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Successful Defined Contribution Investment Design by Ying Gao, Stacy L. Schaus

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CHAPTER 7Designing Balanced DC Menus: Considering Equity Options

Being average means you are as close to the bottom as you are to the top.

—John Wooden, Wooden: A Lifetime of Observations and Reflections On and Off the Court

The third of four pillars of a well-balanced core lineup is equity investments, the focus of this chapter. Offering access to the equity markets within a defined contribution (DC) plan is fundamental—but what’s challenging is determining the number and types of equity choices. Whatever the number, the choices should provide participants with the opportunity to reap both capital appreciation and income from equity markets worldwide. Broadening the opportunity set beyond developed markets opens the door to the world’s most rapidly expanding economies and return opportunities. Unfortunately, today’s DC equity lineups often lack broad access to global markets. What’s more, lineups are often shackled to market-capitalization-weighted indexes, which may further hamper returns and heighten volatility.

By restructuring the equity lineup to include global, dividend, and enhanced index strategies, plan sponsors may improve DC participants’ risk-adjusted return opportunity and the likelihood of retirement success. In this chapter, we’ll examine how equity options fit in DC plan design and what strategies are available and in use today, and how they may evolve in the future. We’ll also consider the role of active and passive management in equity options, how behavioral ...

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