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Adding Real Assets, Emerging Markets Securities, And Liquid Alternatives Could Improve Returns Of Direct Contribution Retirement Plans, BNY Mellon Says

NEW YORK, June 6, 2013 /PRNewswire/ -- Broadening the investment options available to direct contribution (DC) retirement plans to include real assets, emerging market equities and debt, and liquid alternatives could improve risk-adjusted returns while reducing volatility and providing better protection against inflation, according to a white paper from BNY Mellon.

The results are published in the recent white paper, Retirement Reset: Using Non-Traditional Investment Solutions in DC Plans.

"Traditional DC plans do not provide the level of diversification and risk balance that plan participants require to achieve their retirement goals," said Robert G. Capone, executive vice president, BNY Mellon Retirement Group, and the author of the report. The report attributes the limited range of investment options included in DC plans as the primary reason for their inability to match the performance of defined-benefit (DB) plans. DB plans tend to incorporate a range of non-traditional assets. 

The report notes non-traditional approaches could enhance the success of investors in the current environment, which it expects to be characterized by lower long-term expected returns, higher volatility and heightened inflation risk. 

If DC plans were constructed more similarly to DB plans, approximately 20 percent of the DC plan assets would be allocated to non-traditional strategies such as real assets, total emerging markets (which combine equities and fixed income) and liquid alternatives, BNY Mellon said.

"Equities comprise a higher percentage of the DC portfolios than they do of DB portfolios," said Capone.   "We believe that applying the best DB practices to DC plans would reduce equity risk and home country bias as well as thoughtfully incorporating alternative investments to increase diversification, return potential and downside risk management."

The real asset portion of the DC portfolio proposed by BNY Mellon is designed to hedge against inflation and would include Treasury Inflation-Protected Securities (TIPS), real estate investment trusts (REITS), commodities and natural resource equities. 

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