Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Retirement Perspectives

With Morningstar’s recent category change, we think now is a good time for retirement plan sponsors to re-evaluate the bond funds on their investment menu.

Key takeaways

  • Morningstar has split the old intermediate-term bond category into two  new categories.
  • We believe this change should prompt a revisiting of the “core” bond portion of a retirement plan investment menu.
  • Talk to Lord Abbett about our philosophy on fixed income and how we can support your needs.

Two years ago in our article How Strong Is Your Core” we noted how large and diverse Morningstar’s Intermediate-Term Bond Category was, with over 300 funds at the time. What we found surprising was how fundamentally different the funds were, with large disparities in key areas: bond duration (2.5 - 8 years), corporate bond allocations (0 - 95%), asset-backed securities (0 - 47%) and non-investment grade securities (0 - 66%).

“Non-investment grade” was particularly interesting, especially since Morningstar defined the Intermediate-Term Bond Category as funds or portfolios that invest primarily in corporate and other investment-gradeU.S. fixed-income securities. 

Intermediate-Term Bonds and Retirement Plan Menus

Turns out, we weren’t the only ones who noticed this issue. Fast forward to May of 2019 and Morningstar has drastically changed this category, essentially retiring the old one, splitting most of the 300+ funds into two distinct groups, and sending some into a third.

  • Morningstar split most of the $1.7 trillion Intermediate-Term Bond category in two. The new categories are Intermediate Core and Intermediate Core-Plus.
  • Funds with less than 5% in non-investment grade securities are now part of the Intermediate Core category (approximately 140 funds). Funds with a higher exposure to non-investment grade securities have moved to Intermediate Core-Plus (approximately 190 funds).
  • The balance of funds (those with more than 35% in non-investment grade securities) were moved over to the Multi-Sector Bond category, affecting over a dozen funds.

The net result? Generally, more conservative, investment-grade only bond funds are in the Core category and more aggressive funds are in the Core-Plus category. And bond funds with even more exposure to non-investment grade securities were removed from the Core conversation altogether.

Why Is The Morningstar Intermediate-Term Bond Change Important?

When the industry’s most prominent ratings agency makes a change like this, it’s a pretty big deal, and it’s important for several reasons. First, the change should make it easier to distinguish risk and return profiles between different types of bond funds. Other reasons include:

  • The prominence and role of fixed income on plan menus – Given the importance of fixed income within the average retirement plan line up, plan sponsors may find it’s worth revisiting their strategy. The average 401(k) plan has an average of between 18 - 21 funds 4 and three fixed income funds.5 Fixed income is a primary tool for participants who are looking for income, stability, consistency of performance and lower volatility. Nearly two-thirds (66%) of plan sponsors agreed it was important to offer a range of fixed income options based on differing risk, return, and income preferences, according to a 2017 survey.6

     

    Stephen Dopp, National Director, Defined Contribution at Lord Abbett, believes it’s a good time to take a fresh look at fixed income on a plan’s investment menu. “Plan sponsors should consider this change through a fiduciary lens and ask themselves: Why do we have a bond option in the first place? Is our overall objective total return or stability and consistency of returns year over year and low expenses?” He adds: “Does your present bond fund (or funds) still meet your plan and participant needs? Is your ’core‘ allocation still appropriate?”

  • Confirming the bond fund’s category – For practical purposes, plan sponsors should ascertain if their fund or funds are Core, Core Plus or Multi-sector. Indeed, Morningstar felt that over 35% exposure to non-investment grade securities was a large enough allocation to remove the term “core” from the classification of those type funds.
  • Change in benchmarks – The new Core Bond category uses the Bloomberg Barclays U.S. Aggregate Bond Index (which holds 100% investment grade bonds), while the Core-Plus uses the Bloomberg Barclays U.S. Universal Bond Index (which holds on average 5 -8% in risker, below-investment-grade bonds). These benchmarks more accurately reflect the risk of the bond funds in each category. Depending on the options in their plan, plan sponsors should make sure they are using the correct benchmark.
  • Morningstar ratings on funds may have changed – With Morningstar’s old methodology, both conservative and aggressive funds were evaluated against each other, and star ratings were awarded based on the performance relative to the overall group. The category split means we now have “like” measured against “like”: conservative funds rated against other conservative funds, and more aggressive funds rated against more aggressive funds. That means that some funds have received higher or lower rankings as they are compared to other Core and Core-Plus funds. Plan sponsors will need to review their funds ratings for any shifts that may have occurred.

Questions to Consider in Reviewing a Retirement Menu Investment Lineup

Here are five questions for plan sponsors to consider regarding this classification change.

1.  Are they aware of and have they considered how this change affects their particular plan menu?

2.  What is the role of fixed income in their plan?

3.  What does their current fixed income allocation look like?

4.  How many bond options does the plan have and how do they correlate to one another?

5.  How do they feel about the main bond option in the plan, and, what should that bond option be comprised of?


Lord Abbett Can Help

Retirement plan lineups are always evolving, and it’s critical to evaluate if a current plan menu meets participants’ needs for income, stability and less equity-like volatility on an ongoing basis.  Ask your Lord Abbett Relationship Manager about this Morningstar development and what it means for plan sponsors.

We can assist you in evaluating fixed income products that best meet the needs of retirement plan clients. Together, we can put all the resources and solutions of Lord Abbett and your firm to work for your client.

For more information, contact us at 888-522-2388.

 

1  Morningstar, as of 5/1/2019
2  How America Saves 2018, The Vanguard Group
3  Simfund, Brightscope, as of 9/30/2016. Most recent data available.
4 How America Saves 2018, The Vanguard Group  and Iacurci, Greg, “What’s the right number of funds in a 401(k) plan?”, Investment News, February 16, 2018
5 The BrightScope/ICI Defined Contribution. Plan Profile: A Close Look at 401(k) Plans, 2015.  BrightScope and Investment Company Institute, March 2018
6 T. Rowe Price Future of Fixed Income In DC Plans Survey, April 2017

 

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here. The information provided reflects Lord Abbett’s views as of the date of this presentation. Such views are subject to change without notice.

A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.

This material is provided for general and educational purposes only. The examples provided are for illustrative purposes only, and are not indicative of any particular investor situation.

The opinions in this article are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The information contained: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Glossary

Bond duration is the time period required to recover the true cost of a bond, considering the present value of all coupon and principal payments received in the future.

Asset-backed securities are financial securities collateralized by a pool of assets such as leases, loans or receivables

A non-investment grade security is anything below a “BBB” rating by Standard and Poor's or Moody's.

The Morningstar Intermediate-Term Bond represents funds that focus on corporate, government, foreign, or other issues with an average duration of greater than or equal to 3.5 years, but less than or equal to six years, or an average effective maturity of more than four years, but less than 10 years.

The Morningstar Core-Bond Index is a broad investment-grade index that includes the largest, most important sectors of the investment-grade U.S. bond market.

The Morningstar Long-Term Core Bond Index includes all bonds in the Morningstar Core Bond Index that have maturities of seven years or longer.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

This Bloomberg Barclays U.S. Universal Bond Index provides exposure to U.S. dollar-denominated bonds that are rated either investment-grade or high yield with remaining effective maturities between five and ten years. This includes government, corporate, securitized and emerging market bonds.

About The Author

WP_Core_Bond_Funds_IDEAS_RR
image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field