Defined contribution plan sponsors historically have steered clear of incorporating alternative assets in their plans for several reasons, including litigation concerns and structural issues such as liquidity and valuation needs.
But in June, the Department of Labor issued an information letter explicitly permitting the use of certain private equity strategies in DC plans, so long as a prudent fiduciary process is undertaken.
With a legal foundation now established, the Defined Contribution Alternatives Association is releasing a series of white papers on the operational challenges DC plan sponsors must face to incorporate private assets. The first paper — "Daily Valuation of Alternative Assets in DC Plans" — was published Feb. 23 and provides a framework for plans sponsors and industry stakeholders interested in addressing the valuation issue.
In its paper, DCALTA outlines 11 positions that correspond to certain components of the valuation procedure. The positions include guidance on indirect valuations, which DCALTA said "can often work best when anchored to direct valuations, making direct valuations the quality proxy of the indirect valuation approach."
Indirect managers, like funds of funds and plan sponsors, receive limited and varied information about the assets, typically on a lagged basis, DCALTA explained. The key defining feature of an indirect valuation is that it is generally not privy to "contemporaneous, idiosyncratic changes in the underlying assets," it added.
DCALTA also said that "daily forward pricing can serve as a suitable pricing model for private assets in a daily dealing environment."
The white paper is an attempt to create a useful reference for both operations staff and ERISA domain specialists. "Recognizing that each investment structure may be unique, practitioners can adopt the framework to help inform and/or evaluate valuation procedures that best meet their unique conditions," DCALTA said.