Challenges of Including Alternative Investments in 401(k) Plans: Cerulli Report

Title: Alternative Investments Face Hurdles in 401(k) Plans, Cerulli Report Finds

In a recent report by Cerulli Associates, it was revealed that alternative investments, such as private equity and credit, are facing challenges when it comes to being included in 401(k) plans. The higher fees, lower transparency, and less-certain outcomes associated with these asset classes have made defined contribution plan managers hesitant to incorporate them.

While corporate pension plans have been more open to allocating to alternative investments, reaching 12.4% in 2022, defined contribution plans are facing greater constraints under ERISA rules. These rules emphasize the fiduciary duty of plan managers to offer the best investment options with the lowest fees, which can be difficult to achieve with private funds due to their lack of liquidity, opacity, and typically higher fees.

According to the report, only a small percentage of investment managers focusing on defined contribution plans are considering adding private equity to their multi-asset-class products in the next 12 months. The attitude towards private real estate is slightly more open, with some already including it in their products.

Adam Barnett, senior analyst at Cerulli, highlighted the need for legislative changes to ease the pressure of potential lawsuits that plan sponsors might face if private funds underperform. He mentioned that alternative asset managers recognize the challenges they face in getting 401(k) plans to incorporate alternatives, with only 15% expressing interest in such plans.

Overall, Cerulli researchers concluded that including alternatives like venture capital and private credit in DC plans is currently a challenge, as it does not align well with the existing structure. Despite the hurdles, there may be opportunities for adaptation in the future if changes are made to increase their prevalence in target-date funds and advisor-managed accounts.