Some providers of target-date options in defined contribution plans are adding alternative investments — mostly, but not limited to, inflation-protection strategies.
Among 20 target-date families analyzed in detail by Morningstar Inc., five have launched or announced alternatives options since March: AllianceBernstein LP; T. Rowe Price Group; Principal Financial Group; ING Group NV; and OppenheimerFunds Inc.
Executives at these firms say the best way for DC plan participants to invest in non-traditional asset classes is through target-date options that contain some allocation to alternatives, rather than in stand-alone options.
For DC plan executives, target-date strategies enable the inclusion of alternative assets without some potential administrative headaches, said David Wray, president of the Profit Sharing/401k Council of America, Chicago.
Mr. Wray said PSCA's recent survey of 931 defined contribution plans showed about one-third had stand-alone REIT funds and about one-fourth had other stand-alone sector funds. “You find them (alternatives) in customized funds for large plans, but you are beginning to find them in off-the-shelf” target-date funds.
The latest additions by providers exclude investments such as private equity and hedge funds as well as direct investments in real estate.
“You don't want the participant to chase the return of a volatile stand-alone alternative investment,” said Matthew Gnabasik, managing director of consultant Blue Prairie Group LLC, Chicago.
“Given the market volatility since 2008, sponsors are demanding solutions that will smooth the ride for participants,” said Ross A. Bremen, a partner at NEPC LLC, Cambridge, Mass. He believes alternatives are better suited for inclusion in target-date funds than as stand-alone funds.
Packaging several alternatives into one option can be more attractive as investment strategies move in and out of favor. For example, “Some people are becoming less enamored with REITs because they're seeing higher correlations between REITs and equities.” said Joshua Charlson, senior fund analyst for Chicago-based Morningstar Inc.
“If you want an inflation hedge, TIPS (Treasury inflation-protected securities) alone might not be sufficient,” said Chris Lyon, a partner at Rocaton Investment Advisors LLC, Norwalk, Conn. “You need more than one tool in the tool kit. (Clients) are interested in looking to round out their lineup without having to add eight more funds.”
One example of a packaged deal is coming from AllianceBernstein LP, New York. Starting Dec. 31, the Global Real Estate Investment Portfolio will become the Real Asset Portfolio, and the investments will change from REITs alone to a mix of REITs, commodities, TIPS and commodity-related securities.
Company officials believe the four asset classes would be better than one as a “diversifier,” said Thomas J. Fontaine, head of defined contribution investments at AllianceBernstein. “It should provide comparable returns to REITs but with less volatility. It offers enhanced inflation protection.”
The new portfolio, like the old one, will be included in each of AllianceBernstein's 12 target-date funds, which include high-yield bonds and TIPS.
Mr. Fontaine said executives investigated incorporating equity real estate, private equity and hedge funds into the target-date lineup, but decided against it, partly due to the relative illiquidity and higher costs. Another impediment was sponsors' concerns about the complexity and lack of transparency of hedge funds.
AllianceBernstein has $17.3 billion in target-date assets.