US Fund Management Firms Back 401(k) Alternative Assets Proposal, but Others Worry About Risks

There were multiple different financial executives, regulators, and retirement specialists crowded into the conference room overlooking the greater Washington D.C. area. The topic of discussion was a new proposed regulation that could change how millions of people save for retirement through their 401(k) plans.

The original idea is relatively simple: to provide more retirement investment options to employees by improving access to alternative assets for their 401(k) plans. Historically, alternative assets such as private equity, private debt, infrastructure funds, and other forms of private and non-listed investments (i.e. non-publicly traded investments) have been primarily available to large financial institutions and ultra wealthy individual investors. Proponents of the regulation argue that every single employee should have the opportunity to invest in alternative investments through their 401(k) plan.

One of the main proponents of the proposed rule change was Michael Grant, a senior executive at a large asset management firm. He spoke to the audience and pointed out the different ways that the investment industry has evolved over the last several decades.

"Investors need more than just stocks and bonds today," he remarked. "Alternative assets have the ability to help diversify investment portfolios, which can help improve long-term returns."

Grant's view was shared by several large investment management firms. They believe that retirement savers should have access to investment options that are uncorrelated to the public equity markets in order to diversify their portfolios. Given the increased uncertainty facing traditional investment portfolios, Grant believes that alternative assets present an opportunity for growth.

Despite being in attendance at the conference, there were many attendees who disagreed with Grant and the other proponents of expanding access to alternative investments through retirement accounts.

On the other side of the table, was Sarah Mitchell an expert on retirement policy who has studied investor behaviour for years at length. And while she readily admitted that there are several ways to safely invest your money in alternatives (and those of others) there are many risks with alternative investments that the average saver may not clearly understand - if at all.

“The majority of these types of investments typically have lower levels of transparency, less liquidity, and greater difficulty determining an accurate value for the investment (very confusing!)” she said, “If the market becomes stressed those who invested in alternatives could find they have more risk than they ever thought they had!”

Her comments struck a chord with consumer representatives who were concerned about how complicated retirement plans could be beyond what they were intended to be for people wanting to accumulate financial assets. The structure for investing in alternatives can be quite complex (which will typically result in higher fees), have fewer regulatory requirements and therefore, less disclosure was required when compared with publicly traded equities.

There was a heated debate over the coming months; some industry groups provided supportive proof that investing in alternatives will provide a rewarding experience via diversification while others put out studies discussing how using alternative investments could be a disservice to investors. In addition, regulators were required to walk the tightrope between allowing new products to be created versus protecting the investor's money from being invested in poorly performing or fraudulent alternatives.

Every month when individuals contribute to their retirement accounts, it is personal to them and has nothing to do with it being technical. Most individuals simply would like to believe their money will be kept safe and will earn them a return on their investment while continuing to build their nest egg.

Those who set public policy have indicated that if the alternative asset class were to grow, there would be very high levels of protection on investments, such as additional reporting requirements, and increased levels of oversight. In other words, policymakers want to give customers more investment options while reducing their risk as much as possible.

During the meeting, both parties acknowledged that they were working toward a common end. The long-term goal of both traditional and non-traditional investment vehicles is still to provide financial security for millions of citizens in America as they prepare to retire. The issue is to determine an appropriate level of opportunity and appropriate level of risk.