401(k)s need private equity and real estate, study says

investmentnews.com:

401(k) plans are missing out on $35 billion a year in returns they could see if they incorporated private equity and real estate, a recent report from Georgetown University’s Center for Retirement Initiatives found.

That result would be possible if defined-contribution plans such as 401(k)s allocated up to 10% of their assets to illiquid assets — half of that being private equity and half real estate, according to the study. In that scenario, the private equity would replace a mix of listed stocks, while the real assets would displace some U.S. large-cap funds and core bond funds. Those changes would lead to better financial outcomes 82% of the time, with reduced volatility and a median boost in annual returns of 15 basis points.

If that added diversification were applied to all target-date funds within DC plans, it would result in excess annual returns of $5 billion, the study concluded.

But unlike traditional pension plans, which have long used less-liquid assets to their benefit, DC plans such as 401(k)s almost totally lack private equity and real estate. That difference in part reflects the higher liquidity and valuation requirements for DC plans, although some institutional-size DC plans, particularly outside of the U.S., have used their scale to work to address those concerns.

Public DC plans in Australia and the U.K. have successfully done so, said Chris Flynn, head of product development and research at CEM Benchmarking, which contributed to the report.

“Nine of the biggest DC funds in the U.K. just made a commitment to hit 5% private equity by 2030. So it can be done,” Flynn said. “The biggest opportunity is for those really big target-date providers who have the scale to offer something that’s really