Executive Summary
As the landscape of US capital markets and retirement systems shifts towards a greater embrace of private markets and defined contribution plans, this paper investigates the potential benefits of expanding retail investor access to “alternative investments” via these plans. According to the Council of Economic Advisers (CEA):
- Allocating defined contribution (DC) plans to alternative investments could yield substantial advantages for plan participants (retail investors), fund managers, private enterprises (including small businesses), financial markets, and the broader economy.
- Participants in DC plans stand to gain from diversified portfolios, improved risk-adjusted returns, and increased retirement income. For fund managers and private companies, this access opens up a vast, growing, and stable pool of capital. Furthermore, financial markets might experience enhanced liquidity and better price discovery, which collectively could boost GDP.
- Our analysis reveals that across all age groups, an allocation to private equity significantly improves the portfolio’s risk-adjusted return (measured by the Sharpe ratio) and enhances retirement wealth for those enrolled in defined contribution plans.
- Younger investors appear to reap greater benefits compared to their older counterparts when it comes to private equity allocations. The two youngest age cohorts experience an approximate 2.5 percent increase in annuitized lifetime income, whereas the oldest cohorts gain only about 0.5 to 1 percent.
- In total, we estimate that granting retail investors access to private equity through defined contribution plans could yield a GDP benefit of up to $35 billion, equating to 0.12 percent of GDP. This figure specifically accounts for the advantages of private equity access; additional benefits may arise from similar expansions into other alternative investments, such as hedge funds or venture capital.
