The SEC holds the keys to diversifying Americans' retirement portfolios

Virtually every presidential candidate talks about how the economy isn't working for the middle class anymore, and how retirement seems like an unattainable dream for most folks. They have a point. But making the economy work for the middle class doesn't require a wholesale shift. Simple things, like giving America’s Main Street retirement savers access to the same investment opportunities as the wealthy and institutional investors, would go a long way

Now, for the first time since the emergence of defined contribution retirement programs, the Securities and Exchange Commission (SEC) is opening the door to a conversation about providing access to alternative investments in employer-sponsored retirement plans like 401(k)s. Improving American retirement savers’ access to this valuable asset class deserves our attention today.

As the SEC stated in a recent Concept Release dealing with this question, there is significantly more money being raised in the private markets today compared to the public markets. Companies are taking longer to go public, and many are choosing not to go public. Meanwhile, unlike 40 years ago, most individuals now manage their own investments, including their retirement savings. Many Main Street investors have been excluded from the potential growth and diversification found in the private markets in favor of pension, sovereign-wealth, hedge funds, banks and insurance companies. The SEC’s move to consider whether this framework is working for “Mr. and Mrs. 401(k)” is both timely and critical for retail investors that do not have access to the full benefits and range of investment opportunities offered by our capital markets.


Since 1941, traditional pension plan participants have been treated differently than their defined contribution plan counterparts, despite both defined benefit and defined contribution plans serving the exact same investment purpose – to provide retirement income to American workers. The decades since then have seen a continued divergence in the investment opportunities made available to these two groups of American retirement savers, with pensioners being provided greater access to the private markets while those with 401(k)s, for example, have managed their assets with relatively restricted investment options.

The SEC’s action is a vital early step in fixing this inequity and providing similar opportunity to all of our country’s retirement savers and improving our collective long-term financial security. As I laid out in my comment letter to the SEC on behalf of the Institute for Portfolio Alternatives, alternative investments can be a vital part of a long-term investment strategy but today’s retirement savers have largely been left on the sidelines – that must change.

As SEC Chairman Jay Clayton said in an interview with Bloomberg TV, “Retirement money in the defined contribution plan doesn't have the same investment opportunities that a defined benefit plan has, even though they're both retirement dollars.” The fact that these plans generally don’t have access to important long-term diversification tools like portfolio diversifying investments (PDIs) and other alternative products is incongruous because these investments are often well-aligned to a retirement time horizon.

A look at defined benefit plan allocations to alternative investments shows that the access to these investments produced better returns, with defined benefit plans often outperforming defined contribution plans. In fact, between 1990 and 2012 defined benefit plans outperformed defined contribution plans 7.9 percent to 7.0 percent, according to a study by the Boston College Center for Retirement Research.

Defined benefit plan managers and institutional investors are not the only ones who use PDIs to mitigate risk and maximize returns. Financial advisors have used PDI products and other alternative investments to diversify their clients’ non-qualified portfolios for decades. PDI’s lower correlation to equity markets and less liquid nature offer balance, stability and diversification that benefits longer-term investors.


There is proven evidence that alternatives have a place in defined contribution plans, and we must continue to fight for their inclusion in order to help Main Street investors diversify their portfolios and achieve their retirement goals.

The SEC holds the keys to setting this process in motion and can protect investors while giving them tools to meet their long-term investing needs. The easy fix is to allow plan participants access to PDIs as long as the decision to offer an investment option on a plan’s investment menu is made by an ERISA fiduciary or other investment professional. American retirement savers would still enjoy the strong protections offered by ERISA through their plan’s fiduciary. At the same time, this change would likely lead to the development of target-date funds that allocate a portion of their assets to portfolio diversifying investments.

Alternative investments increasingly enjoy international recognition as a vital part of a long-term investment strategy. It is time we let our country’s retirement savers off the sidelines so that they can enjoy the full benefits of America’s capital markets.

Anthony Chereso is the president and CEO of the Institute for Portfolio Alternatives.