The Challenge of Adding Alternative Investments to Workplace Retirement Plans
Title: Alternative Investments Face Hurdles in Workplace Retirement Plans
In the ever-evolving landscape of investment options in the U.S., alternative investments have been gaining attention for their potential returns. However, a recent study by Cerulli Associates has shed light on the challenges faced by alternative investments, particularly in workplace retirement plans.
According to the study, alternative investments, such as private markets, are not yet compatible with the incentives and regulatory requirements of defined contribution plan sponsors. The relative illiquidity and opaque nature of these investments make them less appealing to plan fiduciaries, who are hesitant to recommend them to participants.
The survey of DC investment-only asset managers revealed that more than half have no plans to add private market fund types to defined contribution offerings. The regulated nature of the DC space, coupled with the high fees associated with private equity investments, has contributed to this hesitancy.
While alternative asset managers are beginning to understand the challenges, there is still a lack of interest from DC plans. Real estate, considered an alternative investment in DC plans, may offer a more viable option as a long-term investment play.
Despite the current obstacles, Cerulli believes that private market investments may eventually find their way into DC plans, particularly through multi-asset-class products. Asset managers are showing some signs of considering private equity and real estate for inclusion in plan menus.
The report also highlighted the potential for alternative investments in other sectors, such as ultra-high-net-worth individuals, sovereign wealth funds, and public pension plans. However, mutual funds, which have traditionally been common in DC investing, are facing outflows as investors turn to lower-priced collective investment trusts.
Overall, the study suggests that there is a growing need for innovation in the DC space to provide participants with access to a wider range of investment options. While challenges remain, there is potential for alternative investments to play a larger role in workplace retirement plans in the future.
