Defined contribution plans have been ascendant for several decades, as the older defined benefit plans, a key source of commitments for buyout funds, seem trapped in a secular decline. But working with retirement plan fiduciaries addresses the accredited investor problem, she said.
“Target-date funds are managed by sophisticated managers,” Occhino said. “It’s not the underlying 401-K investor who is picking it. It’s the sophisticated investment manager or plan sponsor.”
The Pension Protection Act of 2006, which opened the door to alternatives in retirement portfolios, provides a safe harbor that plan fiduciaries can use to establish a default investment option that is fully diversified. “If you default them into that, you are going to be protected from fiduciary liability for that investment decision for the participants.”
Today’s target-date funds are a far cry from the original target-maturity funds that debuted decades ago as a vehicle for 401-K retirement accounts. In those days, such funds typically comprised a portfolio of government bonds, stripped of their coupons and sold at a deep discount, which would pay off at face value at maturity, regardless of market volatility in the meantime.
By contrast, modern target-date funds are typically actively managed, with a mix of stocks, bonds and other investments that are progressively adjusted to move to more conservative strategies as the account holder ages. Still, only a handful of target-date funds provide access to alternatives such as buyout funds or direct real estate investments.
One that does provide allocations to alternatives is Callan & Associates, which is the adviser to Wilmington Trust Co on its “Glidepath” family of target-date funds. One major difficulty is the need to provide daily valuations for the fund and daily liquidity to account holders, who are making periodic contributions through their payroll deductions while they work, and making regular withdrawals once they retire.
“It is at this intersection where people are trying to solve for the structural and legal considerations,” Occhino said. It is for that reason that direct real estate investments have found faster adoption than buyout vehicles for such funds, she added. In either case, daily valuations must be modeled because the investments are illiquid, but direct real estate has the advantage of generating current income that the models can employ. Even so, she said she is working now on a target maturity fund that is to include a private equity component.
Occhino said alternatives are likely to grow as a component of defined contribution plans because their returns can improve the performance of the funds that hold them. It also helps to put the retail investors on automatic pilot, she added. “Plan participants are not especially good at investing their own assets.”