Retail Access to Alternative Investments Via Defined Contribution Plans

Summary:
The Council of Economic Advisers examines the case for allowing defined contribution plans (like 401(k)s) to allocate to alternative investments, particularly private equity. The paper argues that measured allocations can improve diversification, enhance risk-adjusted returns, and raise retirement income for participants, while also strengthening capital formation and yielding broader macroeconomic gains.

Key Findings:

• Portfolio benefits: Across age cohorts, adding private equity improves the Sharpe ratio and increases expected retirement wealth for DC participants.
• Age dynamics: Younger savers see the largest impact, with roughly a 2.5% increase in annuitized lifetime income; older cohorts see about 0.5% to 1%.
• Market effects: A wider DC allocation to alternatives could deepen liquidity, improve price discovery, and provide private companies—especially small businesses—with a more stable, diversified capital base.
• Macroeconomic upside: Estimated GDP benefit up to $35 billion (0.12% of GDP) from PE access alone; additional gains may come from other alternatives like hedge funds or venture capital.

Implications:

• For participants: Potentially higher long-run retirement outcomes with prudent, diversified exposure.
• For markets: Greater intermediation of household savings into productive private investment.
• For policymakers and plan fiduciaries: Importance of guardrails on fees, transparency, valuation, liquidity, and risk management when integrating alternatives into DC plans.