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401(k) consultants support alternative investments in custom strategies


The majority of investment consultants support the addition of diversifying assets in 401(k) retirement portfolios particularly as a way to mitigate risk in a volatile investment environment, according to PIMCO.

Of the 49 consulting firms PIMCO surveyed for the eighth Annual PIMCO Defined Contribution Consulting Support and Trends Survey, nearly all (98 per cent) said they support or strongly support the use of alternative investments in custom target-date and target-risk strategies.
Consultants define alternatives as asset classes that fall outside traditional stock and bond categories such as hedge funds, private equity, long/short equity funds, private real estate, absolute return and others. Custom target-date and target-risk strategies are asset allocation investments tailored to adhere to plan sponsor defined retirement time lines or risk appetites. 
Notably, the vast majority believe daily valuation (88 per cent) and daily liquidity (86 per cent) in alternatives are important, which may drive more immediate interest in "liquid alternatives" or alternative strategies that also maintain daily liquidity. Consultants noted volatility reduction (93 per cent), return enhancement (79 per cent) and inflation protection (76 per cent) as the most important benefits that these strategies may deliver.
To mitigate risk and help protect participant assets, the vast majority of consultants also underscore the importance of adding both diversifying fixed income strategies (94 per cent) and inflation-protection securities (84 per cent). Commodities, TIPS and REITS topped the list as the most important inflation-fighting assets. Most consultants believe it is important to actively manage these diversifying asset classes.
As for the outlook over the next three to five years, more than two-thirds of those surveyed said they are concerned that rising interest rates, low returns and high volatility could act as investment headwinds for DC participants. Over half also noted concern with the risk of a sudden market drop and inflation. 
"Institutionalisation of DC plans is continuing, with consultants moving more plans to custom strategies and adding diversifying assets — not only fixed income and real assets but also other alternatives to equity risk," said Stacy Schaus, executive vice president and PIMCO's defined contribution practice leader. "Including these diversifying strategies should help individual investors better navigate rough waters ahead and speed their journey to reaching retirement security."
Consultants also continued to anticipate large plans (i.e., over USD200m AUM) to decouple investment default options (e.g., target dates) from administrative service providers' products. They anticipate the largest plans (i.e., over USD500m in AUM) to select custom target-date strategies, while plans between USD200m and USD500m in AUM may select a hybrid, custom or single manager approach. Among other findings, the survey found that the target date glide path structure is the most important factor for plan sponsors to evaluate when selecting a target-date strategy. 

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