Abstract
Alternative assets—those other than stocks, bonds, and cash—are starting to play a role in defined-contribution (DC) retirement plans and particularly in target-date funds, which are marketed to most retirees as complete investment solutions. The authors ask whether this is a good idea and outline the conditions under which alternatives can sensibly be used as a component of DC plans. They conclude first that risk estimates for alternative assets need to be adjusted upward and expected return estimates downward. Second, the liquidity needs of the fund and of the plan participants should be carefully considered when investing some of the participants’ money in alternatives. Third, the total invested in alternatives on behalf of plan participants should not be large.
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