For an individual DC participant who saves for 40 years and then draws down for 20, the return improvement could translate into an additional $2,400 per year in spending power for a retiree already drawing down $48,000 per year in retirement income, according to the study.
The study also shows that adding a 10% allocation to private equity would boost median annual returns by 0.22%. A 10% allocation to real estate yielded the lowest increase of 0.11%.
The study analyzes reported defined contribution target-date fund allocations and returns in CEM's U.S. database and compares it with the reported allocations and return data of defined benefit plans, which typically include private equity, real estate and other illiquid asset classes.
The study analyzes DC and DB return data from 2011to 2020. It examines the actual range of reported annual real asset and private equity portfolio return series of DB pensions plans, net of costs, to calculate a range of adjusted outcomes assuming the adoption of investment alternatives under a set of DC target-date scenarios. It then compares the range of outcomes for the adjusted target-date scenarios against unadjusted DC target-date options to assess the impact of illiquid asset allocations on target-date performance.
The study argues that simply allocating to traditional stocks and bonds may not generate the same returns in the past because of rising interest rates.
"Many investment strategists foresee a different interest-rate environment going forward," the report said. "It will be increasingly important for plan sponsors to diversify and optimize the asset allocation of their target-date funds."
The 36-page study, called "Has the Lack of Asset Diversification in DC Retirement Plans been a Costly Missed Opportunity?", was funded with a grant from the American Investment Council, a lobbying group for the private equity industry. Georgetown University's Center for Retirement Initiatives said that its funders do not determine research findings or the contributions of its experts and consultants and that the American Investment Council allowed it "to operate in an environment of complete academic freedom."