PLANADVISER - January/February 2022 - 15

Private Equity Value-Add
Replacing TDF equity allocations may improve readiness
THE
SIMULATED swapping of target-date
fund (TDF) equity allocations for private
equity investments in defined contribution
(DC) plans yielded a promising prediction:
more participants being able to retire
at age 65 and maintain income adequacy,
says new research from the Employee
Benefit Research Institute (EBRI).
In his paper " The Impact of Adding
Private Equity to 401(k) Plans on Retirement
Income Adequacy, " Jack VanDerhei,
director of research at EBRI, examined the
impact, in three scenarios, of replacing
5%, 10% and 15% TDF equity allocations,
respectively, with equivalent allocations
to private equity.
... plan sponsors in
the U.S. might have
concerns about
including such
investments in their
DC plan fund menu.
" We found that every level of private
equity modeled resulted in additional
401(k) participants (who are currently
ages 35 to 64) being able to retire at age 65
without running short of money in retirement, "
the paper says.
EBRI used its Retirement
Security
Projection Model (RSPM) to estimate that
the total retirement deficit for all U.S.
households between the ages of 35 and 64
was $3.68 trillion in 2020. The study noted
that not every U.S. worker has access to
an employer-sponsored DC plan, despite
legislation enacted-e.g., the Setting
Every Community Up for Retirement
Enhancement (SECURE) Act of 2019-and
industry innovations to stem account
leakage when participants change jobs.
By increasing allocations to betterperforming-viz.,
private equity-investments,
EBRI raised participants' projected
retirement readiness and reduced their
retirement savings shortfalls (RSS),
defined as " the present value of the simulated
retirement deficits at retirement age. "
" When 15% of the equity in the TDFs
is assumed to be replaced with private
equity, the RSS reduction varies from
4.8% for the youngest cohort to 2.1% for
the oldest cohort, " the paper states. " The
RSS reduction varies from 3.2% for the
youngest cohort to 1.5% for the oldest
cohort when 10% of the equity in the
TDFs is assumed to be replaced with
private equity, and it varies from 1.8%
for the youngest cohort to 0.8% for the
oldest cohort when 5% of the equity in
the TDFs is assumed to be replaced with
private equity. "
In 2020, the Department of Labor
(DOL) published an information letter
about adding private equity investments
as a component of asset-allocation funds
offered as an investment option for
participants in DC plans.
According to the letter, a plan fiduciary
would not violate the duties of a
fiduciary solely by offering a professionally
managed asset-allocation fund with
a private equity component as a designated
investment alternative. The letter
did not authorize plan sponsors to make
private equity investments available for
direct investment on a standalone basis.
Despite the pro-private-equity stance
of the DOL under President Donald Trump,
Serge Boccassini, head of institutional
global product and strategy at Northern
Trust Asset Servicing, more recently said
plan sponsors in the U.S. might have
concerns about
ments in their DC plan fund menu.
The EBRI research was completed
before the DOL, now under President Joe
Biden's administration, issued a supplemental
statement in December to clarify
the 2020 letter. It cautions plan fiduciaries
against the perception that private equity
is generally appropriate as a component
of a designated investment alternative in
a typical DC plan, in response to stakeholder
concerns. -Noah Zuss
➜ Global financial
services firm Hub
International Ltd.
acquired the assets of
Gold Sky Benefits LLC
and Fiducia Group.
➜ Mercer named Holly
Verdeyen its U.S. defined
contribution leader.
She will manage the
strategy, development
and growth of Mercer's
DC and financial wellness
business.
➜ The partner-owned
advisory firm Moneta
appointed Deborah
Dubin as its first-ever chief
philanthropy officer.
➜ Carillon Tower
Advisers, a multi-boutique
asset-management firm,
promoted Joy Facos
to head of sustainable
investing and corporate
responsibility.
including such invest➜
American
International Group
announced that
Constance Hunter
will join its executive
leadership team as
executive vice president,
global head of strategy
and ESG [environmental,
social and governance]
early this year.
➜ Ryan Franken has
rejoined Transamerica
as its national sales
manager of retirement
large markets.
planadviser.com January-February 2022 | 15
➜
http://www.planadviser.com
PLANADVISER - January/February 2022

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