In the face of persistent uncertainty — in the economy, the markets and the geopolitical stage — Americans saving for retirement must have access to the benefits and investment opportunities offered by alternative investments that can improve financial readiness and create a comfortable retirement.
Incentivizing and promoting retirement savings for everyday Americans has been the focus of many for decades. However, too little attention has been paid to modernizing investment options. As inflation has reared its ugly head again, retirement savers must generate the investment growth needed to stay ahead and provide sufficient income for the long term.
More than 100 million U.S. citizens participate in employer-sponsored defined contribution plans. While most Americans’ retirement savings are held in these DC plans, antiquated regulations do not facilitate access to portfolio diversifying investments and other alternative products that can serve as important long-term diversification and inflation-fighting tools. As a result, DC plan participants have been excluded from such investment products.
In this season of high inflation and market volatility, institutional investors are reaping tremendous benefits from diversification during one of the worse investing periods in the past 40 years. In fact, New York’s pension fund just announced a 9.5 percent return for their fiscal year. A remarkable performance it attributed to diversification with alternatives. As demonstrated, portfolio diversifying investments, including those provided by business development companies, can increase the capital directed toward U.S. economic growth.
BENEFITS OF INCLUDING ALTS
Recently released data from the Center for Retirement Initiatives at Georgetown University shows that adding a modest allocation to alternative assets in a multi-asset fund, such as a target date fund, can materially enhance the retirement security of a DC-plan saver, increasing annual income by 17 percent. Participants would not only benefit from better investment performance, but they would also face lower volatility. Perhaps most importantly, these savers could reduce the risk of outliving their assets by almost half.
DC plan investments in alternatives also promotes income equality. For too long, alternatives have been accessible to only high-net-worth investors. Average retirement savers have largely been left on the sidelines, unable to enjoy the full opportunities and rewards of U.S. capital markets. A prudently structured and well-diversified allocation to alternatives in DC plans can reduce this gap and enhance the retirement security of savers.
Facilitating DC plan investment in alternatives can increase the capital directed toward U.S. economic growth while offering Main Street retirement savers an appropriate risk-adjusted return that enhances retirement security. As commercial real estate markets continue to rebound following the COVID-19 pandemic, investing in alternative assets, such as U.S. real estate, can bolster infrastructure investment and provide much-needed economic development in communities across the country, including multifamily and workforce housing. In addition, small business owners lack access to the deep capital markets that are available to large corporations, despite serving as the engine that keeps the American economy running. Alternative investment strategies such as debt lending can provide a critical source of capital to small businesses, allowing them to expand and grow with more flexible terms than those offered by bank loans.
Finally, alternative investments can be an important hedge against inflation while also delivering other investment benefits critical to building diversified portfolios.
THE NEED FOR REGULATORY REFORM
While progress on regulatory reform is being made at the Securities and Exchange Commission, the Department of Labor and in Congress, more must be done to ensure that retirement account holders have access to alternative products.
To provide equal access to the full range of investment opportunities, the SEC must also provide retirement savers with meaningful access to private funds by updating their “look through” requirements. Currently, defined benefit plans regularly invest in private funds, but defined contribution plan participants generally cannot.
The SEC should eliminate the asset limitation restricting closed-end funds from investing more than 15 percent of their net assets in private equity or certain other types of private funds. This will allow more retail investors to gain exposure through a registered, regulated vehicle in which they would benefit from professional management and all associated investor protections inherent in a registered 1940 Act.
The SEC and Department of Labor should work together to modernize electronic disclosure guidelines to reduce plan and adviser compliance costs without negatively affecting retail investors.
Finally, Congress should modernize the Employee Retirement Income Security Act (ERISA) to make clear that plan fiduciaries can consider proven and innovative investment options without putting a thumb on the scale for or against any asset classes.
These recommendations can protect our country’s retirement savers while giving them vital tools to improve financial readiness and create a comfortable retirement. Alternative investments increasingly enjoy international recognition as a vital part of a long-term investment strategy. Now, more than ever, we must continue to fight for their inclusion in order to help Main Street retirement investors diversify their portfolios, enjoy the full benefits of America’s capital markets and achieve their retirement goals.
Anya Coverman leads legislative, regulatory and legal initiatives for the Institute for Portfolio Alternatives (IPA).