As officials at corporate and public defined benefit funds speak of the sour outlook for publicly traded markets and of their intentions to allocate more assets toward alternative investments, they must not leave their employee-directed 401(k) and other defined contribution plans in the lurch.
A growing number of these officials believe a bigger allocation to private equity, hedge funds and other alternative strategies now provides a better risk-and-return tradeoff for their defined benefit funds than traditional equity and bond portfolios. And they now emphasize the importance of absolute return, rather than relative return, in a lackluster market.
But these officials shouldn't move away from traditional capital markets, away from indexing, away from conventional active portfolio management, while leaving their defined contribution plans with nothing more than these standard strategies.
Including defined contribution plans in this new world of alternative strategies won't be easy. First, alternative investment strategies aren't readily available for defined contribution plans. Second, investment education of participants by and large isn't up to the complexity of alternative investments.
If offering alternatives is not feasible, then officials need to come up with strategies for defined contribution plans that better preserve capital and offer better expected returns, in keeping with the same effort spent for defined benefit funds, to fit this new vision of the markets.
