Group Issues Framework for Daily Valuation of Alternative Assets in 401ks

February 25, 2021

When the Department of Labor confirmed that 401k plans may include private equity investments back in June 2020, there were plenty of unanswered questions. Roughly eight months later, uncertainty still persists around how daily valuation and other operational procedures are best implemented.

“Including private assets and other alternative assets in 401k plans is relatively new in the United States,” said Jonathan Epstein, DCALTA Founder and President. “The full breadth of DCALTA members have looked deeply enough at the operational issues to form a meaningful industry consensus. This paper is therefore intended to be a practical roadmap for plan sponsors, and their service providers, so they may move toward implementation with greater confidence.”

The framework encompasses 11 positions grounded in principles of fair valuation, ISO quality management, and effective governance, added Sheridan Porter, DCALTA member and co-founder of valuation technology firm FEV Analytics. “These elements are important for retirement savers and plan sponsors to have confidence that the procedure used to value these private assets is fair and robust,” Porter said.

Alternative assets include investments in private companies, infrastructure, and real estate that have been broadly adopted by defined benefit pensions, and institutions like university endowments, for their beneficial contribution to portfolio performance. Numerous studies have shown that the retirement outcomes of 401k savers could also benefit from access to alternative assets. DCALTA said in announcing the new framework that it supports this position, advocating for a professionally managed and diversified portfolio of such assets as a modest component of a multi-asset class fund, such as a target date fund.

“Individuals have demanded similar investment opportunities as institutions across multiple asset classes,” said Bob Long, DCALTA Director and CEO of Conversus, a StepStone company. “401k savers deserve target date fund options that include moderate, diversified allocations to the high growth private companies and other alternative assets long employed by large institutions.”

DCALTA draws from the thought leadership of its members—a uniquely broad group of industry stakeholders, including plan sponsors, fiduciaries, consultants, accountants, asset managers, recordkeepers, and others—to research and reach general agreement on critical operational procedures, like daily valuation.

“Operational considerations of private asset investing are often nuanced and relatively resource-intensive,” Epstein added. “To the extent that operational issues impede progress, we apply the collective wisdom of our members to analyze the issues and show the industry a path forward. Daily valuation is the first operational topic addressed by DCALTA, with other important topics, such as liquidity management, to follow.”

To read the full whitepaper and/or executive summary, click here.