Asset Managers Exploring Fresh Avenues to Bring Alts Into DC Plans

Asset managers, keen for years to bring alternative investments into defined contribution plans, are pushing ahead with relativelynew pathways via collective investment trusts and interval funds, according to Cerulli Associates.

According to Cerulli, about 25% of asset managers are offering alternative investments to DC plans through these investment vehicles; another 17% are considering offering alternatives through CITs in the next two years, and 25% are considering interval funds, which are closed-end, unlisted funds that investors can redeem at set intervals.

While asset managers often cite the advantages of “democratizing” alternatives to reach everyday investors, Cerulli notes that DC plan fiduciary concerns about the often less-liquid investments remain a challenge and has “hindered adoption.” Alternative investments can also be more expensive, include performance fees and other operational costs, lead researcher Idin Eftekhari, a senior retirement analyst, noted in the report.

“Increasingly, one of the more notable challenges to adoption is plan sponsor inertia,” he wrote.

That was born out in the most recent PLANSPONSOR Defined Contribution Benchmarking Report, which showed that a mere 2.2% of surveyed plan sponsors make alternative investments such as hedge funds and private equity available to participants. PLANSPONSOR is a sister publication of PLANADVISER.

Managing Expectations

Phil Senderowitz, managing director of Strategic Retirement Partners, says alternative investments—which in his mind range from high-yield bonds and real estate to commodity and digital asset funds—certainly may have a place in an individual’s retirement savings portfolio, but the picture grows more complicated when considering them in a core 401(k) plan lineup. Senderowitz sees such investments gaining traction through managed accounts, which are more flexible and targeted for the participant.

“We shy away from using these specialized asset classes in the traditional core lineups,” Senderowitz says. “But what I see happening is that more and more plans are going to be utilizing managed accounts as a default alternative—and more recordkeepers will offer alternatives in the managed account.”

Senderowitz notes that, at SRP, the firm offers alternative investments through adviser-managed accounts, in which advisers can make specific decisions not possible in a more conservative core menu lineup. He, like Cerulli, notes the CIT vehicle for alternatives as a positive development, as it can drive costs down when compared to a ’40 Act fund, which must be registered with the Securities and Exchange Commission.

“CITs can significantly lower the expenses and raise the ability to swap [the investments] in and out,” he says. “You may even have an alt investment available as an option, but carrying zero balance, until you’re ready to start utilizing it.”

Pushing Through

Cerulli found that asset managers are aware that  plan fiduciaries are skeptical of including alternatives in DC plans. About 17% of asset managers reported viewing plan sponsor inertia as a serious challenge, while about 62% view it as somewhat of a challenge to increasing alternatives offerings in DC plans.

Despite the challenges, the Cerulli analysts expect that adoption of alternatives in DC plans will continue to grow, “albeit incrementally.”

From a distribution perspective, the consultancy recommended that “target-date managers—and other DC-focused asset managers seeking to incorporate alternatives into DC-focused products—establish strategic relationships with alternative investment managers that may lack direct access to the DC ecosystem.”

Earlier this month, Apollo Global Management Inc. and its Athene Annuity & Life Co. emphasized during an investor day presentation the opportunity to offer various investment products, including alternative investments, in DC plans. In May, Capital Group, a leading TDF provider and owner of American Funds, formed a strategic partnership with alternative investment firm KKR & Co. Inc. to, in part, bring alternatives to a wider swath of investors.

Despite the potential for more alternatives use, adviser Senderowitz says plan sponsor clients are generally not asking about them, let alone pushing for them.

“A lot of plan sponsors are comfortable with the plain vanilla lineup,” he says. “If [participants] want to go off-roading, they can do it with outside assets.”