Coping with Crisis: Fiduciary Priorities in the DC World
In times of crises, being a fiduciary responsible for providing Defined Contribution (DC) plans for employees is especially critical.
Vanguard recently created some buzz by making private equity options available on its platform. While this offering is currently for Vanguard’s non-profit institutional clients, many articles suggested this could lead to making alternative investments more available to retail investors – the so-called democratization of alternative investments.
I believe individual investors should have more access to the same types of investment strategies currently available to institutional investors and high-net-worth individuals, such as private equity, hedge funds and direct real estate. Indeed, in a world of aging populations, changing demographics, and issues of inequality, it will continue to be imperative that the average American worker has access to quality investments to help them build and maintain wealth, as well as institutional-quality retirement income solutions to manage their risks in retirement.
To that end, while there are many people talking about making alternative investment strategies available in retail-type accounts, I believe the low-hanging fruit is to look to the Defined Contribution (DC) market as the obvious place to focus, for the following five reasons:
Fiduciary Oversight: There is no higher fiduciary standard than ERISA, and participants in a DC plan have a fiduciary that needs to ensure their best interests are served.
Institutional Pricing: Employers can use their scale to bring institutional investments, such as alternatives, to the average American worker at a price they could not have achieved on their own.
Professional Management: In a DC plan, alternatives can be incorporated in professionally managed solutions like a Target Date Fund, overseen by knowledgeable investment professionals.
Long-Term Time Horizon: Many alternative investments are illiquid and require a long-term holding period to pay off. Saving for retirement can be a 60-year or more proposition, making alts a perfect vehicle for less liquid investments with a longer-term payoff.
Broadest Access: For most middle-income Americans, the bulk of their wealth is in housing and their retirement plans. If we want to provide access to alternative investments to a majority of Americans, DC plans are where this can best happen.
There is a real fairness case to democratize investment opportunities and allow more American workers access to the types of strategies that only institutions and wealthy Americans currently utilize. While many plan sponsors have fiduciary concerns in adding these to DC plans, there are also fiduciary concerns of not making these investments available given the compelling case to do so.
PGIM does not establish or operate pension plans.