DC plans urged to consider private equity News added by Benefits Pro on June 19, 2014

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By Allen Greenberg

Pantheon Ventures’ Michael Riak comes across as a crusader: enthusiastic, animated and clearly passionate.

It’s a good thing, because Riak is in the middle of a campaign that is no mean feat, persuading 401(k) plans and others in the defined contribution world to embrace private equity.

“Adding high-quality private-equity investments to defined contribution plans will help address participants’ need for higher returns, bringing to bear the benefits of an asset class long enjoyed by defined benefit plans and other institutional investors,” Riak said in a statement released after he was hired to a newly created position as head of Pantheon’s U.S. defined contribution business.

That was about a year ago. Riak, who is based in New York, has since called on more than 50 consultants and 80 or so employers.

In other words, he’s had little problem getting appointments. But sales to date? Not a one.

Many who have heard his pitch, Riak said, like what he has to say. The problem is that no one is quite ready to be first to leap in, despite the tempting returns.

Over the last decade, private equity, with an average return of 10 percent, has outperformed every other asset class for the biggest pension funds. DC plans, meanwhile, generate average returns of just 5.8 percent, according to a study from the Private Equity Growth Capital Council.

Riak left his position as director of savings and affiliate plans at Verizon Communications to work for Pantheon, a private-equity fund investor that oversees $28 billion in investments.

Pantheon isn’t alone in promoting the notion of private equity in DC plans, though it claims to be the first to offer private equity exposure within target date funds.

Other big firms such as Carlyle Group LP, Blackstone Group LP and KKR & Co. are looking for ways to reach ordinary investors as a growing number of workers are pushed out of public and corporate pension funds to DC plans.

With concerns about risk and liquidity, not everyone is ready to fall for private equity in average Americans’ 401(k)s, or public pensions for that matter.

“I don’t believe that finding newer, sexier investment options — that are also more complex and harder to employ effectively — is the key to helping the majority of Americans make better use of their elective, defined contribution 401(k) plans," Tim Maurer, vice president at Financial Consulate, told CNBC in November.
On Thursday, Riak was in the audience at the DCIO Market Forum at the Princeton Club in Manhattan, hosted by Financial Research Associates. He wasn’t scheduled to make a presentation but had an ally who did: Kevin Vandolder, a partner at Aon’s Hewitt Ennisknupp.

Speaking on emerging trends in plan design, Handolder said alternatives – investments in real estate and other asset classes other than stocks, bonds or cash – in DC plans are helping those plans achieve returns on the same level as defined benefit plans.

Last fall, Hewitt Ennisknupp produced a white paper on alternatives in which it acknowledged that “alternative investments were once considered inappropriate for DC plans.”

“But the landscape has changed significantly,” it said, and the idea of private equity in DC plans is one whose time has come.

“New products and approaches have raised the bar, and many plan sponsors would be well-served to reconsider the role of alternative assets in their DC plans. Over the next few years, we expect alternative investments to become much more mainstream in DC plans,” it said.

Pantheon is counting on it, as is the former Verizon executive it hired.

Originally published on BenefitsPro.com
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