The Potential of Alternative Investments in Defined Contribution Plans

Since 1975, people in the United States have moved from relying on defined benefit (DB) pension plans to almost exclusively relying on defined contribution (DC) plans. Much literature has focused on the effects of this change on the adequacy of retirement savings. Previous research has covered how the onus of making financial decisions is placed on individuals, including how much to save and how to invest. However, the literature has largely overlooked the shift in the types of assets that make up retirement savings and, therefore, the effects on the efficient frontier available to individuals saving for retirement. DB plans have access to not only traditional investments (e.g., stocks, bonds) but also alternative investments, a group of investments that have lower liquidity, low correlation to public markets, high heterogeneity of returns among managers, and less regulation and transparency than traditional investments. Because of the shift from DB to DC plans, individuals have lost access to this portion of capital markets, which are able to potentially improve risk-adjusted returns. The author of this dissertation seeks to understand the potential effects of alternative investments on portfolios, the strategies to effectively implement alternatives for individuals, and the policy levers that would encourage adoption.