Only about one in 10 401k plans offer alternative investment options as part of their target-date funds (TDFs) and just about one-quarter (24%) of plan sponsors have taken action to incorporate environmental, social and governance (ESG) investing into their plan over the last three years.
Those are the key findings in new research from PGIM, the $1.4 trillion global asset management business of Prudential Financial, Inc., released Jan. 27.
“The average American worker doesn’t have access to the same types of investments currently available to institutional and high-net-worth investors,” said Josh Cohen, head of institutional defined contribution at PGIM. “In a world where we are experiencing changing demographics, aging populations and issues of inequality, it is imperative that individual investors have access to quality investments to help them build and maintain their wealth, particularly when it comes to retirement.”
In a recent blog post, Cohen argues that defined contribution (DC) plans may be the best starting point, as they offer the fiduciary oversight, institutional pricing and long-term time horizon needed to effectively deliver ESG and alternative strategies to individuals.
PGIM’s research series, “The Evolving Defined Contribution Landscape,” conducted in partnership with Greenwich Associates, surveyed 138 DC plan sponsors to shed light on changes within the industry, including the use of OCIOs and the investment options offered in 401k plans.
Alternative investments in TDFs
Despite having the ability to bring more sophisticated investment options to plan participants at institutional pricing, most plan sponsors have chosen not to do so. The chart at right illustrates the percentage of plan sponsors who say they are currently incorporating specific alternative investment options such as real estate private equity and debt, hedge funds, private equity and liquid alternatives as part of their target-date funds.
The most common reason for not including alternatives as an investment option is the need for enhanced participant education (67%). This is followed by operational challenges (34%), the perceived litigation risk (33%) and cost (27%).
Interest in ESG is evolving
Almost one-quarter (24%) of plan sponsors indicate they have taken action to incorporate ESG approaches into the plan over the last three years, while more than half (52%) said they have not. An additional 23% were neutral on the matter. Directionally, there is greater interest in incorporating ESG approaches among mid-sized plans with $500 million to $999 million in AUM.
“While ESG is an evolving area with varying views, definitions and approaches, I anticipate investors will increasingly look to diversify their portfolios with responsible and sustainable investments. Investment options that are aligned to ESG preferences and meet fiduciary standards of appropriateness should be made available to workers,” said Cohen.
PGIM’s research is the second of a three-part series on the evolving DC landscape. For more detailed findings and further information, check out “The Evolving Defined Contribution Landscape: Alternatives & ESG as Long-Term Solutions for Long-Term Challenges.”
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
