Amid a push to open U.S. capital accumulation plans to direct investments in private assets, it’s important for plan sponsors and members to take a cautious approach, says Andrew Kitchen, head of Canadian distribution for MFS Investment Management Canada Ltd.
This month, the U.S. federal government introduced legislation that would permit CAP members to directly invest in alternative assets such as private equity and debt, real estate and cryptocurrency.
By comparison, Canada hasn’t seen such targeted legislation toward specific asset classes, notes Kitchen. While Canadian CAP members have some exposure to private assets through mutual funds, target-date funds and balanced funds, he adds, direct exposure has also been limited by the record keepers that administer Canada’s defined contribution plans.
Read: A look at private equity investing in DC plans
“DC plans are often maintained through the main record keepers here [and] they tend to like things that have daily pricing and daily liquidity. To include things like private assets that are often not valued daily means it wouldn’t mesh well with this approach.”
A push toward direct investments in private assets would also put an additional burden on plan sponsors’ efforts to educate members about their investment choices, as well as an increase in associated fees. “It’s often already hard to educate the layman on investment terms and when you then get into things like private assets and private equity, it becomes even more difficult to educate people,” says Kitchen.
“These types of investments are often quite expensive and DC plan sponsors tend to look at things in a very cost-conscious way, making sure they don’t burden their members with high costs. All of these factors will add up.”
Read: U.K. DC pension providers committing 10% of default funds to private markets by 2030
While greater diversification within an asset mix can reduce risk, CAP members’ increased exposure to volatile asset classes can have the opposite effect, he explains.
“Assets like crypto are very volatile, so if they’re used in the wrong hands and without diversification — or if people were using it as a single holding as opposed to a part of a balanced strategy — they could find themselves really coming out on the wrong side of the risk equation.”