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Guest Contributor: Everyday Retirement Savers Need Access to Alternative Investments Amid Roaring Inflation

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IPA Names New President and CEO

By: Anya Coverman, Senior Vice President of Government Affairs and General Counsel at the Institute for Portfolio Alternatives

By: Anya Coverman, Senior Vice President of Government Affairs and General Counsel at the Institute for Portfolio Alternatives

The resurgence of inflation’s impact as a legitimate concern among everyday retirement savers is palpable. Heightened inflation and the latest spike in prices for many goods and services is felt not only in Americans’ monthly budgets, but also in their retirement portfolios, as markets experience volatility in response to the economic uncertainty and changes in monetary policy.

Less clear in our current environment is whether America’s Main Street investors can build the truly diversified portfolios needed to not only abate the impact of inflation but do so in a way that also addresses the secondary impacts of a high-interest rate environment. The wealthy and institutional investors have for years had access to alternative investment opportunities that do just that. It’s time we remove the unnecessary limitations on access to those opportunities for everyone else.

Today, more than 100 million Americans participate in an employer sponsored defined contribution (DC) plan. But while most American’s retirement savings are held in DC plans, antiquated regulations do not facilitate those plans’ access to portfolio diversifying investments and other alternative products that can serve as important long-term diversification and inflation-fighting tools.

A major concern for investors relying on DC plans to serve as their primary retirement savings is whether traditional financial assets such as stocks, bonds, and cash can outpace inflation in the current economic and market environments. Given these concerns, it is critical that the U.S. Department of Labor (DOL), U.S. Securities and Exchange Commission (SEC) and Congressional policymakers consider ways in which the investment options in DC plans can evolve to improve retirement readiness and enhance retirement income outcomes for everyday retirement investors.

Alternative Investments Can Hedge Against Inflation

Alternative investments, such as non-traded real estate investment trusts and business development companies, can be an important hedge against inflation while also delivering other important investment benefits critical to building diversified portfolios. As inflation rises, so do property values, leading investors to benefit from its appreciation potential and cash flows from high quality income-generating buildings. Given that commercial real estate investments can provide income during uncertain inflationary environments, these investments are considered one of the most reliable hedges against inflation.

Recently released data from the IPA/Stanger Monitor suggests that non-traded REITs can not only provide a reliable inflation hedge, but that they can do so while offering substantially reduced volatility, even compared to publicly traded REITs. This unique combination of benefits is important for everyday retirement savers looking to guard against a long-term reduction in purchasing power but also depend on stable investment portfolio performance as they plan for ever-longer retirements.

Non-traded REITs are also more often invested in properties and facilities that have a higher positive correlation to inflation, when compared to the underlying assets of publicly traded real estate. NAV REITs not only allow ordinary investors to purchase shares directly from the management company, rather than on an exchange, but also conduct far more frequent and consistent share-buyback programs than traditional funds not listed on an exchange. NAV REIT management teams have correctly predicted that multifamily, logistics and industrial asset classes would outperform the general real estate market during the past five years, proving to be a success for investors.

Our Industry Must Continue to Advocate for Broad Access to Alternatives

If alternative assets can make such a significant impact on retirement income outcomes and are strategically used in other investment programs, how can our industry help bridge this gap to ensure that the underlying investments in DC plans are improving and evolving to benefit everyday retirement savers?

The DOL and SEC hold the keys, and it is high time that Main Street investors in 401(k)s long-term financial security is prioritized and protected. DOL and SEC action are vital steps in fixing this inequity and providing a similar opportunity to all our country’s retirement savers.

History has shown that broad access to financial markets combined with a robust and modern regulatory framework is a positive driver of economic growth – and we all must remain committed to identifying ways that our regulatory framework can be improved for the benefit of investors. These improvements should always result from due diligence and debate to arrive at the best possible solution for all Americans.  To better protect Main Street from inflation eroding the purchasing power of retirees, the DOL and SEC should encourage savers to diversify their holdings to include positively correlated asset classes like private real estate.

To provide equal access to the full benefits and range of investment opportunities offered by alternative investments, the SEC must provide retirement savers with meaningful access to private funds by updating their “look through” requirements. Right now, defined benefit plans regularly invest in private funds, but defined contribution plan participants generally cannot.

The SEC should eliminate the asset limitation restricting closed-end funds from investing more than 15% of their net assets in private equity or other certain types of private funds. This will allow more retail investors to gain exposure to a market from which they have long been excluded, but through a registered, regulated vehicle in which they would benefit from professional management and all the associated investor protections inherent in a registered 1940 Act vehicle.

The SEC and DOL should work together to modernize electronic disclosure to reduce plan and adviser compliance costs without negatively impacting retail investors.

These recommendations can protect our country’s retirement savers while giving them vital tools to stop inflation from eroding their retirement savings. There is proven evidence that alternatives have a place in DC plans, and we must continue to fight for their inclusion to help Main Street investors diversify their portfolios and achieve their retirement goals. Failure to do so amid today’s roaring inflation and renewed market volatility will only widen the gulf between the well-equipped institutional investors and the retirement savers trying hard not to fall behind.

Anya Coverman is senior vice president of government affairs and general counsel at Institute for Portfolio Alternatives where she leads all public policy and advocacy efforts.

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The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.