A growing number of participants in 401(k), 403(b), and 457(a) plans are taking an interest in alternative investments, finds new research out today from Schroders.
According to the firm’s U.S. Retirement Survey, 36% of participants in these retirement savings plans say they would invest in private equity and private debt investments if their plan provided access.
Among those who expressed interest, 52% said they would allocate less than 10% of workplace retirement assets to private assets; 34% would assign between 10% to 15% of their retirement assets to private investments; 8% would allot over 15%; and 6% are unsure how much they would allocate.
Deb Boyden, head of U.S. Defined Contribution at Schroders, notes that just how alternative investments were utilized in DB plans, it’s possible the funds will be widely implemented in DC plans, as well.
“Alternative investments such as private equity and private debt have long served as important portfolio diversifiers in defined benefit plans,” said Boyden. “Given the evolution of the asset class in recent years, it’s a matter of when, not if, these investments will become more common in defined contribution plans.”
Yet, the widespread adoption won’t happen without its challenges, studies find. The Schroders study reports that describe a growing prominence in alternative investments, 51% of participants surveyed said they do not understand the benefits of incorporating the funds to retirement portfolios, while 64% believe alternative investments are risky.
DC participants have been skeptical on alternatives in the past. A Cerulli Associates brief in May found that while the funds experienced an increase in flows in March for a total of $12 billion, participants were not receptive to alternatives because of illiquidity and obscurity concerns. “Attempting to include alternatives such as venture capital and private credit in DC plans is tantamount to trying to put a square peg in a round hole: It simply doesn’t fit,” Cerulli researchers said at the time.
These concerns were not limited to alternatives either, the Schroders report added. Fifty-two percent of participants said they don’t know how to manage risk in their retirement portfolio, and 59% wished they received additional guidance from their employer on how to invest workplace retirement plan assets.
Ultimately, participant education and communications will need to advance before investors can become comfortable in allocating their savings to alternatives, Boyden concludes.
“Before private assets can reach their full potential, significant inroads in participant education must be made,” she said.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
