Group


Defined Contribution Insights


For insights and guidance on defined contribution investment topics, go to:

Defined Contribution Investment Perspectives

  • Analysis of DC trends from Capital Group’s leading DC specialists
  • Investment topics geared to the needs of DC plans


Defined contribution (DC) plans, originally designed as supplemental  savings vehicles, typically focus only on the savings phase — not the needs of retirees. Part of the reason for the historic success of the traditional defined benefit (DB) plan is that it is structured to provide participants retirement income directly from the plan.

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DC Investment Perspectives: Simplify Menus to Meet Participant Objectives

Defined benefit (DB) plans consistently report better returns — as much as 0.9% higher per year1 — than defined contribution (DC) plans. The Pension Protection Act gave plan sponsors tools to narrow this gap, such as investment re-enrollment and target date funds (TDFs) as default investments. These have helped improve investing behavior for many participants, but what about the 63% of DC plan participants who still make their own investment decisions?2

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Make DC Easy: Go Global

The Rise of Foreign Markets More than half of global market capitalization is non-U.S.

Sources: MSCI as of August 31, 2016. International Monetary Fund, World Economic Outlook April 2016.

Including global strategies in plan menus can increase diversification and investment opportunities.

Home bias (a significant over investment in one’s home country) has been a long-entrenched pattern in self-directed defined contribution (DC) plans. A decade of efforts by plan sponsors in the U.S., including the addition of international funds to retirement plan menus, has failed to successfully spur participants to increase their exposure to non-U.S. assets; the result is that participants are missing out on potentially attractive investment opportunities abroad, including in emerging markets. At the same time, plan sponsors are grappling with the phenomenon of choice overload, as more than a decade of behavioral finance research has shown that the expansion of menu options has proved overwhelming for participants, creating confusion and inertia.

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A Powerful New Approach to Target Date Fund Evaluation

Intermediaries have a new way to differentiate themselves and increase the value they deliver to their clients. The new American Funds Target Date ProView tool provides a fast, powerful online platform to analyze and compare target date fund series to help make an appropriate selection for a DC plan’s participants. 

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Legal Insights: Passive Does Not Reduce Fiduciary Liability

Recent Department of Labor (DOL) emphasis on fees combined with numerous 401(k) plan fee-related lawsuits have led some plan fiduciaries to question whether offering actively managed funds is riskier than passive funds that are typically less expensive.

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Fixed Income Should Anchor a Target Date Glide Path

In this paper, we discuss our approach and philosophy to fixed income in American Funds Target Date Retirement Series®, which we would describe as prudent and measured in broad terms.

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Get More From the Core Investments in Your DC Plan Lineups

The Capital Advantage℠ Participant Case Study

Screening for the Right Core Retirement Plan Lineup

Financial professionals generally agree that when choosing core investments for a retirement plan, it’s important to look for funds sharing certain qualities. These could include lower expense ratios, lower portfolio turnover, higher manager tenure, higher firm-level manager ownership and long-term manager incentive programs.

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Take a More Dynamic Approach to Managing Volatility in Target Date Funds

We believe that target date series should feature not only a gradual reduction in equities over time, but also a gradual shift in the nature of that equity exposure. This transition, which we call recharacterizing the equity exposure, effectively creates a “glide path within a glide path” that can help lower volatility.

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July 2016
 |  FEATURING Bradley J. Vogt

American Funds: Keep Target Date Funds on Target

American Funds portfolio manager Brad Vogt explains the importance of the right target date series to help investors pursue their retirement goals. Beyond the glide path, a good evaluation process should include an examination of the underlying funds and the purpose each serves over the long-term.

Watch the full Masterclass video on AssetTV and earn CE credit.

Watch Video (2:22)


Can You Get the Best of DB With the Best of DC?

Streamline the Number of Investment Options

Ideas for “DB-izing” a DC Plan

Why DBize?

The decline of defined benefit plans and the rise of defined contribution plans have created dilemmas for both plan sponsors and participants. Although they had their own disadvantages, DB plans make saving fairly easy for participants; DB participants are automatically enrolled and don’t have to make any investment decisions. With the growth of DC, much of that responsibility has shifted to participants, with mixed results. However, there are steps DC plan sponsors can take to seek the best of both the DB and DC worlds. By incorporating aspects of defined benefit plans into a DC plan design, plan sponsors can strive to address the following problems that many DC participants face:

  • Low enrollment
  • Inadequate contribution rate
  • Inappropriate asset allocation

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The Value of Time in 401(k) Plans

Exhibit 3: American Funds (R-3) vs. relevant index

*Some indexes do not have histories sufficient for comparison to the lifetime of certain funds. See General Methodology section below for details.

While sponsors should compare their plan’s investments at least once a year with the appropriate benchmarks and peer investments and over a series of different time horizons, the key question remains: How long should those time horizons be to ensure that the resulting decisions are prudent? 

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Is Passive Truly the Safer Fiduciary Choice for TDFs?

Given the rapid acceptance of target date funds (TDFs) as the primary retirement investment strategy for American workers, the choice of target date provider is now among the most important decisions for an investment committee.

The beauty of a TDF is its simplicity for participants. However, its underlying complexity can challenge committees tasked with assessing a TDF’s glide path design, risk/return profile and fee structure as part of fiduciary due diligence.

One of the considerations is whether the TDF should be actively or passively managed. In either case, appropriate due diligence must be conducted. When selecting a TDF provider, sponsors should remember:

  • Passive management does not provide fiduciary protection.
  • Active management may lead to better participant outcomes.

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Why Investment Re-enrollment Matters

Plan fiduciaries devote significant time and resources to educating participants about the importance of saving for retirement.

Despite this effort and the care that goes into making a well-balanced menu of investment options available to all participants, many participant allocations are at odds with their retirement needs.

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Participant Needs in Target Date Fund Evaluation

Meeting DOL Guidelines, Article 1 of 5

Satisfy DOL guidelines with a participant-focused approach to evaluating target date funds.


Wesley Phoa, portfolio manager, target date and fixed-Income funds, 21 years of experience.

Jason Bortz, ERISA attorney, 17 years of experience.

Toni Brown, CFA senior defined contribution specialist, 25 years of experience.

John Doyle, senior defined contribution specialist, 28 years of experience.

Rich Lang, investment specialist, 21 years of experience.

Years of experience as of December 31, 2014.

Target date funds have enormous potential to make defined contribution plans more effective and straightforward for participants. But to capture the funds’ benefits — and to help meet fiduciary obligations — plan sponsors must implement thorough, well-documented evaluation procedures.

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A Closer Look at the American Funds Target Date Retirement Series® 

Exhibit 3: American Funds (R-3) vs. Relevant Index

*Some indexes do not have histories sufficient for comparison to the lifetime of certain funds. See General Methodology section below for details.

In these videos, portfolio managers Jim Lovelace, Wesley Phoa and Brad Vogt discuss the American Funds Target Date Retirement Series.

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Complementary Fixed Income and Equity in Target Date Funds

American Funds Target Date Retirement Series Glide Path

The target allocations shown are effective as of January 1, 2015, and are subject to the Portfolio Oversight Committee’s discretion. The funds’ investment adviser anticipates that the funds will invest their assets within a range that deviates no more than 10% above or below these allocations. For quarterly updates of fund allocations, visit

Glide Path Within a Glide Path: How Fixed Income and Equity Can Work Together to Help Improve Retirement Outcomes

All target date series feature glide paths that reduce equities and simultaneously increase fixed income over time. American Funds Target Date Retirement Series® is distinguished by also featuring shifts in the nature of both the equity and the fixed-income exposure.

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Rethinking DC Plan Options: Embracing a Less U.S.-centric Approach

Aggregate Asset Mix of the Top 1,000 DC Plans as of September 30, 2011

Sources: Pensions & Investments, February 6, 2012; Rimes

Most defined contribution participants have minimal exposure to investments outside the U.S. and are not exposed to the long-term growth potential of some of the world’s most dynamic companies and industries. Just as defined benefit (DB) plans did in the 1990s, defined contribution (DC) plans should consider moving away from a largely U.S.-centric investment view to pursue potentially better absolute and risk-adjusted returns. Plan sponsors can encourage this by providing a balanced menu of investment choices that include international, global and even emerging markets equity options in their DC lineups.

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Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely.Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View fund . 

Returns shown at net asset value (NAV) have all distributions reinvested. If a sales charge had been deducted, the results would have been lower.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the funds’ characteristics statement, which can be obtained from a financial professional or your relationship manager, and should be read carefully before investing. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. 

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. Investments in mortgage-related securities involve additional risks, such as prepayment risk, as more fully described in the prospectus. While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. 

Each target date fund is composed of a mix of the American Funds and is subject to the risks and returns of the underlying funds. Underlying funds may be added or removed during the year. Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals actively manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date. 

Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.

Fund shares of U.S. Government Securities Fund are not guaranteed by the U.S. government.

There may have been periods when the fund has lagged the index or indexes. Certain market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. 

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. Investors should consult their tax or legal advisors. 

Expense ratios are as of each fund's prospectus. 

The American Funds are distributed by American Funds Distributors, Inc.

The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

Allocation percentages and underlying funds are subject to the Portfolio Oversight Committee's discretion and will evolve over time. Underlying funds may be added or removed at any time.

Past results are not predictive of results in future periods.