Do 401(k) Plans Need the High Fees, Complexity of Liquid Alts?

At a time when defined contribution plan sponsors can’t switch fast enough into low-fee index funds, the Washington State Investment Board is going in the other direction. They are pushing to incorporate private equity and other alternatives into its DC investment options.

For Washington State the initiative is about providing better performance to DC participants as well as responding to changes in the markets, including the decline in the number of publicly listed companies that are available to investors.

“It’s timely. There’s been a significant shift from public to private [companies]. DC participants should be able to invest fully in privates,” said Theresa Whitmarsh, executive director of Washington’s investment board, during an interview after a press talk on use of alternative investments in target date funds. “We believe in the investment case for institutions. Why not for individuals?” said Whitmarsh at the Pantheon-sponsored event.

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华盛顿州拥有1000亿美元的资产，成立于1981年，以管理17个不同的城市和州立义福利退休计划。在20世纪90年代中期，通过技术股票的速度弥补，教师推动了董事会开始提供定义的贡献计划。教师认为它们可能会产生比投资委员会更高的性能。WSIB推出了混合定义益处和定义贡献选择的混合退休计划。直流资产现在占总计划的10％。

Whitmarsh表示，WSIB的30年的机构经验已经赋予了强大的证据表现出私人市场的绩效优势。自成立以来，它是私募股权最早的机构之一。

截至2018年6月30日，基金的私营资产在20多年内每年将公共股票表现出4.78％。公共股票返回6.07％，而私人一段时间则会产生10.85％。

Washington State now wants to add private assets to its DC target-date funds that it launched in 2011.

WSIB launched its target-date funds in 2011 as an alternative to the Total Allocation Portfolio, a commingled account that mirrored the portfolio construction of Washington State’s defined benefit plan. The mission was to create a mini DB plan — alternatives included. Total Allocation was offered as a choice to DC participants and later became the largest fund. The board felt it would be prudent to offer multiple target date funds in addition to Total Allocation, which was generally too conservative for younger workers and too aggressive for older employees.

但随后华盛顿委员会面临着包括在TDFS中私营资产的挑战。Whitmarsh表示，从战略角度纳入TDF的替代方案相当简单。董事会仍然摔跤的挑战与记录保存系统，以及公众对私营投资的复杂性的看法。

记录管理员需要工作e expensive overhauls of their systems to accommodate alternatives. That’s a cost that participants in the investment board’s DC plan would have to bear, said Whitmarsh. Record keepers, which have their own proprietary target-date funds, have little incentive to re-do their systems for third-party products.

David O’Meara, senior investment consultant at Willis Towers Watson, says challenges such as fees can be tackled by focusing on net-of-fee performance as well as setting a fee budget and making sure the overall costs of the TDF are kept in check. As for litigation risks, O’Meara said, “any large DC sponsor will be sued at some time.” The important thing is to use a defined process that evaluates options based on potential results for participants.

O'Meara said the performance advantage — and downside protection — of adding alternatives is clear. According to research Willis Towers Watson conducted with Georgetown University’s Center for Retirement Initiatives, expected annual retirement income increases from $53,000 to $62,200 when a diversified set of alternatives is added to a TDF. At age 65, investment returns could increase from 5.1 percent to 6.1 percent with alternatives in the mix.

如果DC市场总体上升，WSIB将使WSIB添加替代方案，使WSIB能够更轻松地为TDFS加入船上，为记录守门员批判性质量和帮助教育参与者有关选项。“我需要市场验收，所以我们可以提供这一点，”Whitmarsh说。

It seems an unlikely time to add alternatives to TDFs as many sponsors have gotten conservative when it comes to the options they offer and the fees the funds charge. That’s because lawyers have filed numerous lawsuits against large companies, alleging breaches of fiduciary duty for a broad range of actions, including offering active funds that haven’t beaten their benchmarks. Litigation prompted a wholesale shift into low-fee, passive funds that companies think few can criticize.

The WSIB may be an outlier in terms of being able to offer alternatives. Whitmarsh said she’s not worried about litigation because the board is a public plan.

Critics of alternatives often point to daily valuation and liquidity as primary stumbling blocks. There is no rule that requires plans to provide daily liquidity, but participants have come to expect it. In most cases, investors would be better served if they could not make daily changes to their 401(k) retirement plans. “I wish we could put the daily valuation genie back in the bottle,” said Christopher Nikolich, head of glide path strategies at AllianceBernstein.