While allocations to alternative investments have long been a staple of endowment and pension portfolios, they have yet to penetrate the defined contribution (DC) market. However, the return profiles and unique diversification of illiquid alternatives may offer an attractive investment opportunity for DC plan participants, according to the latest Cerulli Edge – US Retirement Edition.
While allocations to alternative investments have long been a staple of endowment and pension portfolios, they have yet to penetrate the defined contribution (DC) market. However, the return profiles and unique diversification of illiquid alternatives may offer an attractive investment opportunity for DC plan participants, according to the latest Cerulli Edge – US Retirement Edition.
Currently, DC institutional consultants report very little use of illiquid alternatives within DC plans; less than 1% of DC plans offer private credit, private equity (PE), and hedge funds. Private real estate is the only outlier, with 10% of plans intermediated by an institutional investment consultant containing private real estate.
Only 4% of target-date managers allocate to PE and private debt, and none allocate to hedge funds within their off-the-shelf target-date series. Despite the complexity and the challenges of providing PE and hedge funds in the DC market, further investment, particularly within pooled vehicles such as target-date funds, may help retirement investors achieve superior risk-adjusted returns and diversification benefits.
Cerulli acknowledges, however, target-date managers and plan fiduciaries may be hesitant to allocate to alternatives given the changing regulatory guidance. Cerulli expects conversations related to the inclusion of private equity in DC plans will remain largely relegated to large and mega plans and the consultants that work with these plans.
