Would Illiquid Assets in 401(k)s Be Crazy or Constructive?

401k, illiquid assets, alternative mutual funds, retirement planning

It's complicated.

It’s difficult enough to get plan sponsors and participants covered, educated and invested in retirement saving through the 401k.

Now imagine adding illiquid investments to the mix.

As facepalm-inducing as it sounds, it’s happening across the pond, with Cerulli Associates reporting that “defined contribution pensions” in the U.K. are considering illiquid assets.

While 401ks and similar defined contribution plans here are generally considered illiquid and meant for long-term investing that are difficult to prematurely draw down without penalties, the actual investments offered in the menu (mutual funds and similar pooled assets) are not.

Adding “gated” products as stand-alone investments would, therefore, present challenges, Cerulli notes.

The first is size. Although the DC universe is growing, there remains a long tail of micro plans that are too small to be of interest to asset managers, one of the reasons the trend in the U.K. is toward consolidation.

A potentially larger problem is that illiquid assets can be difficult to understand and are often opaque, which is why many illiquid alternative investments are reserved for qualified investors normally not found in many work-based plans.

Target-Date Solutions

It’s also why illiquid investments at the participant level in a packaged target-date mutual fund product might make the most sense.

Indeed, a report titled “The Evolution of Target Date Funds: Using Alternatives to Improve Retirement Plan Incomes,” from the Georgetown University Center for Retirement Initiatives (CRI) makes the case that such investments increase retirement income and lower risk.

Quantifying the difference in performance overall from the inclusion of illiquid assets in portfolios is tough, although 2016 research found that the performance of DC plans here in the U.S. “improved significantly” after they diversified their asset allocation.

“Asset managers must deliver innovation, consultants must provide education, and DC schemes must be open to what illiquid assets have to offer,” Justina Deveikyte, associate director, European institutional research at Cerulli, concluded. “If these forces align, and regulation changes to facilitate positive action, then 2019 could be illiquid assets’ breakthrough year.”

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