A new report released today from New York-based Cohen & Steers advocates for adding real assets to defined contribution plans—and to target-date funds in particular.
While it’s no surprise that a leading real assets investment manager such as Cohen & Steers would promote their multi-strategy approach to real assets and the impact it can have on a DC participant, the thought leadership piece, “The Benefits of Real Assets in Retirement Plans,” does make some interesting points.
For instance, defined contribution plan menus have historically been short on portfolio diversifiers, consisting largely of core equity and fixed income strategies. That’s especially true of target-date funds, the vehicle of choice for many retirement savers. In fact, the paper points out that while institutional managers tend to allocate as much as 20% to diversifiers including real assets, DC plan allocations average around 1%.
“The result is that the traditional 60/40 equity/bond allocations that form the foundation of most target-date funds have come under significant scrutiny (as has the performance of target funds this year),” states the paper’s author, Vince Childers, SVP and head of Real Assets Multi-Strategy at Cohen & Steers. “The Wall Street Journal recently questioned whether target-date funds are appropriate for most investors, while Barron’s called target-date fund returns ‘mediocre.’”
With target-date funds facing declines in both stocks and bonds, the paper says many fiduciaries are considering diversification options for their retirement plans. Cohen & Steers believes a blend of real assets can be an attractive way to fill that need, offering the potential for some level of inflation protection, diversification and enhanced risk-adjusted returns, with lower historical volatility than individual real assets categories.
Real assets are a tangible investment asset class that covers investments in physical assets such as real estate, energy, and infrastructure.
A “key takeway” from the piece says that with growth slowing and high inflation likely to persist, adding real assets to defined contribution (DC) plan investment menus may help participants better realize their financial goals.
“The goal of portfolio diversification is to own asset classes that tend to experience their above- and below-average returns in different economic and market environments—when one asset zigs, the expectation is that another will zag,” Childers writes. “In recent years, an increasing number of investors have looked to solve this problem by carving out a portion of their portfolio for real assets. Today, the universe of listed real assets has grown beyond real estate to encompass other asset classes, including multi-strategy real assets portfolios.”
The paper goes on to outline Cohen & Steers’ multi-strategy approach to real assets, which the company says that for the retirement plan participant is superior to owning individual real asset funds as it helps reduce menu clutter while potentially providing stronger and more consistent results.
“Given their attractive investment attributes, we believe adding real assets to retirement plan investment lineups can be an effective way for fiduciaries to help plan participants diversify their portfolios and improve potential outcomes,” the paper concludes.
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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.