Participants in defined contribution (DC) plans are unlikely to adopt alternative investments any time soon, finds the latest brief released today by Cerulli Associates.
While alternatives saw a slight uptick in flows for a total of $12 billion in March, participants are not receptive to the funds due to illiquidity and obscurity concerns, the research finds. “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 said.
Additionally, most plan sponsors would rather offer target-date funds (TDFs) over alternative investments due to their cost-effectiveness. “It is difficult to imagine any plan sponsor or advisor casually recommending the inclusion of alternative investments such as private equity, which could have a cost of 2% and hefty operating expenses, unlike the average target-date fund at just 65 basis points,” Cerulli added.
Alternative managers are aware of this indifference—when asked about leading prospects for alternatives in the next 24 months, DC plans ranked last, with just 15% expressing interest in the 401(k) market. Instead, alternative managers are setting their sights on ultra-high-net-worth individuals and single-family offices (65%), sovereign wealth funds (65%), and public pension plans (60%).
“The numbers are a stark reminder that while there may be explosive growth in institutional and retail use of private markets, more than half of defined contribution investment-only [DCIO] asset managers surveyed either have no plans to add or have not yet considered adding two of the largest private market fund types to their offerings,” reported Cerulli.
The research suggests that select alternative investments, like private real estate and private equity, could be more favorable to employers if presented in custom TDFs. However, it’s not certain if even that will skew enough clients towards alternatives, Cerulli concludes.
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