“Defined benefit (DB) plans have benefited from including alternatives since the 1970s, and some defined contribution (DC) plans have included alternative sectors for over 30 years.”
“Alternatives can provide a range of benefits that complement traditional equities and fixed income when included as part of DC multi-asset portfolios.”
The Defined Contribution Institutional Investment Association (DCIIA) is out with a “comprehensive overview” of the case for including non-correlated, alternative assets in 401k and similar DC plans.
“These benefits have historically supported stronger investment outcomes, which could be especially relevant to mitigate lower return expectations for traditional asset classes, post-COVID,” the authors note. “The inclusion of alternatives presents a range of considerations for DC sponsors that, depending on the alternative asset class, includes cost, valuation, liquidity, benchmarking and participant communication.”
The overview mentions the June 3, 2020, Information Letter from the DOL on the use of Private Equity in defined contribution (DC) plans, and how it’s “an important development in the broader conversation around the inclusion of alternatives in DC plans. [While] the DOL issued a Supplemental Statement to the Information Letter on December 21, 2021, but did not change the terms of the letter.”
It then claims alternatives—namely, private real estate (RE), hedge funds (HF), and private equity (PE)—can provide a range of benefits that complement traditional equities and fixed income when included as part of DC multi-asset portfolios.
“Plan fiduciaries interested in implementing alternatives in their DC plan should assess the specific alternative benefits, in addition to the interests and concerns of the various stakeholders in their plan,” it adds, before concluding with next steps:
- Assess objectives for implementing alternatives and potential benefits of inclusion, such as increased diversification, reduced volatility, uncorrelated returns, stable income or potential for enhanced return.
- Assess risk appetite of fiduciaries and internal capacity/willingness to monitor and evaluate options.
- Assess liquidity needs and challenges for your plan based on participant exchange activity and other events that may affect liquidity.
FIND THE COMPLETE OVERVIEW HERE
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.
