Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Alternative investments help diversify employee benefit plans

alternative investments, employee benefit plansAlternative investments are generally defined as investments that do not have a readily determinable fair value. This means this type of investment is not listed on a national exchange, and quoted market prices are not published in financial publications. These investments also do not face the restrictions or regulations that a typical investment, such as a mutual fund, would face, which allows them to employ a wider variety of strategies. They are also sometimes more complex, and will have restrictions on buying and selling. Some examples of investments that would fall into this category are common collective trusts, pooled separate accounts and stable value investments.

Common collective trusts and pooled separate accounts

Common collective trusts (CCT) and pooled separate accounts (PSA) are two of the more common alternative investments you may see offered within your retirement plan. They often look similar to a mutual fund; however, they are not registered with the Securities and Exchange Commission. Most CCT’s and PSA’s are invested in mutual funds. However, they may include other assets such as cash and other riskier investments including derivatives, hedge funds or private equity funds, in which they are invested. Even though many of the investments within CCT’s or PSA’s may have a readily determinable value, they often hold some sort of asset for which the fair value is not readily determinable. These funds are also often set up to deduct fees directly from the fund rather than allocating the fees to the individual investors.

Stable value funds

Stable value funds are also considered an alternative investment as they do not have a readily available market price. They usually consist of guaranteed investment contracts (GIC) offered by banks and insurance companies, which operate by taking deposits from the plan and investing them outside of the plan in mutual funds, CCT’s, PSA’s and other investments. The bank or insurance company then guarantees a specific rate of return that they will pay to the plan along with the principal that the plan had invested. The value of a traditional GIC is the value of the contract or the principal and interest that the GIC must return to the plan.

These are just a few of the many alternative investments you may see offered in an employee benefit plan. Some plans will include derivatives, hedge funds, private equity funds and real estate funds as options for their participants to directly contribute too. Alternative investments, although more difficult to value and report on, do offer value in the ability to diversify an employee benefit plan.

Tyler Henkel