Investment strategy Strengthening fixed income at its core

Fixed income has always played a role in defined contribution plans, but its purpose and structure have evolved significantly over time. The emergence of Modern Portfolio Theory shifted investor focus from capital preservation to balancing risk and return at the portfolio level, helping drive the evolution of DC fixed income from traditional core strategies to core-plus approaches that incorporate a broader range of sectors and opportunities. As DC plans have grown in size and sophistication, fixed income allocations have continued to evolve beneath the surface. Given these changes, it is worth examining the role and evolution of core-plus mandates in today's DC landscape.

The important role of fixed income in DC plans

Before discussing how core plus has evolved, it’s worth revisiting the role fixed income has traditionally played in DC portfolios. Over the past 50 years (1976–2025), there has been only one calendar year (2022) in which both U.S. equities (S&P 500 Index) and U.S. fixed income (Bloomberg U.S. Aggregate Bond Index) have both generated negative absolute returns. In all other periods there has been a diversification benefit stemming from Treasury rates rallying at the same time that equities were selling off.  The takeaway for participants is straightforward: diversification matters.

Why, when, and how do participants use fixed income in DC plans?

Most DC plan participants have a limited understanding of investing concepts such as age-based asset allocation, dollar-cost averaging, and diversification. The widespread adoption of target date funds (TDFs) as default investments has fundamentally changed how participant assets are invested with about 65% of new savings flowing into TDFs, and that figure is expected to grow to roughly 70% by 2030.¹ This shift has important implications for fixed income.

• First, fixed income represents a significantly larger portion of participant portfolios as they approach retirement, reflecting the gradual de-risking built into TDF glidepaths. Among the largest TDF providers, fixed income allocations at age 65 typically range from 45% to 65% of assets.²
• Second, the use of stable value funds among newer participants has declined considerably. Because stable value was once an approved default option, many stable value funds today tend to have participant bases concentrated around retirement age.
• Third, as target date funds have become the primary investment vehicle for many DC participants, plan sponsors are taking a much closer look at both passive and active tiers within the core lineup to support the do-it-yourself investors.

Three trends reshaping fixed income in DC Plans

Over the past several years there have been three primary trends helping to shape core lineups for US DC plans.

Aligning investment menus with participant needs

Plan sponsors periodically conduct investment menu reviews to determine if options within the plan are meeting participant and fiduciary objectives of sufficient diversification with reasonable fees. A recent trend among plan sponsors is to also conduct a demographic study, whereby plan sponsors, via information collected from the recordkeeper, are able to identify trends in utilization of options, enabling targeted communications to participant groups who may be over, or under, diversified for their age.

Greater use of active management in fixed income

As the Bloomberg U.S. Aggregate Bond Index has become increasingly concentrated in government-related debt, sponsors are evaluating whether active core-plus approaches can provide greater diversification and the potential for enhanced risk-adjusted returns. Historical research has shown that many core-plus managers have outperformed the benchmark over longer time periods, particularly at institutional fee levels.3 While passive fixed income remains an important component of many DC plans, adding an active core-plus option may offer participants access to a broader opportunity set and additional sources of return.

Expansion of diversified and alternative exposures

The Department of Labor (DOL) ended its 60-day comment period regarding the newly proposed rule “Fiduciary Duties in Selecting Designated Investment Alternatives," on June 1, 2026. For those plan sponsors debating how to add diversification and access to private markets, there may be alternatives within your core plus fund worth pursuing.  There are a host of deals that have come to market in 2025-2026 that have not been broadly syndicated. Engaging with a core plus manager who has the skill set and resources to invest in both public and quasi-private while still retaining the DOL’s safe harbor factors including liquidity constraints, valuation practices, and cost structures may be a more practical, and operationally feasible first step.

What’s under the hood in today’s core plus strategies?

Passive strategies aim to mirror the key characteristics of the US bond market, typically represented by the Bloomberg U.S. Aggregate Bond Index. Active managers have greater flexibility. Traditional core managers can invest in benchmark sectors as well as other liquid, public sectors that are rated investment grade. Core plus managers have traditionally expanded that opportunity set by allocating a limited portion of assets—typically up to 20%—to sectors such as international bonds, emerging market debt, and high yield bonds. This additional flexibility allows managers to pursue enhanced yield, diversification, and return potential while maintaining a core fixed income profile.

Today, core plus strategies vary widely. Some make modest allocations to plus sectors, while others—such as Invesco— have built out extensive capabilities across hard and local currency emerging market debt, convertibles, non-agency structured securities, bank loans, high yield and, more recently, private placements.

The illustration below demonstrates the breadth of opportunities beyond traditional core fixed income. Our broad capabilities across these sectors enable us to add value through both sector allocation and security selection.

Ignoring Plus sectors may result in missed opportunities

Plus sectors make up half of the fixed income universe

No single fixed income sector consistently outperforms over time, which makes bond diversification crucial

Addressing the fixed income gap in DC portfolios

The typical plan offers substantially more equity options than fixed income, reflecting participants' greater allocation to equities. As a result, many self-directed participants may lack sufficient diversification, particularly as they near or enter retirement. For plan sponsors seeking to simplify their lineup while maintaining diversification, a core-plus strategy can serve as an effective active fixed income solution, often alongside a passive bond option and stable value fund.

Summary

Plan sponsors evaluating core-plus strategies have a wide range of options. Some managers emphasize long-term secular themes, while others focus primarily on bottom-up security selection. Approaches to plus sectors also vary, from limited allocations to areas such as high yield and bank loans to broader, more diversified strategies.

At Invesco, we complement core fixed income exposures with a diverse set of plus sectors, supported by experienced asset class specialists who provide insights on relative value, market technicals, liquidity, and portfolio construction. We believe this diversified approach, backed by deep investment expertise, is better positioned to navigate changing market environments than more narrowly focused strategies.

Plan sponsors may seek institutional-quality managers with clear, repeatable investment processes, strong leadership, and deep investment talent. Understanding decision-making structures, team dynamics, and succession planning is critical, as leadership transitions can influence future outcomes. Perhaps most important is selecting a manager with the breadth and expertise to invest across market cycles, asset classes, and evolving opportunities. A well-constructed core-plus strategy can play an important role by actively managing risk and pursuing opportunities as market conditions change.