The recent pandemic-induced market volatility could make the concept of adding alternative assets to defined contribution plan lineups more attractive for sponsors, but litigation concerns persist, sources said.
"I've seen over the years plan sponsors coming out of periods of extreme market stress in particular and take that as an opportunity to re-evaluate their portfolios," said Josh Cohen, Chicago-based head of institutional defined contribution at PGIM Inc., the investment management businesses of Prudential Financial. "Clearly we're seeing extreme volatility, extreme downside performance in most asset classes, and I have no doubt that this will lead to additional considerations of strategies."
Stuart Odell Jr., San Francisco-based managing director and senior consultant at Verus Advisory Inc., an investment consulting firm and provider of outsourced CIO services, said there hasn't been much clamor for adding alternative assets to DC plans in recent years because target-date funds have performed so well.
"But right now, I'd be looking under the cover of some of these off-the-shelf target-date funds and see what they're actually holding and whether those are really diversifying asset classes and strategies in market environments like this," Mr. Odell said. "I suspect that some plan sponsors or participants in particular will be surprised that they haven't provided true diversification particularly in volatile, down-market environments."
While Mr. Cohen is a proponent of adding alternatives assets to DC plans, he said it's unwise to draw major conclusions from the recent market volatility. And others said it can be difficult to value private assets.
"Just like you wouldn't want to just look at the last six or seven years of a low-volatility environment to say what worked and what didn't, you also don't want to take a four-week period of high volatility and say what works and what doesn't," he said. "I think you want to really have a robust process and look at this over the long term."
But in the coming months and years there will be data examining how private fund investments performed vs. public markets and how DC plans fared vs. defined benefit funds where alternative assets are a staple, said Joshua Lichtenstein, a partner at Ropes & Gray LLC. "The conversation is going to look different on the other side of this because you're going to have data on what extreme market stress did to the different types of portfolios," he said.
David Levine, principal at Groom Law Group LLP who works with the Defined Contribution Alternatives Association, an organization that seeks to expand the use of alternatives in DC plans, said a DC plan lineup featuring mainly public equity options isn't necessarily wrong. But "given the defined benefit plans and institutional endowments using a more diversified mix, maybe diversification is good."