Does daily valuation in DC plans limit investment choices and thereby investment returns? The UK division of Towers Watson makes the argument that although daily valuation offers obvious benefits, it limits exposure to less liquid investments like hedge funds, private equity, infrastructure and reinsurance — investments common in DB plans. Towers Watson estimates that DC plans would realize a 5% gain through these illiquid investments.
But do we want unsophisticated plan participants putting their money into investments they don’t understand? And aren’t some TDFs and managed accounts exposing their investors to alternatives? Delays in getting money out can be discerning, as evidenced by a major record keeper’s proprietary fund that bought real estate versus REITs and couldn’t liquefy the assets during the housing crisis.
Exposure to alternative type managers will be important as private equity firms like Carlyle, BlackStone and KKR begin to move into to DC market. The question is whether daily valuation systems limit their entry and whether the benefit of daily trading and pricing outweighs long term gains.
