Missed Opportunity: Asset Diversification



A comprehensive new analysis from Georgetown University’s Center for Retirement Initiatives points to opportunities for target-date funds to increase returns by adding illiquid options to the mix and calls on regulators to provide a more clear framework for doing so. 

Increased Returns

The pandemic set many workers and savers back in their plans for retirement, making it ever more important to ensure retirement plans generate strong returns. Toward that end, financial experts are pointing retirement plan sponsors to new possibilities:

A lack of diversification in defined contribution plans has been a significant missed opportunity for plan sponsors, according to a new report produced by Georgetown University’s Center for Retirement Initiatives, in conjunction with CEM Benchmarking Inc., which argued that adding illiquid assets to target-date funds is a strategy that plan sponsors should explore. Incorporating illiquid assets, such as private equity, real estate and infrastructure, in TDFs could result in a 0.15% increase in return per year over a decade, the report stated.  

“The total TDF market as of 2021 held about $3.27 trillion in assets, according to Morningstar data, so a 15 basis point improvement on all target date options over the next 10 years would be at least $5 billion,” said Angela Antonelli, research professor and executive director of Georgetown’s CRI….

Reporting for Plan Sponsor,  Remy Samuels explains that the analysis reviewed allocations and returns of defined contribution target-date funds from 2011-2020,

“assessed how DC plan participants’ experiences would have changed had DC TDFs made higher allocations to illiquid assets during this time period,” and, concluded: “the allocation of a mixture of both private equity and real assets resulted in the highest percentage of returns, with 82% better outcomes over a 10-year period.” According to the report, for example: “For an individual participating in a DC plan, this improved return on investment, if obtained over the course of a career, would result in an additional $2,400 per year in spending power for a retiree with $48,000 per year in retirement income….”.  

Higher Fees?

Although illiquid assets typically involve higher fees for investors, experts, including 

 Chris Flynn, a leader at CEM Benchmarking points out “A higher cost portfolio that delivers better risk adjusted returns, net of costs, delivered the better bang for the buck ….” Noting that “large providers of TDFs can use their scale and buying power to deliver above-average value in these asset classes via offerings to plan sponsors and their participants,” the authors suggest that plan sponsors: “should continue to further demand that their service providers, specifically their investment managers, TDF providers, and investment consultants, create, find, and deliver compelling real asset and private equity investment vehicles that can deliver successes like those achieved by DB plans….” Correspondingly, regulators are encouraged“to provide a clear framework for how plan sponsors could include private assets within DC plans. This would remove a key barrier to adoption by prudent sponsors who see a compelling case for investing in private assets….” 

Thinking Forward?

As the Society for Human Resource Management reminds plan sponsors, “Being thoughtful about plan design can dramatically improve employees’ chances of accumulating wealth and achieving a secure retirement.” Indeed, given the optional provisions included in SECURE 2.0, many plan sponsors are rolling up their sleeves alongside their committees to consider new tactics. While working to strengthen company sponsored plans, it is also critical for plan sponsors to update their protections. With litigation and regulatory actions on the rise, no plan sponsor wants to find themself scurrying to find an  ERISA defense attorney at the cost of $600—per hour.  At Colonial, a whole year of Fiduciary Liability coverage is less than a few dollars a day, and we even include Cyber Liability coverage to protect the business and retirement plan in the event of a cyber breach. When it comes to ERISA, it’s best to be proactive: choose your affordable plan sponsor protection package here in minutes.


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