Can open multiple-employer plans serve as the catalyst to wider adoption of illiquid alternative asset classes in 401(k) plans?
While the connection may not be obvious on its face, Joshua Lichtenstein, an ERISA attorney and partner at Ropes & Gray, says the benefits that alternatives have served in defined benefit portfolios is compelling reason to expand the range of investment vehicles in 401(k) plans.
The fiduciary structure of MEPs could facilitate wider access to alternatives, thinks Lichtenstein.
“Defined benefit returns are higher and difference seems to be the use of alternatives,” he said.
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Illiquid alternatives like private equity, hedge funds, and real estate are staples in pension management. Some alternatives are available to investors in 401(k) plans. Data from the Plan Sponsor Council of America shows that about 11 percent of DC plans include some form of alternative asset class, typically through mutual fund TDFs.
Registered funds are limited to the amount of underlying unregistered investments they can include before tripping the Securities and Exchange Commission’s definition of accredited investor.
That limitation, and a decade of fee-based lawsuits against sponsors of defined contribution plans, has left most employers leery of offering illiquid, opaque, and often expensive asset classes, even if those assets could enhance returns and retirement outcomes.
“It’s impossible to talk about the DC landscape without talking about litigation risk,” said Lichtenstein. “In my view, that has influenced the makeup of investment menus. The big movement has been to identify the lowest cost investment options to reduce litigation risk.”
That could change with MEPs. Under the Setting Every Community Up for Retirement, or SECURE Act, which was attached to the funding package President Trump signed into law last week, large money managers can be the fiduciary sponsors of Open MEPs.
“Part of the challenge individual sponsors face when designing a menu with alternatives is they always don’t have the infrastructure. It’s more difficult to benchmark and compare private funds compared to public funds. But providers of open MEPs will be sophisticated financial institutions. They understand how private funds work, the questions that need to be asked of fund managers, and how to evaluate their claims. And they have a broad view of what’s available in the market.”