Alternative investments have long been used in defined benefit plans, but adoption has been slow in defined contribution plans, despite evidence that the strategies have led to better performance for participants.
Research from Cerulli Associates suggests that over the next few years, alternative investments will become “commonplace” in defined contribution plans. The global edition of The Cerulli Edge found that more than 47% of plan sponsors feel alternatives “have a role to play in DC investing.”
An article in the Winter 2015 issue of The Journal of Alternative Investments, written by David Kupperman and Scott Kilgallen of Neuberger Berman, found that additional performance from alternative investments (in this analysis meaning mutual funds that use single or multiple hedge funds strategies) in DB plans led to better returns overall for participants than those in DC plans.
“Although some of the disparity between DB and DC performance may be attributed to such factors as fees, portfolio construction and market timing by participants, we believe the lack of alternative investments is an important factor in DC plan underperformance,” according to the authors.
Growth of alternatives as a standalone DC plan investment has been hindered by regulations that aim to protect investors.
“Given the increased complexities and lack of liquidity — particularly for limited partnership structures — of these investments, it would be imprudent to let unsophisticated investors participate in less regulated (and often riskier) investments,” Cerulli noted.