Peer Intelligence | Summer 2023

By Chris Flynn

In partnership with CEM, Georgetown University’s Center for Retirement Initiatives (CRI) released a new study which found that adding private equity, real estate, and infrastructure to the target date funds (TDFs) of defined contribution (DC) retirement plans would have resulted in a 0.15% (15 basis points) increase in return per year over a decade. When applied to all U.S. target date options, such an increase would currently represent $5 billion in additional annual net returns.

Download Link: GeorgetownCRI-CEM-Benchmarking_Research_Paper

Podcast Link: Episode 39: Has the Lack of Asset Diversification in DC Retirement Plans Been a Missed Opportunity?

Webinar (August 22, 2023): Registration Page

The study looks at the time period between 2011-2020, and begins with every target date option found in CEM’s database of U.S. defined contribution plans for the full time period. The research then modelled a range of outcomes that might have been achieved over the decade had they included either up to 10% private equity, 10% real assets (a blend of real estate and infrastructure) or 5% of each. Private equity replaced a pro rata mixture of public equity, while real assets replaced a stock-bond blend expected to contribute equally to the option’s total risk.

The study is timely as many DC plans around the world consider what sort of diversification might deliver the best outcome for participants over the next few decades. In early July 2023, nine of the U.K.’s largest plans pledged via the Mansion House Compact to allocate 5% of the assets in their default funds to unlisted equities by 2030.

A key input for this study is a realistic and representative range of what net returns might have been obtained by private asset portfolios.

The actual range of 10-year net returns in these private asset classes obtained by defined benefit (DB) plans in CEM’s U.S. database was used to represent what might have been obtained in them by DC plans. This range of returns captures any persistence in higher or lower performance and is net of all costs associated with the asset class, including not only manager fees and carried interest, but the internal costs of overseeing external programs or running direct or co-invest programs.

Adding both private equity and real assets had the highest proportion of outcomes that were an improvement on the performance of the original target date options: 82% of outcomes were superior, with a median improvement of 0.15% per year.

Georgetown CRI and CEM’s research focuses on the potential benefit of unlisted assets in TDFs. Their inclusion does create challenges around valuation and liquidity – challenges that can be addressed provided there exists a reason for doing so.[1] Our hope with this research was to provide evidence based on the experience of DB plans as to how such an allocation might have shaped outcomes.

-----------

[1] See DCALTA research on valuation (Feb 2021) and liquidity for instance: Research | DCALTA