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Few Retirement Plans Offer Alts in Target Date Funds: Study

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Only 13% of retirement plans offer alternative investment options, according to research released Wednesday by PGIM, the global asset management business of Prudential Financial.

In addition, just 24% of plan sponsors have incorporated environmental, social and governance approaches into the plan over the past three years, PGIM reported.

“The average American worker doesn’t have access to the same types of investments currently available to institutional and high-net-worth investors,” PGIM’s head of institutional defined contribution, Josh Cohen, said in a statement. 

“In a world where we are experiencing changing demographics, aging populations and issues of inequality, it is imperative that individual investors have access to quality investments to help them build and maintain their wealth, particularly when it comes to retirement.” 

Cohen argued in a blog post last year that defined contribution plans may be the best starting point, as they offer the fiduciary oversight, institutional pricing and long-term time horizon needed to effectively deliver ESG and alternative strategies to individuals. 

PGIM’s new research is the second of a three-part series on the evolving DC landscape conducted in partnership with Greenwich Associates, which surveyed 138 DC plan sponsors from March 5 through July 17. Each plan sponsor had at least one 401(k) plan and at least $100 million in 401(k) assets. 

Alternative Investments in Target Date Funds 

Following are the percentage of plan sponsors that say they currently incorporate specific alternative investment options as part of their target-date funds: 

  • Real estate private equity: 9%
  • Real estate private debt: 5%
  • Hedge funds: 4%
  • Private equity: 4%
  • Liquid alternatives: 4%.

Sixty-seven percent of plan sponsors explained that the need for enhanced participant education was the reason for not including alternatives as an investment option.

Thirty-four percent said the reason was operational challenges, 33% cited the perceived litigation risk and 27% the cost.

Evolving Interest in ESG 

Fifty-two percent of plan sponsors in the survey said they had not taken action to incorporate ESG strategies into the plan over the past year.

Twenty-four percent said they had done so, and 23% purported to be neutral on the matter.

PGIM’s research found greater interest in incorporating ESG approaches among midsize plans with between $500 million and $999 million in assets under management.

In a rule that took effect Jan. 12, the U.S. Labor Department limited ESG-focused investments in 401(k) plans over the objections of asset managers, financial industry trade groups and sustainable investment advocates. This rule is now under review by the Biden administration.

“While ESG is an evolving area with varying views, definitions and approaches, I anticipate investors will increasingly look to diversify their portfolios with responsible and sustainable investments,” Cohen said. 

“Investment options that are aligned to ESG preferences and meet fiduciary standards of appropriateness should be made available to workers,” Cohen said.