Few retirement plans offer alternatives within target-date funds, PGIM study finds

Rhea-AI Summary

PGIM, the asset management division of Prudential Financial (NYSE: PRU), reveals that only 13% of retirement plans include alternative investments in their target-date funds (TDFs). Moreover, 24% of plan sponsors have implemented environmental, social, and governance (ESG) strategies over the past three years. The study indicates that the main barriers to incorporating alternative investments are the need for enhanced participant education (67%), operational challenges (34%), perceived litigation risk (33%), and costs (27%). Interest in ESG approaches appears to be growing, particularly among mid-sized plans.

Positive

• 13% of retirement plans offer alternative investment options in target-date funds.
• 24% of plan sponsors have integrated ESG strategies into their plans over the last three years.
• Research indicates growing interest in ESG investments, especially among mid-sized plans.

Negative

• 67% of plan sponsors cite enhanced participant education as a barrier to including alternative investments.
• Operational challenges (34%), perceived litigation risk (33%), and costs (27%) hinder the incorporation of alternatives.

New research from PGIM, the $1.4 trillion global asset management business of Prudential Financial, Inc. (NYSE: PRU), finds that 13% of retirement plans offer alternative investment options as part of their target-date funds (TDFs). In addition, approximately one-quarter (24%) of plan sponsors have taken action to incorporate environmental, social and governance (ESG) approaches into their plan over the last three years.

Josh Cohen, Head of Institutional Defined Contribution, PGIM. (Photo: Business Wire)

“The average American worker doesn’t have access to the same types of investments currently available to institutional and high-net-worth investors,” said Josh Cohen, head of institutional defined contribution at PGIM. “In a world where we are experiencing changing demographics, aging populations and issues of inequality, it is imperative that individual investors have access to quality investments to help them build and maintain their wealth, particularly when it comes to retirement.”

In a recent blog post, Cohen argues that defined contribution (DC) plans may be the best starting point, as they offer the fiduciary oversight, institutional pricing and long-term time horizon needed to effectively deliver ESG and alternative strategies to individuals.

PGIM’s research series, “The Evolving Defined Contribution Landscape,” conducted in partnership with Greenwich Associates, surveyed 138 DC plan sponsors to shed light on changes within the industry, including the use of OCIOs and the investment options offered in 401(k) plans.

Alternative investments in target-date funds

Despite having the ability to bring more sophisticated investment options to plan participants at institutional pricing, most plan sponsors have chosen not to do so. The chart below illustrates the percentage of plan sponsors who say they are currently incorporating specific alternative investment options such as real estate private equity and debt, hedge funds, private equity and liquid alternatives as part of their target-date funds:

The most common reason for not including alternatives as an investment option is the need for enhanced participant education (67%). This is followed by operational challenges (34%), the perceived litigation risk (33%) and cost (27%).

Interest in ESG is evolving

Almost one-quarter (24%) of plan sponsors indicate they have taken action to incorporate ESG approaches into the plan over the last three years, while more than half (52%) said they have not. An additional 23% were neutral on the matter. Directionally, there is greater interest in incorporating ESG approaches among mid-sized plans with $500 million to $999 million in AUM.

“While ESG is an evolving area with varying views, definitions and approaches, I anticipate investors will increasingly look to diversify their portfolios with responsible and sustainable investments. Investment options that are aligned to ESG preferences and meet fiduciary standards of appropriateness should be made available to workers,” said Cohen.

PGIM’s research is the second of a three-part series on the evolving DC landscape. For more detailed findings and further information, check out “The Evolving Defined Contribution Landscape: Alternatives & ESG as Long-Term Solutions for Long-Term Challenges.”

For timely insights and perspective on the defined contribution space, follow Josh Cohen on LinkedIn.

About the survey

The research was conducted by Greenwich Associates from March 5 through July 17, 2020 using an online, quantitative approach with 138 DC plan sponsors who have at least one 401(k) plan and at least $100 million in 401(k) assets.

ABOUT PGIM

PGIM, the global asset management business of Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10 largest asset managers in the world¹ with more than $1.4 trillion in assets under management as of Sept. 30, 2020. With offices in 16 countries, PGIM’s businesses offer a range of investment solutions for retail and institutional investors around the world across a broad range of asset classes, including public fixed income, private fixed income, fundamental equity, quantitative equity, real estate and alternatives. For more information about PGIM, visit pgim.com.

Prudential Financial, Inc. (PFI) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. For more information please visit news.prudential.com.

WEBSITE
FIND OUT MORE AT: pgimfixedincome.com

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JOIN THE CONVERSATION: Follow @PGIM on Twitter

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¹ Prudential Financial, Inc. (PFI) is the 10th largest investment manager (out of 527 firms surveyed) in terms of global assets under management based on Pensions & Investments’ Top Money Managers list published on June 1, 2020. This ranking represents global assets under management by PFI as of March 31, 2020.

View source version on businesswire.com: https://www.businesswire.com/news/home/20210127005174/en/

FAQ

What percentage of retirement plans offer alternative investments according to PGIM?

PGIM's research shows that 13% of retirement plans include alternative investment options in their target-date funds.

How many plan sponsors have incorporated ESG strategies in the last three years?

Approximately 24% of plan sponsors have taken action to incorporate ESG strategies into their plans over the past three years.

What are the main barriers to including alternative investments in retirement plans?

The primary barriers include the need for enhanced participant education (67%), operational challenges (34%), perceived litigation risk (33%), and costs (27%).

Which segment of plan sponsors shows greater interest in ESG approaches?

Mid-sized plans with $500 million to $999 million in assets under management show greater interest in incorporating ESG strategies.