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Exclusive Interview: DCALTA’s Jonathan Epstein Explains How You Might be More Familiar with Alternative Investments Than You Think

Exclusive Interview: DCALTA’s Jonathan Epstein Explains How You Might be More Familiar with Alternative Investments Than You Think
November 21
00:02 2017

This past summer I had the honor of moderating a panel of leading experts in alternative investments at a meeting of DCALTA (Defined Contribution Alternatives Association), a 501(c) non-profit organization created to educate the community on the benefits of including alternative investments within a defined contribution framework to better secure retirement outcomes for plan participants. In preparing for that meeting, it struck me that “alternative” investments in 401k plans have been around for quite sometime and are more commonly used than some may believe. For example, GIC-based stables income funds as well as Collective Investment Trusts represent popular forms of alternative investment options.

Jonathan Epstein, who has served in the defined contribution community for over 20 years, serves as President of DCALTA. He created DCALTA to further focus on enhancing retirement outcomes. He also serves as Institutional Sales Director for ThirtyNorth Investments, LLC in New Orleans, Louisiana. He’s offered some insightful thoughts on the subject of alternative investments to readers of

FN: Jonathan, it’s a pleasure having a chance to speak to you again. Tell us a little about yourself. What were some of the key milestones in your career arc that have led you to where you are today?
Epstein: Thank you, Chris. I have been in in the financial services industry for 22 years and had the privilege of learning the industry from different vantage points. This includes tenure with a non-profit DC plan provider, a global benchmarking firm, a trust company and now, with ThirtyNorth Investments, a women-owned investment firm. I find that my experience working with sponsors of public sector defined contribution plans, mid-to-mega corporates and MEPs has helped shape my views on the industry and ultimately, the mission of DCALTA.    

FN: What’s DCALTA about and what prompted you to create it? Did you pattern it after anything you’ve seen before?
Epstein: DCALTA, the Defined Contribution Alternatives Association is a non-profit that represents many stakeholders interested in ensuring that plan participants have the same access to asset classes that have been successfully utilized by others. These include U.S. defined benefit plans, foreign defined contribution plans, university endowments, and other sophisticated investors following a long-term retirement path. DCALTA`s mission is to enhance and secure participant outcomes through education, research, and advocacy on the benefits of responsibly including hedge funds, private equity, and other alternative investments within a defined contribution framework.

I would say that DCALTA`s composition is unique in that we were cognizant from the beginning to ensure that multiple types of industry stakeholders were being represented. To accomplish this, we fostered board representation from varied investment disciplines, the consulting community, asset servicers, and benchmarking/indices firms. Just as important, we wanted the plan sponsor community actively engaged. As a result, we are almost finished forming our Plan Sponsor Advisory Committee that represents the broad DC community and includes public, corporate and non-profit DC plan sponsors. 

FN: I’ve noticed DCALTA has a very impressive (and quite diverse) Board of Directors. How did you find such prominent people for your board and what motivated them to join?
Epstein: Thanks, and it certainly was not an easy undertaking. When I started this process a couple of years ago, some of the 401k lawsuit settlements were taking place and this, unfortunately, stifled our progress. But this did not last long and our current Board of Directors embraced our mission from a broader sense and effect change through a collective effort.

I am very proud of our Board of Directors and how each individual contributes a unique skill set towards achieving our mission. Also, the board was not only structured to represent the industry, it also represents gender diversity, a key tenet that even passes through to our underlying committees.

Interestingly, each board member has a wide range of experience dealing with alternatives and this fosters a productive and dynamic meeting environment. As mentioned, we have involved plan sponsors from the beginning because they are predominantly serving as the investment fiduciaries and their insight is invaluable. This certainly bodes well when an investment officer has had experience already working with alternatives via their respective defined benefit plans. They’re engaged and not only view alternatives from a risk/reward perspective, but also from a fiduciary perspective.

FN: OK, let’s get to the meat and potatoes of this. We’ve seen much press on alternative investments. Some articles frame these investments as “cutting edge.” In fact, we’ve had alternative investments in 401k plans almost since the beginning. Can you tell our readers about the broad spectrum of “alternative investments” from the ones they might not think of as “alternative” to the truly novel products that are out there?
Epstein: The term, “alternative investments” encompasses a myriad of strategies and investment types that are not considered your typical stock or bond investment. They can include investments like private equity, commodities and infrastructure. Some of the more commonly used non-traditional investments in DC plans include high yield bonds, emerging market debt, TIPS, real estate and commodities. There are also stand-alone multi-strategy funds used to offset the risk of inflation and/or minimize volatility. Other non-traditional investments being utilized by plan sponsors include managed futures, risk parity, equity long/short, infrastructure, and direct investment in privately held companies. There`s also venture capital, MLPs and timber.  The list goes on and each alternative has a unique risk/return profile, varying liquidity requirements and different methods for valuation. Alternatives are used in portfolios for different reasons, whether to optimize returns, hedge against downside risk, or even add diversification.

FN: Among the questions plan sponsors have regarding alternative investments is the degree of additional – or, at the very least, “unique” – fiduciary liability they bring with them. Recalling the spectrum of alternatives mentioned above, what are some of the issues fiduciaries should be aware of for the different segments of alternative investments?
Epstein: I do not like to think that casting a wider investment net on asset classes and alternative strategies, especially those that are designed to reduce risk, as increasing a sponsor’s fiduciary liability. That seems to be the misnomer, that the term “alternatives” assimilates to higher risk or higher cost investments. Like with traditional investments, a similar due diligence process should be applied when selecting and monitoring these types of investments. One main consideration is analyzing what risk/return expectations are desired of each non-traditional investment being considered. Other key factors that plan fiduciaries should consider include cost, liquidity, transparency, and the ability to analyze risk-adjusted net performance. For example, liquid alts, are designed to replicate hedge fund-type strategies and are completely different than illiquid alternatives, like infrastructure or private equity. Naturally, they will all require different types of investment screening and measurement.

FN: What do you see as some of the most popular of the newer alternative investment offerings? What is the typical profile of the plans that are exploring the use of these products?
Epstein: As you know, DCALTA represents many types of non-traditional investments and the ability to measure their uptake uniformly is not an easy task. Also, the term “popular” may not equate to actual uptake. For example, if a thousand DC plan sponsors added stand-alone liquid alts funds to their investment menus, you could construe that liquid alts are gaining popularity. However, if plan participants don`t understand the investment and chose not to invest in it, then they really are not that popular.

As far as some of the newer types being considered by plan sponsors, we are seeing investments that can access the private markets, whether debt or equity, making headway. In addition, direct real estate is being used within diversified asset allocation models, like Target Date Funds. Many of the larger DC plans that use custom TDFs are already using hedge fund strategies, like risk parity, to help minimize risk along glide path progression. Also, many of the larger plans already invest in alternatives through their DB plans and are comfortable with their risk/return profiles. As far as illiquid alternatives, they are not only common in foreign DC plans, but their benefits have been taken advantage of for years. There are also U.S. DC plans that access the illiquidity premium through sleeves within their TDFs, where cash flows are managed around that investment.

FN: DCALTA is currently working on a project in Australia to test the viability of some types of alternative investments being used creating “virtual” defined benefit plans within the framework of a defined contribution plan. Can you give us some specifics on this? How does this work? What do you hope to discover? What’s unique about the Australian DC environment that makes this project more suitable for them? How might we tweak the U.S. DC infrastructure to possibly duplicate what’s going on in Australia?
Epstein: Australia has one of the strongest DC systems in the world. They not only have a mandated superannuation guarantee payment of 9.5% (employer contribution), but that figure will start increasing after 2021. The AU DC system comprises 90% of their total retirement system and this is intriguing to me. My interest is not only with their system, but with the investments being offered to members. Many Superannuation Funds use Balanced Funds as their default investments. This is similar to our QDIA and why I am interested in their funds. Specifically, that many of their Balanced Funds take advantage of alternative investments, even the illiquids. DCALTA is currently in the process of collecting data from a group of Supers and this will help us interpret the impact that both private equity and infrastructure has had on their funds’ portfolios. In addition, we have the support from the academic community through the Institute for Private Capital, to assist us with this project.       

FN: What’s next for DCALTA?
Epstein: We will continue to build out our research, public policy, and plan sponsor committees while increasing general membership. As mentioned, we recently formed an alliance with the Institute for Private Capital, and we are excited to collaborate with the academic community on our AU Superannuation’s project. The results will help drive our advocacy and educational efforts. Our goal would be for DC plan sponsors to have access to many types of asset classes and not be restricted because of regulatory constraints or the fear of litigation. 

FN: Beyond DCALTA, what do you see as the greatest challenge today to the retirement plan industry and for retirement savers in particular?
Epstein: Great question, and fundamentally, I feel that fee compression has taken on a toll on the DC community, especially the investment managers and plan providers. What happened to “you get what you pay for”? Personally, I would be willing to spend more for an active manager that had the ability to outperform or to access the private markets. In addition, I would pay more for a recordkeeper or TPA that was able to customize their service model or provide a higher level of service. I would also feel comfortable paying more for outsourcing certain fiduciary functions. I guess what I am trying to convey is that nothing good can come from a bottoming out on fees. Don’t forget, that value makes up the other side of that equation. As far as the impact of this on retirement savers, we are seeing robo advisers gain momentum and auto features become the norm. However, I feel that participants will always want someone they can talk to about their investments and unfortunately, it may take a market correction to realize it.   

FN: On a personal note, thank you for showing great interest in my new book on the subject From Cradle to Retirement – The Child IRA: How to start a newborn on the road to comfortable retirement while still in a cozy cradle. What do you see as the primary advantages of having children save through an IRA and what do you think can be done to encourage more parents to help their children establish a Child IRA? [Ed. Note: You can read more about it here: – just scroll down below the sliding picture and click the links to the relevant articles.]
Epstein: I think the Child IRA is a brilliant idea and anytime a parent can help their child avoid the worries or struggles that come along with retirement saving, is a huge positive. Also, the value of compounding is a powerful tool and to start at age zero for children and end at age nineteen, is intriguing. I also think that if payroll deduction were made available, that the ease would attract many more parents to contribute. I look forward to reading more about the concept and please let me know how I can help.   

FN: Jonathan, are there any other thoughts or ideas you’d like to share with our readers?
Epstein: I just want to thank you for even considering me as an interviewee. Also, I`ve always enjoyed your articles and the humor you inject into them. Thanks for that and please keep it up.

FN: It’s wonderful to have you share your ideas and experience with our readers, Jonathan. Alternative investments represent a vary broad and interesting topic. I’m sure there will be much more to come on them in the future. I’m especially fascinated by the work be done by DCALTA and where that might be headed. Our readers will no doubt be interested to learn of any developments.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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