Using Alternatives in. Defined Contribution Plans

Transcription

1 Defined Contribution Plans Using Alternatives in Defined Contribution Plans Mark Hamilton Chief Investment Officer, Asset Allocation Kathleen Beichert SVP, Head of Retirement and Third-Party Distribution Executive Summary The challenge of achieving diversification and improving risk-adjusted returns has heightened investor interest in alternatives. Although defined benefit plans have relied on alternatives for decades, defined contribution (DC) plan sponsors are beginning to use them to help participants better manage portfolios during challenging markets, and increase the probability of reaching their desired retirement outcomes. A strategic allocation to alternatives may help investors meet a diverse set of objectives: improving total returns and reducing volatility, while helping to manage the risks of equity market drawdowns, inflation and rising interest rates. A packaged multi-alternative approach has the potential to help streamline fund lineups, eliminate participant selection hurdles, and give fiduciaries a prudent way of adding diversification to participant investment options. The defined contribution (DC) retirement plan market has evolved significantly since the first 401(k) plans were sanctioned in 1981, when early plans featured a modest menu of investment selections. Widespread adoption of these plans and the equity bull market of the 1990s encouraged sponsors to offer investment menus with a broad range of equity funds, multiple fixed income options, and self-directed brokerage accounts. The Pension Protection Act of 2006 encouraged the addition of target-date funds and managed accounts. Yet this evolution has not necessarily resulted in better diversification of participant portfolios, and a typical 60/40 balanced portfolio may no longer deliver the level of risk-adjusted returns necessary to meet retirement funding needs. Against this backdrop, the current fixed income universe is at record low yields after a secular decline in interest rates and inflation over the last 32 years. As a result, investors must now consider a potential risk they haven t seen in a generation potential capital losses on the safe part of their portfolios. We are also more likely to see increased volatility in fixed income assets and bond returns that look similar to starting yields. The future prospects for a typical balanced portfolio may look even cloudier. Simply put, plan sponsors need additional tools to help participants cope with a more challenging market currently characterized by low rates, the potential for higher volatility, and structurally lower expected returns. But there is some good news for both sponsors and participants: Alternative investments may be able to supply these additional tools to help fill the performance gap and potentially improve longterm portfolio outcomes. Defined contribution plans, with $5.9 trillion in assets at the beginning of 2014, 1 historically have not offered alternatives. However, the market is evolving and DC plans are beginning to take a cue from defined benefit (DB) plans, which have successfully used alternatives for decades. Exhibit 1 For Institutional Use Only Not for Use with Retail Investors Not FDIC Insured May Lose Value Not Bank Guaranteed 1

2 OppenheimerFunds Exhibit 1 Asset Mix of Top DB and DC Plans Aggregate asset mixes as of February 2015 Top 1,000 Top 1,000 Asset Class DB Plans DC Plans Domestic Stock 24.3% 48.3% International Stock Global Equity 3.4 * Stable Value 13.8 Domestic Fixed Income Global/International 2.1 Fixed Income Cash Target Date 15.1 Inflation Protection 0.4 Annuities 0.1 Private Equity 5.8 Real Estate Equity 4.4 Alternative Investments 6.7 Other Total *Global Equity allocation not provided. Source: Top 1,000 Largest Retirement Funds, Pension & Investments, February To the DC plan sponsor, offering a diversified set of alternatives can help increase the probability that participants reach their desired long-term return targets. For participants, a strategic allocation to alternatives may provide reduced volatility, a hedge against a variety of market risks and potentially improved total returns. Accordingly, sponsors not doing so already may want to consider adding alternatives to their DC plans. Defining the Alternative Market There is no standard definition of an alternative investment. Some commentators define alternatives as any investment strategy that is not traditional equity or fixed income. In fact, precisely which asset classes are considered alternatives changes over time. For example, a new asset class that is not widely held but offers performance, risk and correlation characteristics different from those of traditional equities and fixed income will likely be considered an alternative. Over time, however, as that asset class becomes more readily available in the market, and as it becomes more widely held and better understood, it often moves into the mainstream and ceases to be considered an alternative. This evolution has happened time and again with asset classes ranging from international small-cap equities to emerging market debt. We can think of the alternative market in three broad segments: Alternative assets seek to deliver value by giving investors exposure to a non-traditional market such as commodities, real estate or master limited partnerships. How those assets are managed is less important to investors than the exposure they give to a particular market. Alternative strategies are the opposite. They seek to deliver value to investors based on how well a manager executes a particular strategy such as market neutral, long/short equity or global macro. These alternative strategies often combine traditional assets with non-traditional techniques, such as shorting securities or markets. As a result, alternative strategies are often less reliant on economic factors or market direction to generate return. We typically refer to this category as alpha-oriented alternative strategies. 2

3 The Right Way to Invest Private asset alternatives make up a third segment, which includes investments in direct real estate, infrastructure, private equity and private hedge funds. While these assets are not usually liquid enough for mutual fund investments, investors are often compensated for being locked in to these investments for several years. For purposes of the defined contribution market, plan sponsors seeking to offer a diversified set of alternatives may want to focus on the more liquid alternative mutual fund market. We foresee issues for plan sponsors entering the private asset alternative markets given the illiquid nature of the assets and the daily liquidity needs of participants. Participation in these markets also raises additional issues about legal, administrative, operational or fiduciary requirements. Exhibit 2 Why Consider Alternatives? Under the Employee Retirement Income Security Act of 1974 (ERISA), plan sponsors are fiduciaries of their DC plans and must act prudently and in the best interests of participants when selecting investment choices for the plan. They have an obligation to diversify plan assets and must monitor strategies in the plan as well as other potential options then prevailing on an ongoing basis. Today, many DC plans may be over-invested in traditional style boxes. Offering access to a prudent suite of alternatives may potentially help sponsors manage their fiduciary duties while helping participants manage through a structurally challenging market environment. In short, adding alternatives to a plan can potentially increase the probability that participants reach their desired investment outcomes and help bridge the gap between actual and targeted returns. From an investment perspective, the benefits a strategic allocation to alternatives seeks to provide are clear. They can potentially improve total returns, help reduce portfolio volatility and manage downside deviation, expand the efficient frontier and allow participants to hedge a variety of market risks such as equity market drawdowns, volatility, inflation and rising interest rates. More broadly, access to alternatives may help participants achieve disparate goals such as more effective diversification and improved risk-adjusted returns. Although alternatives contain their own set of risks, their return profiles can differ significantly from traditional equity and fixed income, and they can have modest or sometimes Exhibit 2 Alternative Mutual Funds Alternative Strategies (Alpha-Oriented) Global Macro Long/Short Equity Equity Market Neutral Alternative Assets (Beta-Driven) Global Real Estate Commodities Managed Futures Bear Market Currencies Precious Metals Trading Volatility Private Asset Alternatives Direct Real Estate Private Debt Direct Infrastructure Private Equity Private Hedge Funds Source: OppenheimerFunds. *The acronym refers to the asset class Master Limited Partnerships. 3

4 OppenheimerFunds negative correlations with traditional assets. Exhibit 3 Consultants used to analyze DC plans from the perspective of maximizing returns, and from that vantage point, asset class risk was paramount. Today, there is an evolving trend toward analyzing these plans from the perspective of getting to, and then through, retirement. This means sponsors, when selecting the investment lineup, need to consider the risks faced by participants, such as failing to accumulate sufficient savings, suffering major losses at an inopportune time in the savings lifecycle, or having inflation eviscerate a retiree s purchasing power. In other words, sponsors should consider the breadth of potential benefits from allocating to alternatives aside from the obvious goal of improving total returns beyond what could be achieved through traditional style box exposures. Alternative assets and strategies tend to be modestly and sometimes even negatively correlated with stocks and bonds over time. For this reason, exposure to alternatives can potentially be a powerful way to diversify a portfolio. Perhaps in response to the challenges associated with achieving growth in a highly volatile environment, investor interest in alternatives is gaining momentum. Assets in U.S. alternative mutual funds and ETFs have more than doubled since 2008, and now represent over 949 portfolios with more than $599 billion as of Annual net flows have averaged $58 billion since 2008, although there was a slowdown in 2012 due in part to an improving equity market. Participants who use a financial advisor may already be familiar with alternatives, since nearly three-quarters of advisors currently use alternatives, and an equal percentage report having increased their usage in the past year. 2 In fact, industry consultant Strategic Insights predicts that alternatives will continue to grow at 15% compound annual growth rate through 2017, and higher growth across the alpha-oriented strategies and multi-strategies. Significantly, there appears to be no evidence any of these trends are reversing. Exhibit 3 10-Year Correlation of Alternatives as of 3/31/15 Security U.S. U.S. Equity Multi- Global Strategy Commodities REITs Multi- Alternatives Traditional Assets U.S Alpha Strategies Multi-Strategy Commodities Real Asset Alternatives Income Alternatives Alternative Solution Multi-Alternatives Source: Bloomberg as of 3/31/15. Correlation expresses the strength of the relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and 1 (perfect negative correlation). A positive perfect correlation occurs when the two series being compared behave in exactly the same manner. are represented by the Alerian MLP Index. is represented by LMMA Price PM USD. Commodities are represented by the Bloomberg Commodity Index Total Return. is represented HFRX Macro Index. Multi-Strategy is represented by the HFRX RV Multi-Strategy Index. is represented by the S&P 500 Index. U.S. are represented by the Barclays U.S. Aggregate Bond Index. are represented by the FTSE EPRA/NAREIT Global Index TR USD. are represented by the CS Loan Index. are represented by the Swiss Re Global Cat Bond Performance Index Total Return. Multi-Alternatives is comprised of the following: 50% HFRX RV: Multi-Strategy, 5% Bloomberg Commodity Index Total Return, 5% LMMA Price PM USD, 5% FTSE EPRA/NAREIT Global Index TR USD, 10% Alerian MLP Index, 10% CS Loan Index, 15% Swiss Re Global Cat Bond Performance Index Total Return. The indices shown are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any particular investment. Diversification does not guarantee profit or protect against loss. See page 11 for index definitions. Past performance does not guarantee future results. 4

5 The Right Way to Invest Total Returns From an investment perspective, one key benefit from an allocation to alternatives is the potential for higher total returns. Exhibit 4 shows the annual performance of alternative assets and strategies over the past 10 years. Several of these alternatives have done extremely well over the period shown, meaningfully outperforming both stocks and bonds. In addition, the persistency of this performance is also notable particularly for asset classes like gold, Master Limited Partnerships () and some of the income alternatives like bonds. We believe the breadth of alternative asset classes available to sponsors and the diversity of their performance/risk characteristics help ensure that many participants may be well served by access to a prudent set of alternatives in a DC plan, regardless of market environment. A better comparison for participants or plan sponsors may be an aggregate alternative portfolio that includes a blend of alternative strategies that are more alphaoriented as well as real asset alternatives and some income alternatives. We have included this type of multi-alternative benchmark for comparison purposes and this aggregate benchmark performed between stocks and bonds over the 10-year period. We think this is a good proxy for how a well-diversified alternative portfolio should have performed over time. Reduced Volatility Another important benefit from an allocation to alternatives is the potential for lower volatility at portfolio level. The key phrase is at the portfolio level. Certain alternatives assets have higher (and sometimes much higher) volatility than traditional equities or fixed income. This can potentially cause challenges for portfolio Exhibit 4 Alternatives Performance from * * Annual Return Cumulative Return 21.52% 43.72% 31.92% U.S. 5.24% 75.58% 35.63% 13.83% 29.85% 32.36% 14.73% 4.04% 13.07% % 20.00% Commodities 8.32% Multi-Strategy 7.70% 7.21% 6.77% 5.50% 4.00% U.S. 2.92% 26.98% Commodities 16.23% 23.20% 15.76% 13.07% 15.44% 12.59% 9.59% Multi-Strategy 12.58% Multi-Strategy 8.97% 12.02% 7.33% 6.27% U.S. 6.97% 4.32% 2.45% 0.48% Multi-Strategy 15.60% 20.41% 28.75% 44.87% Multi-Strategy 42.05% 29.24% 20.03% 41.25% Commodities 16.83% 36.14% 26.45% 25.04% 15.08% 13.56% 11.13% 8.93% U.S. 7.84% 3.73% 2.08% 1.82% 0.39% Commodities Commodities Multi-Strategy 5.56% 36.65% 18.91% 10.05% 0.05% 1.88% 36.99% 13.39% 9.97% 15.98% 10.28% 9.73% 8.26% 5.20% 27.60% 10.85% 6.15% 2.24% 1.79% 4.83% Multi-Strategy 0.92% U.S. 4.22% 3.79% Multi-Strategy 3.40% 0.31% U.S. 2.02% 13.66% 6.02% U.S. 5.97% 4.77% 2.06% 1.81% 0.12% 0.35% 2.07% Multi-Strategy 1.72% U.S. 1.61% 0.95% 0.61% 0.24% 0.22% 1.58% 10.75% 8.49% 8.00% 7.70% % % % % Multi-Strategy 6.17% Multi-Strategy 82.04% 5.74% U.S. 4.92% 4.75% 74.82% U.S % 59.05% 2.61% U.S. 4.33% 3.01% 37.06% U.S. 5.93% U.S. 6.54% 8.14% Commodities Multi-Strategy 3.04% 9.52% 1.67% 5.23% 1.00% 10.38% 0.08% Commodities 2.07% 4.65% 48.90% 0.01% Commodities Commodities 2.83% 13.32% 1.06% Commodities Commodities Commodities Commodities 27.33% 17.01% 5.94% 3.56% 30.41% n Traditional Assets n Alpha Strategies n Real Asset Alternatives n Income Alternatives n Alternative Solution *2005 is for the period 3/31/05 12/31/05 and 2015 is for 12/31/14 3/31/15. Source: Bloomberg. are represented by the Alerian MLP Index. is represented by LMMA Price PM USD. Commodities are represented by the Bloomberg Commodity Index Total Return. is represented HFRX Macro Index. Multi-Strategy is represented by the HFRX RV Multi-Strategy Index. is represented by the S&P 500 Index. U.S. are represented by the Barclays U.S. Aggregate Bond Index. are represented by the FTSE EPRA/NAREIT Global Index TR USD. are represented by the CS Loan Index. are represented by the Swiss Re Global Cat Bond Performance Index Total Return. Multi-Alternatives is comprised of the following: 50% HFRX RV: Multi-Strategy, 5% Bloomberg Commodity Index Total Return, 5% LMMA Price PM USD, 5% FTSE EPRA/NAREIT Global Index TR USD, 10% Alerian MLP Index, 10% CS Loan Index, 15% Swiss Re Global Cat Bond Performance Index Total Return. The indices shown are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any particular investment. Diversification does not guarantee profit or protect against loss. See page 11 for index definitions. Past performance does not guarantee future results. 5

6 OppenheimerFunds construction for plan sponsors. For instance, gold bullion had an annualized standard deviation of 19.3% over the last decade through 3/31/15, much higher than traditional stocks and bonds. However, the yellow metal had a correlation of just 0.07 to the S&P 500 over the last decade through 3/31/15. 3 Exhibit 3 See page 4. Those risk and correlation statistics mean that gold a high volatility asset on its own can potentially help reduce the volatility of an overall portfolio when intelligently blended with other alternatives or asset classes. Some alternative strategies and income alternatives have much lower volatility than real asset alternatives like gold and commodities. Over the same period, the alpha-oriented strategies as benchmarked by the HFRX Relative Value Multi-Strategy Index and HFRX Macro Index, had moderate to low correlation to the S&P 500 and had very low to negative correlations with the Barclays Aggregate. This is what we would typically expect from less market-driven strategies, as they rely more on active management for their returns. These varying levels of volatility across alternatives can pose additional challenges for sponsors thinking about adding both types of alternatives to a plan. The broader implication is that when deciding which alternatives to offer in a DC plan, sponsors should consider how different alternative assets and strategies perform relative to traditional assets as well as to one another. In Exhibit 3, we have included the Multi-Alternative benchmark which can represent a well-diversified alternative portfolio. This demonstrates the low to moderate correlation benefits of adding this type of alternative solution to traditional assets. The optimal mix of alternatives will vary depending on the plan sponsor s objectives, in terms of risks to be hedged, target return, diversification, volatility tolerance, downside protection and other factors. This process of sensibly blending different alternatives together can help sponsors maximize the likelihood of effective diversification and achieving participants goals. It can also help minimize the likelihood of embedding unintended risks in their menu of choices. Hedging Market Risks An additional benefit from an allocation to alternatives is the potential to hedge a variety of market risks such as inflation, rising interest rates, equity market drawdowns and volatility. Historically, real assets like gold, commodities, and REITs have performed well during periods of high or rising inflation. These real asset alternatives can be additional tools to help protect the purchasing power of participants assets. Income alternatives like catastrophe bonds and designed to provide a level of income with little sensitivity to interest rates can act as a potential hedge to participants in a rising interest rate environment. Similarly, certain alpha-oriented alternative strategies have the potential to add value during periods of high volatility by minimizing downside risk. Below, we compare how alpha-oriented alternative strategies performed vs. U.S. stocks during periods of stress. Exhibit 5 We ve Exhibit 5 Alpha Strategies: Potential for Cushion in Times of Stress Long-Term Capital Managment Crisis 6/30/98 8/31/98 Tech Bubble 3/31/00 9/30/02 18% 13% Credit Crisis 10/31/07 2/27/09 5% 3% 3% 15% 19% 44% 51% S&P 500 HFRI Multi-Strategy HFRI Macro n S&P 500 Index n HFRI Multi-Strategy Index n HFRI Macro Index Source: Bloomberg for the HFRI Macro Index, HFRI RV Multi-Strategy Index, S&P 500 Index. See page 11 for index definitions. 6

7 The Right Way to Invest highlighted three of the biggest drawdowns in the past 20 years: the Long-Term Capital Management crisis; the bursting of the Tech Bubble, and the Great Recession. In each time period, the S&P 500 Index experienced drawdowns of anywhere from 15% to 51%. During the first and third periods, alpha-oriented strategies, as benchmarked by the HFRI Multi-Strategy and the HFRI Macro indices, had much lower drawdowns and during the second period, their performance was significantly positive. In our view, this demonstrates the main objective of the alpha strategies: seeking to minimize downside risk and provide a differentiated return stream versus traditional investment in equities. Sponsors offering alternatives can potentially help participants manage through challenging market environments by providing access to hedging strategies that are often not available through traditional equity or fixed income exposures. Expanding Efficient Frontier and Providing Choices Adding alternatives to a portfolio can potentially expand a participant s efficient frontier, which may lead to greater return per unit of risk, or requiring less risk per unit of return. Exhibit 6 A multi-alternatives portfolio can provide plan sponsors and participants with choices depending on their objectives. If the end objective was to increase potential return, then an allocation to a multialternatives portfolio funded from fixed income would most likely achieve that goal. This could help achieve that goal, increasing the return but also increasing the level of risk. If the main objective of a participant is to maximize the risk-adjusted returns, then an allocation funded proportionately from equities and fixed income would be suitable. This will modestly increase return potential and reduce risk. And finally, if the primary goal is risk mitigation, then an allocation funded from equities would be most appropriate. This would decrease the overall risk level, but it would potentially lower portfolio returns, as we would not expect a multi-alternative portfolio to keep pace with equities. Regardless of where an allocation to multi-alternatives is funded from, it has the potential to improve the risk/reward profile and give plan sponsors and participants greater flexibility to meet objectives. Key Considerations We think it s increasingly important for plan sponsors to fully evaluate all considerations and risks when thinking about the liquid alternative market. As we pointed out before, alternative strategies and assets have very different risk and return characteristics and objectives. Exhibit 6 The Power of Alternatives Multi-alternatives can improve a traditional portfolio s risk/reward Funded Proportionately Funded from Fixed Income Potential Return Funded from Equities Balanced Portfolio Risk Source: OppenheimerFunds proprietary research of potential return and risk of a 60/40 portfolio, comprised of 60% S&P 500, 40% Barclays Aggregate, with a 0 30% allocation to a Multi-Alternatives. Multi-Alternatives is comprised of the following: 50% HFRX RV: Multi-Strategy, 5% Bloomberg Commodity Index Total Return, 5% LMMA Price PM USD, 5% FTSE EPRA/NAREIT Global Index TR USD, 10% Alerian MLP Index, 10% CS Loan Index, 15% Swiss Re Global Cat Bond Performance Index Total Return. 7

8 OppenheimerFunds In many ways the alternative mutual fund market is very heterogeneous and this can definitely pose challenges for plan sponsors when thinking about portfolio construction and creating a comprehensive alternative allocation. In many instances plan sponsors can look to certain investment managers that have knowledge and experience in alternatives and multi-asset portfolio construction to outsource some of those responsibilities. Another key concern that sponsors should be mindful of is if the alternatives are actually providing real diversification to a traditional portfolio. Many alternative offerings in the liquid mutual fund market end up delivering returns that are closely correlated with equities. It s also important to make sure that the assets in the funds are sufficiently liquid and that the fees are commensurate with the value the funds provide. In our view, we don t think it s prudent for plan sponsors to pay high management fees to get additional exposure to the equity or fixed income risks that they would get in a traditional portfolio. Sponsors need to make sure that the alternatives are actually delivering the diversification characteristics that they desire. What Do Sponsors Want? First and foremost, sponsors want to discharge their fiduciary duties to participants responsibly. Beyond that, they want offerings designed to seek enhanced returns, improved diversification and reduced volatility, thereby increasing the likelihood that participants may achieve their return objectives. If possible, they would also like to reduce menu clutter and guard against the risk of performance-chasing behaviors. Finally, they want offerings in their plan that participants will actually invest in. Offering a broad and sensibly constructed suite of alternatives can help sponsors achieve these objectives. An important trend in the DC market has been the streamlining of the investment menu to an average of 19 funds. 4 Newer still are plan menus featuring just a handful of outcome-driven asset allocation buckets such as growth, income, inflation protection or diversification. We believe many of these buckets could consider alternatives as a way to seek to enhance returns, dampen volatility, manage downside risk and help meet return objectives. Toward that end, sponsors may want to consider a multi-alternatives portfolio that is designed to provide a one-stop asset allocation solution. This approach would normally entail a professionally packaged and managed strategy that can help reduce clutter by replacing numerous alternatives with a single offering. In essence, the one-stop solution can give participants fewer but potentially better choices. Sponsors can also control the risk/return profile of the alternatives they offer, and avoid a plan menu with a confusing array of options. Multi-alternative funds offer attractive insertion points by minimizing participant selection hurdles and providing professional allocation and management of more sophisticated strategies. A key benefit for participants is the ease and convenience of one-stop shopping. The investment manager decides which alternatives to include, determines the appropriate weights necessary to balance risk contributions across alternative categories, and then actively manages that allocation on a day to day basis. Plan participants need only decide whether to invest in the alternatives solution, how much to buy and how to fund the purchase. We think we are in the early stages of professionally packaged and managed products in the alternative space as these solutions provide many benefits to plan sponsors and participants alike. Educational efforts, while still important, can be simplified. Instead of trying to understand the holdings of a commodities or MLP fund, participants can focus on the potential benefits of an investment in alternatives. Finally, a comprehensive solution can help minimize performance chasing because the investment manager, not the participant, decides the allocations to the alternative. How Do I Know If Alternatives Are Meeting Objectives and How Should We Measure Them? Plan sponsor fiduciaries (and participants) will need benchmarks to measure the performance of their alternative strategies. But much like the definition of alternatives themselves, there is no universally accepted methodology. Fiduciaries should keep in mind that return enhancement is not always the primary objective for an allocation to alternatives diversification, downside risk management, reduced volatility, inflation protection or stability of returns may actually be paramount. For certain alternatives, an appropriate benchmark may be readily apparent. For instance, sponsors could look to the Dow Jones-UBS Commodity Index or the Bloomberg Commodity Index to measure performance 8

9 The Right Way to Invest of a commodity strategy, the Alerian MLP Index for or the FTSE EPRA/NAREIT Global Index for Global REITs. If inflation protection is a key goal, sponsors might consider a CPI-plus or TIPS-plus benchmark, while sponsors seeking an alpha strategies benchmark might consider a cash or LIBOR-plus approach. Those offering an alternative solution might consider a blended benchmark that reflects the broad allocations of the underlying alternative assets and strategies. In order to better understand how an alternative portfolio should behave over time we compare how a Multi-Alternatives benchmark, comprised of indices of alternative assets and strategies, and a U.S. stock portfolio performed before, during, and after the credit crisis. Exhibit 7 The Multi-Alternative benchmark kept pace with the stock market rally that preceded the 2008 crisis and retained more of its value during the crisis. Although it lagged in the bull market after the crisis, the alternative benchmark achieved its objective: seeking to provide a more consistent and stable return stream. Finally, sponsors might consider a benchmark that tracks how a typical 60/40 balanced portfolio (or some minor variation) performs versus a balanced portfolio that includes an allocation to alternatives. This type of approach helps to avoid a misplaced focus on return amplification and instead considers other factors such as diversification, reduced correlations, or hedging of specific market risks. It also gives sponsors the flexibility to select appropriate benchmarks to measure the performance of their alternative offerings. The approach should be documented in the plan s Investment Policy Statement and reviewed periodically. Exhibit 7 Multi-Alternatives Providing a Smoother Ride Over Time Growth of $100 $250 S&P 500 Index Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Source: Bloomberg for the S&P 500 Index and the Multi-Alternatives. Multi-Alternatives is comprised of the following: 50% HFRX RV: Multi-Strategy, 5% Bloomberg Commodity Index Total Return, 5% LMMA Price PM USD, 5% FTSE EPRA/NAREIT Global Index TR USD, 10% Alerian MLP Index, 10% CS Loan Index, 15% Swiss Re Global Cat Bond Performance Index Total Return. Past performance does not guarantee future results. 9

10 OppenheimerFunds Positioning Alternatives in a DC Plan Once a sponsor decides to offer alternatives, the next question becomes how to position those offerings. One possibility is as part of a balanced portfolio that goes beyond core equity and fixed income exposures. Alternatives used as part of a next generation balanced portfolio can help diversify exposures, reduce volatility and may potentially enhance returns, helping to increase the likelihood that investors may achieve their target returns. However, alternative investing has special risks and considerations and investments in certain alternative asset classes may not be appropriate for all investors. When it comes to alternatives, investors often want to know which ones should they buy, how much they should own, how they should fund those purchases, or at what life stage to enter or exit. Part of the benefit of using a premixed multi-alternative approach is that it obviates some of these questions. A one-stop approach can give participants broad exposure to a suite of alternative assets and strategies that the investment manager has analyzed, thoughtfully packaged together, and actively manages based on the market environment. The packaged solution can address key risks that plan sponsors and participants are trying to mitigate as well as provide a complementary return stream to traditional assets. It is unrealistic to assume sponsors could educate DC plan participants on all the details of alternatives, which helps explain why education today is focused on outcome-driven solutions. However, alternatives could be part of such an education program with a focus on how they function in an overall portfolio rather than on the details of each underlying strategy. Of course, the more educated participants are on the use of alternatives, the more likely they may be to continue making contributions and stay invested during the inevitable periods of market volatility. Plan sponsors should also consider working with their advisors and recordkeepers to set allocation limits to help ensure that participants do not over-allocate to alternatives. Alternatives, are intended to be portfolio completion tools rather than core exposures in retirement plan lineups. Investment consultant Hewitt EnnisKnupp suggests it is reasonable to allocate up to 20% of the assets in most multi-asset funds to alternatives, depending on the liquidity of the strategies used, with lower ceilings for funds designed for older participants. 5 For investors seeking to diversify through a multi-alternative allocation similar to that described in Exhibit 7 (see page 9) a target allocation would likely be close to 15%, with 9% taken from the equity exposure closest to the S&P 500 Index and 6% taken from the fixed income exposure. Conclusion Two current trends are clear: the DC plan market continues to evolve, and investors continue to allocate more capital to alternatives. Over the next several years, we expect the availability of alternatives within DC plans to increase meaningfully. Many DB plans have used alternatives for decades. Large DC plans have begun to include them in their plan lineups, and we expect continued penetration into mid-sized and smaller plans. For sponsors that do not offer alternatives today, the key question is whether they can afford to be later adopters. Since a prudent allocation to alternatives, when added to a traditional balanced portfolio, can potentially help enhance returns, improve diversification, reduce volatility and manage downside risk, we believe earlier is better. In summary, we think sponsors can help fulfill their fiduciary duties by offering prudent alternative exposure in their DC plans. By selecting investment managers who can offer effective educational materials on alternatives, sponsors can also help ensure participants understand the rationale for and the potential benefits and risks of an allocation to alternatives, which is a critical step in setting appropriate expectations and fulfilling their fiduciary responsibility. 10

11 The Right Way to Invest The Barclays U.S. Aggregate Bond Index is an investment-grade domestic bond index. The S&P 500 Index is a broad-based measure of domestic stock market performance. HFRI Macro Index: Index that includes investment strategies that contains a broad range of asset classes in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top-down and bottom-up theses, quantitative and fundamental approaches and long- and short-term holding periods. HFRI RV Multi-Strategy Index: Multi-Strategy index employs an investment thesis predicated on realization of a spread between related yield instruments in which one or multiple components of the spread contains a fixed income, derivative, equity, real estate, MLP or combination of these or other instruments. HFRX Macro Index: index that includes both discretionary and systematic currency strategies. Systematic currency strategies have investment processes typically as function of mathematical, algorithmic and technical models, with little or no influence of individuals over the portfolio positioning. Discretionary currency strategies are reliant on the fundamental evaluation of market data, relationships and influences as they pertain primarily to currency markets including positions in global foreign exchange markets, both listed and unlisted, and as interpreted by an individual or group of individuals who make decisions on portfolio positions; strategies employ an investment process most heavily influenced by top-down analysis of macroeconomic variables. HFRX RV Multi-Strategy Index: Multi-Strategy index employ an investment thesis predicated on realization of a spread between related yield instruments in which one or multiple components of the spread contains a fixed income, derivative, equity, real estate, MLP or combination of these or other instruments. Strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk-adjusted spread between these instruments represents an attractive opportunity for the investment manager. The FTSE EPRA/NAREIT Global Real Estate Index is composed of property company constituents that trade on several global exchanges and are designed to represent general trends in eligible listed real estate stocks worldwide. is represented by LMMA Price PM USD. The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (). The Credit Suisse Loan Index is a composite index of senior loan returns representing an unleveraged investment in senior loans that is broadly based across the spectrum of senior bank loans and includes reinvestment of income (to represent real assets). The Swiss Re Global Cat Bond Performance Index Total Return is a basket of natural catastrophe bonds tracked by Swiss Re Capital Markets; is calculated on a weekly basis; is market-value weighted; and includes reinvestment of income. The Dow Jones-UBS Commodity Index is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange The Bloomberg Commodity Index Total Return (formerly, the Dow Jones-UBS Commodity Index Total Return) is designed to provide diversified commodity exposure by combining the returns of futures contracts on a diversified basket of physical commodities and the returns on cash collateral invested in 13-week (3-month) U.S. Treasury Bills. The index relies primarily on liquidity data and dollar-adjusted production data in determining the relative quantities of included commodities. Each index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Past performance does not guarantee future results. 11

12 The Right Way to Invest We believe the Right Way to Invest is to make global connections, look to the long term, invest with proven teams, and take intelligent risks. For more information, visit oppenheimerfunds.com. Mark Hamilton Chief Investment Officer, Asset Allocation Mark serves as head of the Global Multi-Asset Group and leads the Firm s efforts in designing and implementing multi-asset and alternative products and solutions. Kathleen Beichert SVP, Head of Retirement and Third-Party Distribution Kathleen oversees the business development, strategy and relationship management for the Firm s retirement and third-party business. Kathleen has been in the industry since Visit Us oppenheimerfunds.com Call Us Follow Us 1. Source: ICI, 2014 Investment Company Institute Fact Book, 54th Edition. 2. Source: OppenheimerFunds Research, Source: Bloomberg, 3/31/ Source: PSCA s Annual Survey of Profit Sharing and 401(K) Plans, See Alternative Assets: The Next Frontier for Defined Contribution Plans, Hewitt EnnisKnupp, September 2013, p. 8. Investments in mutual funds are subject to market risk and volatility. Shares may gain or lose value. Alternative asset classes may be volatile and are subject to liquidity risk. While alternative funds may be appropriate for a portion of a retirement plan investment, they are not a complete investment program. Diversification does not guarantee profit or protect against loss. These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the close of business on March 31, 2015, and are subject to change based on subsequent developments. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses, contain this and other information about the funds, and may be obtained by visiting oppenheimerfunds.com or calling Investors should read prospectuses and summary prospectuses carefully before investing. For Institutional Use Only. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY OppenheimerFunds Distributor, Inc. All rights reserved. RPL June 2, 2015