The new U.S. tariff regime has reintroduced elevated uncertainty and associated volatility to the markets with no clear end in sight. As companies grapple with the implications for the bottom line and investors gauge the near- and longer-term repercussions for bond yields and share prices, defined contribution plan sponsors face challenges, too—namely, how to keep participants on track to achieve their goals, and how to make sure that the plans are prepared for the evolution of the investment landscape.
In terms of participants, we believe the name of the game is communication: emphasizing the long-term nature of equity investing, the difficulty of timing the market, the value of broad diversification across asset classes, and the merits of dollar-cost averaging. It can also mean highlighting the bells and whistles associated with a plan, including educational materials and access to advisors where applicable and the array of investments that may be suitable for different participants across ages and personal situations.
Taking a Fresh Look
As for plan composition, we believe now is probably not the time to make wholesale changes, but that it could be beneficial for plan sponsors to assess their offerings’ downside mitigation and risk-adjusted return potential. It may also be useful to assess how investment options have performed during past periods of volatility and whether that could offer lessons for the future.
A key issue for many plan lineups is passive exposure. Although passive equity vehicles offer a price-efficient means to access market indices, they do not provide cover when markets deteriorate, and those tied to the S&P 500 remain heavily concentrated in a handful of large-cap growth names. In our view, a key part of the solution is diversification—making sure participants understand the need to allocate among (and within) stocks, bonds and other assets.
At the same time, it makes sense to provide equity strategies that offer some risk mitigation, for example, through careful selection of quality companies and avoidance of weaker ones. This is particularly true among small-cap stocks, where low-quality companies make up a substantial portion of indices. Mid-cap stocks may also be worth a look given their status as a “sweet spot” between the economic growth potential of smaller companies and the greater stability of larger names.
Sponsors should also understand the nature of the fixed income options within their plans. Typically, these consist of passive or near-passive strategies, which tend to be heavily weighted to high-duration government securities. Such exposures have been an important part of asset allocations given the ballast they have historically provided during market shocks and/or economic downturns. However, given the major shifts occurring on the economic landscape, we believe flexibility could be important, making it advantageous to include actively managed fixed income strategies that can fine-tune duration and credit exposures across sectors and geographies; this can help manage risk and capitalize on meaningful opportunities for yield enhancement. Also valuable are income- and capital-preservation strategies that cater to those closer to retirement.
In addition, while a traditional mix of equities and fixed income can offer meaningful diversification, adding some alternative investments can help in seeking relatively low correlations to improve risk-adjusted return. While we believe that “evergreen” private equity (PE) funds can serve this role for self-directed investors, plan sponsors may also look to include PE sleeves within target date funds as a way to capture the potential of the asset class.
Back to Basics
In the current environment, many have views on the impacts of tariffs and trade deals, but no one (that we know) has a crystal ball revealing the ultimate contours of the new economic landscape. Rather than try to speculate, we believe that plan sponsors should focus on what they can control: plan menus that offer diversification and best-in-class strategies to help participants as they seek to achieve long-term investment and income goals.
Meaningful Diversification Can Take Advantage of Performance Divergence
Asset Class Correlations
*Source: Neuberger Berman, Bloomberg-Barclays, J.P. Morgan, Morningstar LSTA, FTSE Nareit, NCREIF, HFRI, Burgiss, infraMetrics; analytics are as of April 30, 2025. High yield is represented by BB and rated fixed securities. Data is from January 1, 2007 through April 30, 2025. An exponentially weighted average was employed to place more weight on recent data, with a seven-year half-life. For example, data as of April 30, 2017 was given half as much weight as data from April 30, 2024 in determining correlation figures. Past performance is no guarantee of future results.