Alternative investments in retirement plans

As administrators, we see all kinds of investments in the plans we handle – from CDs to mutual funds to individual securities to what I call alternative investments – non-publicly traded REITs (Real Estate Investment Trusts), viatical settlements (life insurance policies sold to an unrelated third party), direct holdings of real estate, and the like.

Setting aside the pure investment risk/return considerations, these investments have one issue in common that is problematic for small plans – they are hard to value.  It’s one thing to buy an office building for $5 million if you are CalPERS (California Public Employees’ Retirement System) and have a gazillion dollars to invest to eventually provide for long-term monthly benefits, and it’s another thing when you have a few hundred thousand in a plan and need to know fair value for a small real estate parcel or REIT so you can pay out a terminated participant.  You really should get it appraised – at a cost of $5,000 to $10,000, if done right. Plus, a longer plan tax return/report is required when such investments are held, so that adds some costs as well.

Long story short, from an administrative side, alternative investments in small plans are simply not practical.  This post is NOT about the pure investment qualities of such investments – they might have some higher expected returns (I wouldn’t take that as a given though, and they certainly have higher risk characteristics), but any higher returns are generally going to be eaten up by higher expenses.  Stick with publicly-traded securities where values are determined daily – there’s a huge universe of them, and it’s hard to believe that you can’t find something suitable within that universe.