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Note to Participants: Follow the ‘Smart Money’

The nation’s largest defined benefit public pension plans increased their exposure to international equities last year by a significant 21.4%, according to a recent Reuters report. [1. Reuters, “U.S. Public Pension Holdings Highest Since 2007 Peak,” Census, March 28, 2013.] These pension plans added 6.4% to the asset class in the fourth quarter alone, while also reducing domestic equity allocations by 1%.

International equity investments now stand at their highest level since the survey began collecting data in 2000 among large public DB plans.

Yet 401(k) plan participants have been slow to shed their home investing bias, and direct a meager (in our view) 9% to an asset class that we see as a virtual mandate given today’s globalized economy. [2. Cerulli Quantitative Update, Retirement Markets 2011.] Granted, usage of target date funds is on the rise, and by and large these funds have foreign stock allocations more in line with what we believe to be an appropriate global portfolio core. But the active allocators among 401(k) participants appear to be positioned for the past, not the future.

Take a cue from the “smart money” and encourage do-it-yourself participants to be forward-thinking and invest in a more globalized future. And reevaluate: Are the target date fund solutions you recommend in sync with the best thinking of the managers of large public pensions? Are the international equity allocations you’re using in your custom target date or target risk models positioned for the past — or the future?

Please note, the date in a target date fund’s name refers to the approximate year when an investor in the portfolio is assumed to retire, likely would stop making new investments in the portfolio, and may plan to start withdrawing money. Using an asset allocation “glide path,” (how the asset allocation changes as the target date nears) the portfolios generally become progressively more conservative until and after the approximate date of an investor’s “transition” into retirement. An investment, including the principal value, in a target date fund is not guaranteed and a portfolio can suffer losses, including losses near, at, or after the transition date, and there is no guarantee that a portfolio will provide adequate income at and through the investor’s retirement.

Mutual funds are subject to market risk and volatility. Shares may gain or lose value. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Diversification does not guarantee profit or protect against loss.

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These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict performance of any investment.

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RPL0000.130.0413 April 23, 2013