DCALTA Releases Principles for DC Stakeholders in Use of Private Market Investments

Amid debate over the benefits of making private market investments within defined contribution plans, the Defined Contribution Alternatives Association issued a guide to help retirement plan fiduciaries, finance professionals and stakeholders navigate the complexities of those investments.

In a new paper, “Principles for DC Stakeholders on the Consideration and Use of Private Market Investments,” DCALTA—a proponent of alternative investments—suggested that public assets may no longer suffice to meet retirement liabilities and that the inclusion of private market investments could improve the risk-adjusted, net-of-fee returns.

“Providing the necessary tools and access gives Investors the best chance to meet their retirement goals is just one piece of the puzzle,” said Matt Garzone, a DCALTA board member and a senior vice president for private placements at Natixis Investment Managers, in a statement. “Understanding how to prudently implement and incorporate those pieces is just as important for the success of plan sponsors and participants.”

5 Core Areas

The principles are based on five core areas: fiduciary process, value for money, asset class distinctions, operations and participant communications.

For fiduciary process, DCALTA recommended private market solutions be treated consistently with other asset classes commonly used in retirement plans. The report stated that the Department of Labor has been clear that fiduciary standards apply to all assets, regardless of class. Due diligence and disclosure processes provide a suitable framework for disclosing investments, according to the paper.

When evaluating alternatives—or any other investment—investment cost is not the sole consideration under the Employee Retirement Income Security Act, the paper stated. Morningstar added that those making decisions about the value of money should consider whether the investment is expected to enhance net returns, while also accounting for the underlying risk of the investment and the benefits of its diversification.

DCALTA stated that asset class diversification is a key principle of ERISA. While a more diversified portfolio is exposed to a wide range of risks, it is also exposed to less concentrated risks. The vast array of alternative investments can be evaluated by their characteristics and the role they play in a portfolio.

A plan investment option can be a single manager, asset class or strategy, or it may be a multi-asset approach, such as a target-date fund, according to the report. Each PIO is managed separately and may have multiple components, such as asset classes, as well as multiple managers/funds within each component. According to DCALTA, the implementation of alternative investments into DC plans “may prudently take different operational approaches in PIOs that dictate alternatives exposure.”

The paper also stated that participant communication materials should disclose general information about the asset classes and the characteristics of private market investment exposure within PIOs. Disclosure will vary based on the information’s materiality.

Where Plan Sponsors Go From Here

Fiduciaries—responsible for maximizing value for participants while also managing operational and liquidity risks—could benefit from understanding the unique characteristics of private investments, the report claimed. Plan fiduciaries who construct custom PIOs, as well as those considering pre-packaged PIOs constructed by an investment manager, may choose to adopt one or more principles when evaluating their options.

DCALTA’s principles come as President Donald Trump is expected to sign an executive order directing federal agencies to provide clearer guidance about private investments in 401(k) plans. Industry experts remain split on whether the investments are appropriate for retirement plans.