PlanAdvisor

Bringing Alternative Assets Into 401(k) Plans

The market volatility that ensured at the outset of the coronavirus pandemic has shown the importance of diversifying retirement plan portfolios.

While the stock market has recovered since its sharp 30% downturn in March at the onset of the coronavirus pandemic in the U.S., plan sponsors are increasingly interested in helping their participants diversify their portfolios with alternative asset classes, retirement plan industry experts say.

According to TIAA, more than 45% of retirement plan participants have an inappropriate amount of risk in their portfolios. Since 75% of the flows into retirement plans with automatic enrollment go to the qualified default investment alternative (QDIA), it stands to reason that sponsors might consider selecting a target-date fund (TDF), custom TDF or managed account that allocates a portion of the investments to alternatives, says Tim Walsh, senior directing manager at TIAA. “With 75% of the flows going into the default, it would make sense for advisers to try to differentiate their service with QDIAs that invest a small portion in alternatives, including products with guarantees.

“Advisers seem to be preparing for a low-rate environment extending at least through the middle of this decade, so the search for yield is on and they are looking to go out on the yield curve,” Walsh continues. That is why TDFs, custom TDFs or managed accounts that include dividend-paying equities, private equity-type solutions, direct real estate, real estate investment trusts (REITs), commodities and fixed annuities that pass the risk onto an insurance company might make more sense to sponsors and advisers right now, he says. “We are seeing some of these types of alternatives being included in an easy-to-use, packaged solution that is QDIA-compliant,” Walsh says, and when a plan does make these allocations part of its QDIA, it often conducts a re-enrollment to get its participants into this new option.

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