- January 1, 2022: Vol. 9, Number 1

A brave new (wacky) world: Pay close attention to what’s happening at the margins

by Geoffrey Dohrmann

For more than 20 years now, we’ve been warning the investment management and consulting communities that the defined benefit (DB) pension cow they’ve been milking has been getting skinnier and skinnier.

The widespread global adoption of defined contribution (DC) plans and the attendant freezing and/or termination of DB plans has been a gradual, ongoing process — like a frog who finds himself slowly boiling in water, it may not feel very threatening until it’s too late. To cite some statistics, according to the U.S. Department of Labor, in 1975 103,346 DB pension plans were being offered to employees of public and private U.S. organizations, along with 207,748 DC plans. However, DB plans controlled nearly $186 billion in total assets, while DC plans controlled some $75 billion, less than 29 percent of pension fund assets.

Over the next 45 years, however, the number of DB plans shrank considerably, and contribution growth in DC far outstripped that of DB. By 2018, only 47,000 DB plans remained, while DC plans numbered 675,000. In addition, DB plans controlled slightly less than $3 trillion in assets, while DC plans now controlled more than $6 trillion. And annual contributions to DC plans had grown to almost 10 times greater than those to DB plans.

Clearly, this huge shift has had, and will continue to have, even more dramatic impacts on how capital is formed and flows to the real assets sector from these investors. So, those managers who aren’t yet thinking about how to serve both the DC pension fund market and the private wealth advisory market may soon find themselves, as I once did at one of my first PREA (Pension Real Estate Association) meetings, standing alone in the cocktail party room, as everyone else had left for their offsite dinners and social events.

A couple of things you should know about this market. First, the people who run the investment programs for these kinds of funds typically are not the same people who run the DB side of the house. I recently asked a public pension fund staffer friend of ours whom I should contact on the DC side of their organization. She replied that she didn’t even know who that might be. Furthermore, the decision-making process in DC focuses on different issues. Initially, the focus was primarily on structuring investment options. Today, the focus is shifting towards affecting investment outcomes on behalf of fund participants. But issues we’ve long been accustomed to addressing when attempting to serve the DB side of the house, such as asset allocation and modern portfolio management theory–driven approaches, really aren’t part of the agenda on the DC side of the house.

Liquidity, however, is critical, as are fees and related administrative costs, as well as the need for daily pricing mechanisms.

The types of programs available to participants are also different. Most smaller plans still provide only a limited menu of equities and fixed-income portfolio options. But with the growing focus on developing better investment outcomes for participants, many of the larger funds are now offering custom target-date funds or outcome-oriented “white label” plan options. In both cases, the asset-allocation decisions are already baked in for the benefit of participants. Consequently, the investment plans offered to these new types of programs need to be tailored to meet their specific needs for liquidity, daily pricing, reasonable fee structures, reporting and communication.

In 2007, Casey Quirk, in a joint venture with Merrill Lynch Financial Institutions Group, published a landmark white paper, The Brave New World. One of the observations noted in the report was, in a lower interest-rate environment, the traditional 60/40 equities/fixed-income portfolio mix was going to be insufficient to meet institutional and individual investors’ financial objectives. The report also pointed out that individual investors were not only underexposed to the alternative investments they’d need to achieve their objectives, but also incredibly ill-equipped to make informed investment decisions about adding these kinds of alternatives. Consequently, they predicted the emergence of a new breed of professionally managed multi-asset investment products with the asset-allocation decision already baked in. And that’s precisely what has been happening during the past 14 years.

If you and your organization are clinging to a business-as-usual approach to real asset investment management, that probably will continue to work for a few more years. But if you cling to those notions for too long, you could end up alone and forlorn at the end of the cocktail party.

To help those of you who are interested in pursuing these plans, our data services team has been reaching out to large DC schemes to collect contact information for these organizations. Already, our IREI.Q database is populated with records for several thousand DC plans. So, resources are available to help accelerate your efforts in this area. In October 2021, our IREI : LIVE webinar series tackled the topic, and replays of the three-panel presentation are available under the Videos & Podcasts tab on our website,

Something else you should be watching carefully on the margins: the emergence of crowdfunding platforms and the application of blockchain technology to various aspects of the real assets investment business, including the way in which capital is formed, moving forward.

Wow. Just when you thought you knew just about all there was to know about this business, you suddenly wake up and realize it’s a Brave New World.

Be very, very careful. While it might be a Brave New World, it also very much continues to be a Wacky World out there, too.


Geoffrey Dohrmann is executive chairman and publisher of Institutional Real Estate, Inc., publisher of Real Assets Adviser.

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