Cerulli Associates Report: DC Plans Unlikely to Adopt Alternative Investments

The latest research brief released by Cerulli Associates reveals that participants in defined contribution (DC) plans are hesitant to adopt alternative investments despite a slight uptick in flows totaling $12 billion in March. The primary reasons for this reluctance are concerns over illiquidity and obscurity associated with these funds.

According to Cerulli, attempting to include alternatives like venture capital and private credit in DC plans is challenging as they do not align well with the structure of these retirement accounts. Most plan sponsors prefer offering target-date funds (TDFs) due to their cost-effectiveness compared to alternative investments, which can have higher costs and operating expenses.

The research also indicates that alternative managers are shifting their focus away from DC plans, with only 15% expressing interest in the 401(k) market. Instead, they are targeting ultra-high-net-worth individuals, single-family offices, sovereign wealth funds, and public pension plans.

While some alternative investments like private real estate and private equity could be more appealing if presented in custom TDFs, Cerulli suggests that it may not be enough to sway employers towards alternatives. The research highlights the challenges faced by defined contribution investment-only (DCIO) asset managers in adding private market fund types to their offerings.

Overall, the findings underscore the current indifference towards alternative investments in DC plans and the preference for more traditional investment options like TDFs. Despite the growth in institutional and retail use of private markets, the adoption of alternatives in DC plans remains limited.