DC Plans Slow to Adopt Liquid Alts…But Why?

DC Plans Slow to Adopt Liquid Alts…But Why?

A recent article on Wealth Management.com titled “Liquid Alts in DC Plans? Don’t Hold Your Breath” discusses the relatively slow adoption of Liquid Alts by defined contribution (DC) Plans relative to what Defined Benefit Plans (DB) have done. The arguments for liquid alts, as the article presents, include managing return and risk management, managing volatility, potentially greater diversification, and a strategy less sensitive to broader equity and fixed income markets. What seems to be holding DC plans back? A lack of familiarity with liquid alts, higher costs, recent performance in the multi-alternative category has lagged equities, and fear of lawsuits.

While those are reasonable challenges, the larger issue being ignored by plan sponsors and advisers is what needs to be done to help participants reach their goals matching forward-looking investment needs to the forward-looking investment environment. For example, forward return expectations for fixed income and equities over the next decade are in the low single-digit category. Additionally, low levels of inflation the last few decades have led to complacency regarding inflation’s impact on fixed-income investments. Target date funds have been great marketing tools, and their simplicity has improved the effectiveness of participant outcomes, but their significant reliance on fixed income as participants get older leaves them subject to inflationary risk.

Given the investment outlook, perhaps the additional tools provided by exchange-traded products, collective investment trusts, and other liquid vehicles that move beyond traditional equity and fixed income allocations need a closer look. These tools are increasingly at their disposal and may help address the limited forward investment expectations and assist participants in funding their future retirement needs.   Its possible a market event will be required to spur change.  But the that begs the question…will that be another example of  “closing the barn door after the cows have gotten out”, such as the tremendous demand for tactical strategies post 2008.