An Opportunity for Liquid Alternatives in DC Plans

As plan advisers are increasingly focused on new strategies to improve plan participant outcomes, liquid alternatives may present an opportunity to diversify retirement portfolios.

In a paper, “Liquid Alternatives and the Opportunity in Defined Contribution Plans,” from Pershing Prime Services’ Executive Insights series, Mark Aldoroty, head of sales and relationship management for Pershing Prime Services, and Rob Cirrotti, head of retirement solutions at Pershing, say the increased returns and hedges that reduce risk in liquid alternatives can have a significant impact to participant outcomes over time.

The paper suggests that the best fit for liquid alternatives in a defined contribution (DC) plan is within a target-date strategy or advisory model. “You can’t throw these investments into a DC plan lineup and expect plan participants to figure out what to do with them,” the paper says.

To make a liquid alternative offering attractive to a DC plan, advisers need to examine what reasonably converts from the hedge fund space to the DC plan space. The strategy needs to feel like a daily liquid product. The paper notes that DC platforms are evolving to accommodate these strategies.

Advisers need to educate DC plan fiduciaries about the benefits of liquid alternatives to plan participants. Some fiduciaries may be completely unfamiliar with these strategies. Because these strategies are relatively new and do not come with a decades-long benchmarking history, there needs to be fact-based education for all DC plan decisionmakers, the authors contend—plan fiduciaries, as well as advisers. They need education about hedging and non-correlated risk. While there is not yet definitive proof that liquid alternatives improve retirement plan outcomes, advisers can look to how these vehicles have helped in other areas of investing and correlate that to retirement plans.

The paper contends DC plan fiduciaries need to change their focus from investment selection risk to retirement adequacy risk. They are increasingly going to be judged on results participants achieve, so they should shift their thinking toward offering investment options that can produce better outcomes.

“While the role of a DC plan fiduciary remains the same, in providing prudent investment decisions, the investments to consider are ever changing. With the growth of alternative investments, DC plan fiduciaries need to educate themselves on new products and how they will, or will not, fit into their DC plan investment menu,” the authors conclude.

The paper may be requested from here. A free registration is required.