Participants Show Interest in Alternative Investments, but Knowledge Gaps Remain

More than one-third of investors participating in 401(k), 403(b) and 457 workplace retirement plans expressed interest in investing in private market assets, according to the Schroders 2024 U.S. Retirement Survey.

However, half of the plan participants surveyed did not understand the benefits of adding alternatives to their retirement portfolio, which could limit adoption in defined contribution plans.

Schroders, via research consultancy 8 Acre Perspective, surveyed 2,000 U.S. investors ages 28 through 79, including 780 Americans who currently participate in a workplace plan. The survey was conducted from March 15 through April 5.

Prior research conducted by Georgetown University’s Center for Retirement Initiatives found that a lack of diversification in DC plans has been a significant missed opportunity for plan participants. Incorporating illiquid assets, such as private equity, real estate and infrastructure, in target-date funds, for example, could result in a 0.15% increase in return per year over a decade, the research found.

Schroders found that 80% of participants said access to private investments would lead them to increase the amount they are contributing to the plan.

Among those who expressed interest in private market investments, 52% said they would allocate less than 10% of workplace retirement assets to private assets, and 34% would allocate between 10% and 15% of retirement assets to private assets. Only 6% said they were unsure how much they would allocate to private assets.

Meanwhile, many participants do not understand the benefits of alternative assets, and 64% of those surveyed said the investments sound risky.

“This highlights the need for enhanced education and communication on the benefits these products offer and the role they play in diversified portfolios,” says Deb Boyden, head of U.S. defined contribution at Schroders, via email. “For certain asset classes like private equity and private debt, liquidity is also a challenge. However, strides are being made by the industry to overcome these challenges.”

Because alternatives such as private equity and private debt are illiquid assets, it is difficult for investors in alternative assets to get daily pricing and regularly check their balances. The assets also tend to be harder to sell quickly because there is low trading activity or interest in the securities or because the secondary markets for private asset classes are less developed than they are for public market assets. Illiquid assets also tend to have greater price volatility.

The knowledge gap among participants also is not limited to alternatives, as 52% of participants reported not knowing how to manage risk in their retirement portfolio, and 59% said they wish they received more guidance from their employer on how to invest their workplace retirement plan assets.

Boyden added that employers have an opportunity to provide clearer guidance and tools that explain how alternative investments can serve as portfolio diversifiers and enhance potential long-term returns. She said offering workshops, interactive tools and personalized financial advice can empower participants to feel more confident in navigating alternative investment choices.

“Collaboration with plan providers to create targeted, easy-to-understand content around alternatives is crucial,” Boyden says. “In addition, product development can make it easier for plan participants to access alternatives through multi-asset solutions that include private assets. These solutions are professionally managed to provide diversification and could add the benefits of private assets while easing adoption.”

Boyden finds growing interest from plan sponsors in adding alternatives as an investment option in DC plans, particularly as they look for ways to provide participants with greater diversification options. While public equities have been driving returns in recent years, Boyden said plan sponsors with a long-term view are recognizing that private market assets will provide diversification in the long run.

“Many sponsors are familiar with the success of alternatives in defined benefit plans and are considering how to bring similar strategies into the defined contribution space,” Boyden says. “While adoption has been gradual due to the perceived complexities and education barriers, we believe the tide is turning. As the regulatory environment evolves and the benefits of these investments become clearer, more sponsors are exploring how they can responsibly include alternatives in their plan menus.”