Defined contribution retirement plans would be significantly helped by private and alternative investments, according to investment management firm Neuberger Berman, the Defined Contribution Alternatives Association (DCALTA) and the Institute for Private Capital (IPC).
“Investing in private funds increases average portfolio returns and reliably increases Sharpe ratios, or return per unit risk in 100% of cases,” Neuberger Berman said a new study, called “Why Defined Contribution Plans Need Private Investments.”
The results of the study “suggest that typical diversified portfolios could benefit from allocations to private and alternative investments, such as private equity and venture capital,” according to Neuberger Berman, which is a founding research partner of DCALTA, publisher of the research paper with IPC.
The call for private equities to be added to retirement plans comes after the Securities and Exchange Commission’s June 18 concept release on harmonization included the idea.
But not all investment experts agree that it’s such a great idea to open retirement plans to private equity. For example, John Rekenthaler, vice president of research for Morningstar, said in a July 9 post at his firm’s website that concerns include the fact that “private-equity databases are incomplete.” He explained: “Because private-equity funds are unregistered, they do not submit public filings. Instead, they report their performances to whom they wish, when they wish. This process overstates the industry’s totals, because the top private-equity funds are happier to share their results than are the bottom-fishers, who would prefer to remain unnoticed until their fortunes improve.”
An even larger issue is that “there are major problems with the performance calculations for those private-equity funds that do report,” Rekenthaler said.
Public comment was sought by the SEC on the issue and it wasn’t immediately clear what its next move would be on the subject.