Alternative investments gain popularity with plan sponsors

290595_feat_imgThe financial industry responded to the market events of 2008 to 2009 by launching a host of alternative investment products. These products seek to diversify exposure away from traditional fixed-income and equity assets and to minimize risk.

Risk-aware plan sponsors have been rapidly adding alternatives to their lineups, but plan sponsors still have a long way to go in offering these options to retirement savers.

Putnam’s white paper, “Five years after the meltdown: What has changed in DC lineups?” shows that alternatives can help to mitigate one of the biggest threats to retirement income — the risk of negative returns early in retirement, or sequence-of-returns. Some highlights from the white paper:

Alternative strategies surge among defined benefit plans. Among the 1,000 largest corporate DB plans, allocations to private equity and other alternative strategies increased between 2009 and 2012 at the expense of equity exposures, according to a study of retirement markets in 2013 by industry research firm Cerulli Associates.

Big institutional portfolios are part of the push. High-profile institutional portfolios now incorporate more alternative investments, Cerulli finds in a separate report, citing Harvard University’s 40% allocation to alternatives in 2013. These trends “will likely inspire more product development activity in this asset class,” Cerulli notes in the report.

Diversification and lower volatility draw attention. Alternatives — including absolute return, low-volatility equity approaches, strategies that focus on traditional inflation-fighting tools like commodities and real estate, and even distressed securities investments — have gained favor in recent years as a way to seek better diversification and reduced volatility.

Mainstream investors turn to absolute return strategies. Mainstream investors have latched on to absolute return funds as a way to reduce risk and provide consistent returns. These funds aim to provide positive, targeted returns over time with less volatility than more traditional benchmark-oriented funds. They seek to provide diversification regardless of the direction of the stock or bond markets. Retirees, for example, can benefit from an absolute return strategy as they shift from accumulating assets to drawing them down.

Who is using alternative investments, and why?

Plan sponsors that offer DB plans as well as defined contribution plans appear to be more likely to offer alternatives. In fact, they are twice as likely in their plans to offer alternatives, including commodities, structured products, long/short strategies, private equity, absolute return, and “go anywhere” mutual funds.

DC-only plans take a simpler approach. Treasury Inflation-Protected Securities (TIPS) are the only alternative investment category that DC-only plans appear more likely to offer than DB/DC plan sponsors. Perhaps that’s because TIPS are more conservative and more easily understood – and DC-only sponsors may only/? be dipping their toes in the water. Moreover, TIPS may be considered “safe,” rather than the wider alternatives area, which is often perceived to be riskier rather than risk mitigating.

Greater risk awareness leads to more alternatives. Plan sponsors who say they want to help participants minimize risk to their income in retirement make more alternatives available in their offerings.

Advised plan sponsors are quicker to adopt alternatives. Alternatives use is generally – but not universally – higher among advised plan sponsors. When told by an intermediary that alternatives could increase returns, reduce volatility, and manage downside risk for participants, almost all plan sponsors are at least somewhat receptive. Drilling down to those who already work with a paid financial intermediary, 76% responded that they would be absolutely certain (18%) or very likely (58%) to consider adopting such alternatives in their plan.


whitepaper_cta_grRetirement plan professionals:

Download the Putnam white paper, Five years after the meltdown: What has changed in DC lineups?


Cerulli Associates, “Retirement Markets 2013: Data & Dynamics of Employer- Sponsored Plans,” “U.S. Monthly Product Trends” (July 2013).

The study, organized in partnership with Brightwork Partners, surveyed for-profit organizations that offer a 401(k) plan with assets of $25 million or more. Conducted online between November 8, 2013, and December 13, 2013, the survey compiles data provided by 254 senior executives involved in evaluating investments available to participants in their organization’s retirement plan.

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