Participants nearing or in retirement often face the challenge of generating income while managing investment risks. Unfortunately, many defined contribution (“DC”) plan menus fail to provide suitable tools to address this need. In such cases, we believe plan sponsors should consider adding flexible fixed income options to their lineups—in particular, go-anywhere multi-sector fixed income strategies.
Changing Demographics
The profile of DC plan participants has changed markedly in recent decades; 20 years ago, most participants were accumulators who needed investment options focused on growth to help them amass greater assets for retirement. Today, most 401(k) assets are held by participants at or near retirement age with needs that can be very different from accumulators, focused more on asset preservation and income generation.
Unfortunately, the bias of DC plans remains toward accumulators, as reflected in the heavy weighting of equity options (10 – 12 that serve to fill out all nine style boxes) but limited fixed income options—typically consisting of a money market or stable value fund, and a core or core-plus fund. We believe this takes considerable opportunity off the table and may put investor goals at risk.
While core and core-plus bond funds serve as foundational elements in many DC plans, their primary focus on high-quality, investment-grade bonds means they are well-suited for objectives centered around asset preservation and stability. However, this approach often limits both diversification and opportunities for enhanced income, as core-plus funds may include only a modest allocation to higher-yielding sectors. For participants seeking greater yield potential and broader diversification—especially in the context of evolving market conditions such as the shift from zero-interest policies starting in 2022—multi-sector fixed income strategies may offer an alternative designed to address these specific needs.
Multi-Sector’s Post-COVID Strength
Growth of $10,000 initial investment with $5,000 in annual contributions ($192 biweekly) thereafter
Source: Morningstar. U.S. Fund Intermediate Core-Plus Bond is represented by the Morningstar Intermediate Core-Plus category, U.S. Fund Intermediate Core Bond is represented by the Morningstar Intermediate-Term Bond category and U.S. Fund Multisector Bond is represented by the Morningstar Multisector Bond category. Data as of June 30, 2025. Past performance is no guarantee of future results.
Searching for Solutions
To improve potential retirement outcomes, we believe participants may need access to a broader array of fixed income options that can offer higher yields, better diversification across credit quality and more effective interest rate management.
While they have considerable merits, target date funds (“TDF”) may not always be the answer—particularly when it comes to retirement or near-retirement age participants. Most TDF series eventually roll into a product with an allocation to equities of 35 – 65%, depending on the manager—potentially too aggressive a level for some investors.
Even if a plan offers a variety of standalone fixed income strategies, it may be unrealistic to expect participants to allocate to them or adjust their portfolios in light of market changes and individual needs.
Drilling Down on Multi-Sector
In our view, expanding the range of fixed income choices to include a multi-sector strategy not only aligns with the diversified approach seen in equity offerings, but also offers participants additional tools to construct well-rounded, income-generating portfolios that offer meaningful diversification and address the varying risk tolerance and income needs of plan participants.
A common argument for target-date funds is that older participants may require their equity exposure to generate potential capital growth in order to maintain retirement income over time. However, multi-sector fixed income portfolios can hold high yield, emerging markets debt and other assets that, while somewhat more volatile than traditional fixed income, can provide additional total return potential without the level of risk associated with stocks.
Attractive Returns with Lower Drawdown Risk
Performance and Risk
Last 20 Years Through June 30, 2025
| Total Return | Std Deviation | Avg Drawdown | Max Drawdown | |
|---|---|---|---|---|
| CORE PLUS | 3.38% | 4.41 | -3.04% | -16.73% |
| U.S. HIGH YIELD | 6.51% | 9.08 | -5.54% | -33.23% |
| EMERGING MARKETS DEBT | 5.47% | 8.91 | -6.22% | -25.85% |
| S&P 500 | 10.73% | 15.11 | -10.35% | -50.95% |
Source: Morningstar. Core Plus represented by the Morningstar Intermediate Core Plus Category, High Yield represented by the ICE US High Yield Constrained Index and Emerging Markets Debt by the JPM EMBI Global Diversified Index. Returns are annualized. Data as of June 30, 2025. Past performance is no guarantee of future results.
Portfolio managers of an active multi-sector strategy can look across markets for what they believe are attractive investment opportunities and potentially add value through asset allocation, security selection, duration/yield curve positioning and currency management. In our view, the ability to employ a greater variety of approaches through an active strategy may lessen participants’ vulnerability to interest rate volatility and allow adjustments for changing market conditions, resulting in a potentially better risk/reward profile for participants.
Final Takeaway
We believe that the addition of a multi-sector fixed income portfolio option can provide participants with a professionally managed fixed income solution—serving either as a complement to traditional core or core plus funds, or as a standalone option for the fixed income portion of their portfolios. This flexibility allows plan sponsors to address the diverse needs of participants throughout their full investment lifecycles, whether they are still contributing or already in retirement. Of course, the quality and risk profiles of multi-sector managers may vary significantly, reinforcing the importance of thorough due diligence by plan sponsors.
