Adding alternative investments to target-date funds within defined contribution plans can improve returns for participants while not making their lives any more complicated.
So says a policy report from Georgetown University’s McCourt School of Public Policy, which points out that in the absence of defined benefit plans, secure retiree income is “becoming a thing of the past” and the volatility of holdings in DC plans endangers the ability of participants to retire.
As a result, the report recommends that TDFs be diversified to include asset classes such as private equity, real estate and hedge funds as a means of improving retirement outcomes while at the same time not making the DC plan any more complicated for the participant.
Such diversification provides better returns, the report says, “when compared with a portfolio solely composed of equities and fixed income.” In addition, it can mitigate loss in downside scenarios, as well as improving the probability of not running out of assets for those participants who leave their assets in the plan after retirement.
Says the report, “A diversified TDF has a higher probability of maintaining positive retirement assets after 30 years of retirement spending; it also provides higher expected returns and lower downside risk at the time of retirement and 10 years post-retirement, mitigating the negative impacts of a short-term market shock for those participants at or near retirement.”