Alternative Allocations: Enhancing retirement options with alternatives

In this episode of the Alternative Allocations podcast series, I had the opportunity to speak to Jonathan Epstein about the work that Defined Contribution Alternative Association (DCALTA) has been doing to educate key stakeholders about the merits of including alternatives in defined contribution plans. Defined benefit (DB) plans have used alternative investments in a very meaningful way for decades, but alternatives have been limited in defined contribution (DC) plans.

I began by asking Jonathan to describe DCALTA and its mission. Jonathan indicated that he founded DCALTA in 2015 to focus on the advantages of including alternative investments in DC plans. He recognized the need to educate all stakeholders about the merits, including plan sponsors, consultants, alternative investment providers, recordkeepers, and regulators, among others. DCALTA performs independent research and writes white papers to help the extended community understand the challenges and opportunities.

I wanted to understand why there has been such a big difference in allocations to alternatives in DB and DC plans, and what steps can be taken to make these valuable investments more broadly available. I asked Jonathan about the DOL letter¹ suggesting the inclusion of private equity in retirement plans, and the impact that it had on the industry.  

Jonathan pointed out that large DB plans often have CIOs overseeing their asset allocation, as well as dedicated resources identifying and conducting due diligence on funds. Consequently, these funds often have healthy allocations to alternatives and often much better results. However, he noted that, “there are 718,000 401(k) plans that really need to have diversification and access to private equity, private credit, infrastructure, commodities, and real assets.”

I asked Jonathan about the concerns of the regulators, and he noted a few key ones—liquidity, pricing, product structure, and education for plan participants—all wrapped around fiduciary responsibility. He indicated that progress has been made over the last several years, and the newer product structures help in addressing some of these issues. Jonathan mentioned that interval funds, collective investment trusts, and managed accounts are product structures that are beginning to gain traction in DC plans.

With the progress made over the last couple of years, and the increased collaboration across key stakeholders, I wondered what the allocations to DC plans may be in the next five years. Jonathan stated that, “five years from now, I would think that an allocation of 10%-15% spread across different strategies will be normal.” Let us hope that will become the norm as it would benefit retirees.

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