You’ve no doubt read about the poor state of Americans’ retirement savings. The three legs of the retirement “stool” – private savings, pensions and Social Security – are wobbly, to say the least. And for most, one of the legs of the stool doesn’t even exist. With the exception of public employees, the vast majority of Americans do not have a pension, given that private employers have been gradually shifting away from defined benefit (DB) plans for decades. By 2018, the Department of Labor reported that only 26% of the workforce had access to a DB plan. Instead, employers have been opting to offer a 401k or other defined contribution (DC) plan. Today, more than 100 million Americans participate in an employee-sponsored DC plan, comprising total household assets of $6.2 trillion according to the Department of Labor.
But while most American’s retirement savings are held in DC plans, those plans generally don’t have access to important long-term diversification tools like portfolio diversifying investments (PDI) and other alternative products that are more closely aligned with their retirement time horizon. DC plan fiduciaries have historically not included non-traded REITs, BDCs, interval funds and direct participation programs to their plans. DB plans, on the other hand, continue to invest in alternative assets like private equity and real estate, with an average target allocation of 6.1% according to Prequin. This allocation to alternative investments has produced better returns, with DB plans outperforming DC plans by 90 basis points annually between 1990 and 2012 (7.9% annual return for DB plans vs. 7.0% annual return for DC plans), according to a study by the Boston College Center for Retirement Research. In a more recent time window – between 2003 and 2012, that performance increased, with DB plan returns beating DC plans by 1.3% (vs. 0.9% between 1990 and 2012).
DB plan fiduciaries and institutional investors aren’t the only ones who use portfolio diversifying investments to mitigate risk and maximize returns. Financial advisors have used PDI products and other alternative investments to diversify their client’s portfolios for decades. The lower correlation and less liquid nature of PDIs can offer balance, stability and diversification that benefits longer-term investors.
So, what would it take to increase the usage of alternative investment products in DC plans? The Securities and Exchange Commission asks that question and is soliciting public input through a recent Concept Release on the Harmonization of Securities Offering Exemptions. The SEC’s openness to investment products other than mutual funds, stocks, and bonds for long-term retirement plan savers is encouraging. We applaud their creative thinking and we look forward to offering our ideas in response to the concept release. The IPA is also actively encouraging the Department of Labor to issue guidance under ERISA that would help facilitate the inclusion of alternative asset classes within DC plans.
For over 35 years, the IPA has advocated for wider acceptance of portfolio diversifying investment products. There is proven evidence that they have a place in DC plans, and we will be fighting for their inclusion along with our partners at the Defined Contribution Real Estate Council and the Defined Contribution Alternatives Association. We’ll also take a deep dive on this important issue next month at IPAVision in Toronto – we hope you’ll be there to join the conversation.
I am confident that IPA members will continue to offer and manage PDI products that help Main Street investors diversify their investment portfolios and achieve their retirement goals. And we intend to continue expanding opportunities for everyday Americans to secure their retirement by taking advantage of all asset classes.
Anthony Chereso is the President & CEO of the Institute for Portfolio Alternatives.