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Bringing the Best of DB to DC Fund Options

Individual investing has become a prominent part of the investment landscape. Whether for retirement, wealth management, estate planning, or other purposes, the enormous growth of individually directed assets has stirred increased interest in and attention to the way individuals try to set and meet investment goals. Unfortunately, most individuals fare less well than institutional investors when it comes to the choices they make and, most important, their ability to achieve overall financial security.

In response, defined contribution plans (or DC) and wealth management advisors are turning to lessons from institutional investing, including its emphasis on low expenses, long-term returns, appropriate funding levels, and liability driven investment (e.g., income replacement), in an effort to significantly improve outcomes for individuals.

As a part of this trend, defined contribution pension plans and advisors are increasingly recognizing the benefits of adopting a global investment framework by selecting a global equity index such as the MSCI All Country World Index (MSCI ACWI or MSCI ACWI IMI) to guide asset allocation and construction of the target date and core fund lineup. Such a framework, which is based on an advanced and well-documented methodology, is designed to include the full range of investable stocks across all countries, regions, sectors, styles, and sizes. Consequently, it can help investors gain access to the global investment opportunity set as well as avoid key dysfunctions associated with many fund lineups, including benchmark misfit and underperformance.

This paper is organized in the following sections: Section I lays out the challenge of individual investing, including its triumph and its tragedy. Section II outlines the heroic approach to individual investing, including the key areas where defined contribution pension plan sponsors and advisors are adopting lessons from other institutional investors to help individuals avoid specific pitfalls. Section III shows why institutional investors are moving toward the global investment framework for equities. Section IV examines how investors are implementing the global investment framework, showing how to improve target date funds, model portfolios, and the core fund lineup through simple approaches based on indexes that, when added together, offer exposure to the full global investment opportunity set. Section V offers a conclusion and implications for defined contribution plan sponsors and advisors.