Annuities are one thing, but alternative investments as well?
Defined simply as anything other than stocks and bonds, alternative asset classes are touted for their “non-correlation,” something proponents say is critical to effective diversification and portfolio optimization.
Most commonly involving private equity, REITs and hedge funds (or hedging strategies)—among others—they’re meant to move independently of more traditional markets for better risk-adjusted returns.
But do they belong in 401ks?
It’s a question asked and answered by no less than the former director of the PBGC, Charles E.F. Millard, in the pages of The Hill on Thursday.
He made a strong case by pointing to pension plan and endowment success, wondering about the fundamental fairness of alternative access by DB participants, but not their DC counterparts. And he pointed to research from institutional benchmarking firm CEM that shows the significant outperformance many pension plans experienced as a result of their inclusion.
“One more thing to make your blood boil,” Millard noted, amping up the rhetoric. “Wealthy investors have access to these classes whenever they wish, because they are ‘qualified’ or ‘accredited’ and can therefore reap the diversification benefits these investments provide.
So why aren’t they currently offered in the majority of 401ks?
“It is because your employer is afraid of litigation,” he somewhat dismissively added. “The Investment Company Institute (ICI) estimates that there is over $5 trillion in 401(k)s plans. Amounts of money like that attract trial lawyers the way honey attracts bees.”
High fees mean a higher threshold for added alpha, and lawyers can use fuzzy math to argue (often successfully) against their justification.
What he didn’t mention is the complexity inherent in most alternative investments, and the dismal financial literacy rates that make even the most basic money concepts difficult for participants to understand.
Millard sidestepped the issue by simply calling for their inclusion in target-date funds, and called for Department of Labor guidance with a semi-safe harbor to help spur it along.
“If employers, defined benefit pensions, and wealthy individuals can invest in these important, diversifying asset classes, then middle-class investors should be allowed to do so too,” he concluded.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
