Alternative Investments in Retirement Plans – Part II

Originally Published 09/18/2025

At the end of Part I we noted that many Advisors and Plan Sponsors are reluctant to recommend Alternative Investments (private market investments, real estate, digital assets, commodities, infrastructure development, and longevity pools) in Defined Contribution (DC) retirement plans due to heightened litigation concerns.

Alternatives’ inherent fiduciary risk, complexity, high fees, lack of liquidity and  transparency, and operational hurdles, elevate Advisors’ and Sponsors’ workload (discussed in the previous installment) at the same time they elevate their litigation exposure. Two conditions aggravate litigation exposure and make Advisors and Sponsors prime litigation targets:

• ERISA creates no “safe harbor” for Alternatives.

• ERISA’s strict prudence standards can be cited if Alternative Investments underperform or are deemed inappropriate for participants.

Alternative Investments, e.g., private equity and hedge funds, are often included in defined-benefit pensions. U.S. defined benefit (DB) plans allocate 10% to 25% of assets to alternative investments, depending primarily on plan size and sponsor preferences.

Defined contribution (DC) plans, in contrast, allocate 1% and 5% (if any) to alternative investments. Notwithstanding, DCs generate a disproportionate amount of class action litigation. These lawsuits invoke the Employee Retirement Income Security Act (ERISA) duties of loyalty and prudence to allege that Fiduciaries breached their duty offering riskier, higher-cost, and less-transparent investments. 

• Risk and complexity: Plaintiffs contend that complex, less-liquid alternative investments are too risky and unsuitable for average, less-sophisticated retirement plan participants.

• High fees: Plaintiffs argue that high-cost alternatives violate the Fiduciaries’ duty to act in the best interest of plan participants.

• Lack of transparency and liquidity: Alternative assets are harder to value and sell than public market investments. Plaintiffs maintain they pose risks for plan participants access to funds or require more accurate and frequent performance data. 

• Underperformance: Alternatives that underperform market benchmarks have triggered litigation. “The Intel Case”[1] (discussed below) showed this does not guarantee victory for plaintiffs.

  
  

If outcomes are the sole determinants of liability, the fiduciary’s defense would be problematic. Every one of the plaintiffs’ allegations is arguably correct.

• Private Equity Investment Candidates are privately held with strong growth potential in cutting edge industries. The PE relationship creates contractual and administrative complexity between (among others) the candidate, the candidate’s suppliers and target market, the private equity firm, the fiduciary, and the candidate’s potential purchaser or angel. None of those relationships are either simple or low risk.

• Alternatives have higher, more complicated, and less transparent fees and fee structures than traditional stock or bond funds and managed portfolios.

• Alternatives and their valuation complicate plan audits, Form 5500 reporting, and participant recordkeeping, increasing costs and complexity.

• Alternative investments are illiquid; often without a secondary market that facilitates liquidity. Most Alternative investments require multi-year commitments (“patient money”). They don’t  fit well in DC plans that require daily or more frequent liquidity.

• Alternative Asset values are often based on models rather than market prices. Valuation algorithms (and the analysts who concoct them) are often “optimistic” – leading to what one critic characterizes as “Mark-to-Make-Believe” accounting and valuation, and obviating transparency and suitability.

  
  

Faced with that reality, Sponsors and Fiduciaries successfully responded to plaintiffs’ allegations with variations of: “So What? There is nothing inherently “bad” about including alternatives in Defined Contribution plans. You knew what you were getting into. We did everything we should. We can prove it.”

Stated a bit more eloquently: Sponsors and Fiduciaries successfully argued that including alternatives is not automatically a breach of fiduciary duty if managed with care and diligence – and demonstrated that they followed a comprehensive, well-documented, and prudent decision-making process under ERISA standards. The Courts ultimately agreed with them, elevating process above outcomes.

We add nuance to their successful defense in our next installment.

Cambyses Financial Advisors  offers Portfolio, Asset, and Wealth Management and Planning services, for Businesses, their Retirement Plans, and their Owner’s Succession and Retirement. For more information, contact us at : +1 (818) 489-4228 or steven@cambysesadvisors.com

The Article is not an endorsement of any product or producer we mention. It is not an offer to buy or sell any security. Investments in sector companies may be risky and speculative. Consult your financial advisor for additional information. 

The information in this article has been included in good faith for general information purposes only. It is not intended to amount to advice on which you should rely, and we give no representation, warranty or guarantee, whether express or implied as to its accuracy or completeness. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our articles.

[1] Formall