Should DC Plans Include Alternative Investments?

A rising number of the world's largest pension funds are allocating billions of dollars into alternative investments, such as gold, silver and other valuable commodities. The consistent rise in demand for these alternatives is due to the risks and dangers commonly associated with traditional ways of investing, such as stocks and bonds. because all alternatives are scarce and only increase in value over periods of time, alternative assets offer minimal risk, especially in the long-run . As a result, investments in alternatives have been growing fast, and many believe that alternative investments should be included in DC plans, a type of employee retirement plan.

As of 2010, employee benefit plans had about $3 trillion invested in alternative investment offerings. From this, returns have been steady, and providing customers with an average of 5 to 10 per cent, which represents a reasonably safe investment that can be expected to grow over time. According to Morningstar, during 2010, 34 percent of institutions had more than one-quarter of their portfolios in alternatives. Research released in 2012 showed 78 per cent of all advisers were using alternatives. Most alternatives are appealing to investors because they can include private equity and other illiquid types of investments. But they are not always among the more exotic investments, either. Investing, for instance, in gold, real estate and timber is considered by many to be an alternative investment.

It would seem that in times of economic uncertainty and high volatility, alternatives are the solution for many worried investors. Because of their ability to hedge against inflation and protect investment principle, an increasing number of investment-seekers would like to see added exposure to alternative investments in their DC plans. Analysts (and myself included) agree that introducing hard assets would provide long-term benefits for investors, offer stability in tumultuous times and encourage profitability for the investing plans.