Larger corporate pension plans are moving to riskier investments, according to recent research by Fitch Ratings. Assets in “Level 3,” which include thinly traded and hard-to-value investments like real estate, rose to 8.5% of total assets, up from 7.8% for the same period a year ago. Sixty-six of the 224 plans profiled have more than 10% in Level 3 investments. And three well-known companies have more than a third of their assets in these riskier investments: Hanesbrand (44%), Verizon (43%) and Kroger (37%).
In an era when many experts believe that it will be harder to achieve good returns, it makes sense that more sophisticated investors such as corporate pension plans would turn to riskier, illiquid assets like real estate and hedge funds. Though DC plans can learn a lot about investing from their DB brethren, who consistently outperform them, there are major differences — even as some experts are calling for Level 3-type assets in DC plans. For one thing, DB plans have a better chance of determining when they need to move to more liquid assets to pay off obligations or when there is a unique event like winding down a division.
DC participants manage their own investments, however, and are less likely to be able to manage their cash needs. For example, during the recent economic crisis, one major insurance provider invested in real estate rather than real estate funds and was caught short of cash when plans wanted to move and investors tried to cash out at a time when real estate prices were greatly depressed.
