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Peer Intelligence | Fall 2022

How prevalent are alternatives in U.S. D.C. plans?

By Chris Flynn

This summer, CEM joined the Defined Contribution Alternatives Association (DCALTA) as a member. DCALTA brings together stakeholders, including plan sponsors, asset managers, advisors, and service providers, to share information and collectively seek solutions to overcome impediments that may limit the use of non-traditional investments and strategies in defined contribution plans. DCALTA’s work includes education and research on potential benefits of including alternative investments within a defined contribution framework.

A major focus is the use of alternatives within target date options, where they can be managed as part of a broader portfolio, and where liquidity and other operational challenges can be mitigated.

As a DCALTA member, CEM has committed to publicly releasing certain metrics covering the use of alternative asset allocation within target date options by plan sponsors in our U.S. DC database. The 2020 data is now available on the DCALTA website (DCALTA- A Collective Voice on Alternative Investments in DC Plans) under “Resources/DC Alts Allocation”. We will release updates to this data annually, beginning with the release of 2021 data later this calendar year.

Looking at our data, the most obvious takeaway might simply be how much potential room for change there could be. Target date options in our database average under 1.5% in ‘alternatives’ (we’ll follow DCALTA here, and include private equity, real estate, infrastructure, hedge funds or risk parity investments as ‘alternatives’). Custom, as opposed to off-the-shelf, target date options had closer to 3% alternatives. This stands well below the asset allocation decisions of U.S. defined benefit (DB) plans. Corporate DB funds in the CEM U.S. database held just under 15% alternatives, while public sector peers sat at 28% alternatives. An example of the highest range we saw? The average for the ‘Maple 8’ – the largest 8 Canadian funds, sat at just over 50% alternatives.

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One of CEM’s key insights – for 30 years now! – is that costs should be viewed not in isolation, but as part of a value proposition, and the most successful plans in our database have been those prudently incurred cost where there was a potential to improve performance. Different asset allocations – especially those that incorporate private assets – have very different cost structures. Not surprisingly, the inclusion of alternatives significantly moves target date option costs. The average cost of target date options with any alternatives was 31 basis points, while the average for those without was 13 basis points.

If you have an interest in following the adoption of alternative assets in the U.S. target date world, I’d invite you to continue to follow our annual releases alongside DCALTA. If you’d like to learn more about CEM’s approach to benchmarking for target date options that benchmarks cost while controlling for scale and asset allocation, and provides comparisons not only on return by target date year but also relative glide path risk, reach out to Janjaap Weeda, Product Manager, DC:

Peer Intelligence | Fall 2022