Alts Are Coming To a Retirement Plan Near You. What’s Next?

Even some celebrities don’t get this much fan mail.

In March, the Department of Labor proposed regulations that would expand access to alternative investments — private assets, real estate and the like — for millions of retirement account owners across the country. The agency solicited comments from the public, raking in more than 40,000 letters both supporting and opposing the measure. But when will alts actually make their way into 401(k)s? It could be as soon as this fall, experts said, once the DOL can review all those comments.

“With today’s advent of AI, it’ll be even easier for [the Labor Department] to look through the great big pile of 40,000 letters and figure out, ‘OK, what are the common trends or common themes that are being released here?’” said Mike Dullaghan, director of retirement sales execution for Franklin Templeton. “What they’ve done many, many times — and I would maybe expect it here — would be that they’ll release, after they digest those letters, an FAQ. And that’s really been a helpful part of the understanding process.”

Million DOLlar Baby

Defined contribution plans have been utilizing private markets and private real estate for decades, but the DOL’s proposed rule is bringing new attention to the area. It’s also going to bring private assets to smaller, less sophisticated plans. “We’ve typically seen private assets in the above-billion-dollar plans, and that’s a small percentage of the total number of defined contribution plans in the industry,” Dullaghan said. Private assets shouldn’t serve as standalone investments on any type of 401(k) menu, he added, but instead as part of a target date fund or professionally managed portfolio. “That’s the place where you truly have the potential to … bring it down into the land of million-dollar plans, instead of billion-dollar plans.”

What’s also important to consider is that “industry participants” (such as record keepers, advisors, consultants and asset managers) tend to agree that adding alts to defined contribution plans is an essential element of a broader asset allocation program, said Tripp Braillard, head of defined contribution distribution at Clarion Partners. The opposition mainly stems from some advisors, advocacy groups, industry watchdogs and Democratic lawmakers.

Hold the Risk, Please. Those who oppose alts in 401(k)s often cite their propensity for increased risk. But that doesn’t have to be the case, Braillard said, particularly for assets like real estate that have been used by large pools of institutional capital for decades.

“Most large defined-benefit plans in the US or pools of retirement capital, sovereign wealth funds, endowments and foundations, etc., all use private markets and private real estate today,” he added. “Most investors who aren’t used to private markets, they just automatically think, ‘Man, that sounds way more risky than what I’m doing.’ I think the more folks get into it and look under the hood, the more they learn that private markets are a really good addition to a well-diversified asset allocation program.”