Square Pegs, Round Holes and ‘Convenient’ Conclusions

  Every so often a report comes along that says less about retirement policy than it does about the temptation to reduce complex issues to a simplistic scoreboard — that fits a particular agenda. 

Even if it amounts to jamming a square peg into a round hole.

This week’s entry comes from a report arguing that 401(k) plans without private equity and other alternative investments “significantly outperformed” pension plans that invested heavily in those alternatives. The implication, of course, is that pension plans — and perhaps the experts managing them — somehow got it wrong. More precisely, it takes to task the decision(s) by those once-vaunted defined benefit plans for having the temerity to invest in … private markets (gasp!). 

Now, there are plenty of reasons to approach the introduction of private markets to defined contribution plans with caution — and that was before the recent Labor Department proposal.[i] But any credible retirement plan professional understands that defined benefit and defined contribution plans have COMPLETELY different timeframes, objectives, and risk factors to consider. Comparing their returns[ii] without acknowledging those differences is a bit like comparing the performance of a fire department and an ambulance service based solely on fuel efficiency.

Technically measurable? Sure.

Useful? Not so much.

The report headlines with an assertion that DC plans’ “superior performance was a result of the defined contribution plans’ simpler portfolio mix, and the outperformance holds even when controlling for plan size and risk.” 

Yes, but. Defined contribution plans are accumulation vehicles. Their objective is largely straightforward: maximize participant account growth over time, subject to participant behavior and investment elections. Particularly over the past 15 years — a period dominated by one of the strongest public equity runs in modern history — that has proven to be a very favorable environment for equity-heavy portfolios. Oh, and they’re under the direction of millions of different individual savers, with widely divergent interests, needs, expertise and — attention spans.

To put it mildly, defined benefit plans operate under a different mandate entirely.

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They aren’t simply trying to maximize returns. They are trying to ensure that promised benefits can actually be paid — not just next quarter, but decades into the future. That means managing liabilities, liquidity needs, funded status volatility, cash flow demands, and demographic realities. Mature pension plans with large retiree populations often must maintain substantial allocations to fixed income and diversifying assets precisely because they have obligations that continue regardless of what the markets are doing.

And that, ironically enough, was once considered a virtue (see Goal Lines).

For years, many of the same voices now criticizing pension plan allocations celebrated the advantages of defined benefit investing: professional management, institutional discipline, diversification, long-term investing, risk pooling, and access to asset classes unavailable to most individual investors.

Pension plans were often held up as examples of how retirement investing should work — insulated from participant panic, emotional trading, and the limitations of retail investing.  To this day many industry experts promote shifts toward the DB-ification of DC plans.

Now, after a prolonged bull market in public equities, the narrative has, apparently, shifted.

Suddenly, diversification is evidence of caution. Liability management is evidence of underperformance. And 401(k) plans — once criticized for placing too much responsibility and risk on individual workers — are being celebrated for the very market exposure that once made them suspect.

Funny how market cycles can reshape philosophy.

The report’s comparison period also matters. Measuring outcomes beginning in 2009 effectively captures nearly the entirety of the post-financial crisis equity surge. In hindsight, portfolios with heavier public equity exposure were almost destined to look superior over that period.

Then again, hindsight has always been the easiest investment strategy.

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None of this is to argue that pension plans are beyond criticism, or that alternative investments always justify their fees or complexity. Reasonable people can debate those questions — and should.

But treating pension plans and 401(k)s[iii] as though they are interchangeable investment products competing for quarterly bragging rights misses the larger point.

Let’s face it — the gap in investment returns may well have something to do with the allocation to private market investments at a particular point in time. But the commonsense conclusion is that the real explanation goes so far beyond that that the comparison is … ludicrous. One can only imagine that those resharing the headline of this particular report seem only to care about the conclusion it draws, rather than the arguably shaky foundation upon which it was based.

The real issue here isn't whether the square peg or the round hole is somehow superior. It's the insistence on forcing one into the other and then declaring victory even when the fit looks awkward.

Sometimes a square peg is supposed to be square. And sometimes the problem isn't the peg at all — it's who’s holding the hammer — and why.

• Nevin E. Adams, JD

 

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[i] Which, for my money, mostly reminds us just how complicated and fraught with concerns that process is. See Talking Points: Retirement Income, Defaults and Fiduciary Duty.

[ii] Not to mention blurring the potential distinctive differences between all the defined benefit plans and all the various defined contribution plans that are being aggregated together to get those (gulp) AVERAGE results.

[iii] Not to mention the vast array of plan types being “mushed” together to derive these conclusions: “Using complete Form 5500 filings for all open U.S. private sector defined benefit plans and all defined contribution plans (over 58,000 plans, $7.7 trillion in combined assets) between 2009 and 2024, and incorporating verified return data for U.S. state and local public pension systems from the Public Plans Database…”

 

Retirement Income, Defaults and Fiduciary Duty

 I will confess that I am (still) of a mixed mind on imbedding retirement income solutions in 401(k) plans — and a new whitepaper on the implications of the new Investment Selection rule has done little to assuage those concerns.

The Morningstar paper — aptly titled “Guaranteed Income in DC Plans: Evaluating Target-Date Funds with Built-In Annuities” — covers a lot of ground. That said, more than half the paper is background[i] — chronicling both the trend lines to date, as well as offering a readable description of the two primary types of retirement income options that have found their way into the target-date fund framework (and yes, they’re quite different!). Those trendlines have captured the attention (and doubtless recirculation) of the paper, particularly among proponents.

But the “meat” of the paper considers the implicatio
ns of applying the Labor Department’s “new” Investment Selection Rule (though its official label at present remains “Fiduciary Duties in Selecting Designated Investment Alternatives”), and its list of six factors fiduciaries are charged with applying in their consideration(s) of all participant-directed choices[ii] on their retirement plan menu — at least if they expect to benefit from the presumption of prudence the Labor Department proposes to invoke in what it at least calls a “safe” harbor.

Factors Focus

And while those six factors — fees, complexity, performance, benchmarking, liquidity, and valuation — are to be broadly applied under the proposal, much (most? All?) of the coverage and discussion to date has been about the application of the Labor Department’s proposal to private markets, cryptocurrency, and the like. That said, this paper thoughtfully reminds us that retirement income option(s) require careful consideration as well.

Not to blend the first two, but fees on these retirement income offerings are definitely “complicated.” They’re higher than the other components of the target-date fund — the question is, what is the commensurate value? Their addition to the target-date fund definitely also adds mechanical complexity, certainly at the participant level (presumably the default facilitates adoption, but at some point, the participant has to “deal” with the reality).

As for performance — well, as the paper acknowledges, “Evaluating these products’ performance requires accepting upfront that forecasting is hard.” Ditto benchmarking, for much the same consideration. “Participants receiving guaranteed income through a GLWB or income annuity are benefiting from something traditional performance comparisons do not capture,” according to the authors. “This is where the Department of Labor’s emphasis on meaningful benchmarks becomes especially challenging for these products.” 

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And then there’s liquidity and valuation — which are one thing at a plan level, and potentially something quite different at the participant level. Oh, and the authors add a seventh factor; financial strength and the insurer’s credit rating — which while the SECURE Act may well provide helpful guidance there, those factors certainly bear additional, thoughtful consideration — and I would argue particularly so in a default fund scenario.

Complicate ‘Ed’

The paper itself is undeniably positive[iii] in its assessment of the need for, and the opportunities with, these solutions. It not only reviews the growing number of target-date structures incorporating guaranteed income components, it also outlines the potential behavioral and longevity-risk benefits of annuities.

But in my reading, the analysis is far more “nuanced.” Indeed, much of the paper reads like a litany of unresolved complications:

• Different annuity structures behave very differently.
• Fees and guarantees can be difficult to evaluate.
• Liquidity tradeoffs remain significant.
• Portability remains a significant concern — people change jobs, plan sponsors change recordkeepers, recordkeepers get acquired, insurers merge, and rollovers are complicated enough already.
• Participant understanding is limited — to say the least. Much less the understanding of the plan fiduciaries (and advisors) considering these options.

Little wonder that current adoption remains fairly muted despite years of industry attention and encouragement.

Proponents would, and have of course, argued that defaulting participants into these structures merely applies the same behavioral-finance principles that helped positively drive participation and savings rates higher.

If these structures were a straightforward solution, adoption likely would have moved beyond niche implementation by now. Instead, the industry continues searching for a retirement-income framework that participants will understand, fiduciaries will accept, and recordkeeping systems can realistically support — or at least one that can be slipped into a target-date offering that has already passed those tests.

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And while it remains just a proposal at this point, the Morningstar analysis suggests that applying the Labor Department's proposed framework to retirement-income solutions may rightly prove to be more challenging than applying it to traditional investment options.

The challenge is that retirement-income products are not merely investments with different return characteristics; they are insurance structures layered into investment vehicles. That distinction may ultimately require a different fiduciary lens altogether.

And whether the required analysis produces better fiduciary decisions — or simply more complexity — remains to be seen.

• Nevin E. Adams, JD

 

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[i] In fairness, a full quarter of the 13-page paper is devoted to disclosures/disclaimers.

[ii] Lifetime income options were one of the categories of investment alternatives named in President Trump’s August 2025 Executive Order (even if most wouldn’t be inclined to include them in that category).

[iii] In one executive summary bullet, it’s noted that assets in target-date strategies that include an annuity component for lifetime income grew to $44 billion at the end of March 2026, up from $25 billion a year earlier. However, in a separate bullet it’s acknowledged that “so far, growth has been driven by two series: BlackRock LifePath Paycheck (USD 26 billion in assets at the end of March) and custom target-date AB Lifetime Income (USD 14 billion).” So, $40 billion of the $44 billion in just those two.

A PEP-spective on Fiduciary Reviews

  Some months back, the Labor Department published an intriguing three-part “proposed rule” that, to my eye, offered helpful fiduciary tips that go well beyond pooled employer plans (PEPs).

The title alone — “Pooled Employer Plans: Big Plans for Small Businesses” — told you all you needed to know about the motives behind the publication. And, true to form, both the data provided on the current state of pooled employer plan adoption and the focus of the request for information (RFI) included were very much in the spirit of removing barriers to PEP adoption, if not outright promotion of the same.

But what I viewed as the third part of the publication (though it’s labeled V. Fiduciary Tips for Small Employers Selecting a PEP) was, to my eye, the most intriguing aspect, in no small part because it served as a valuable reminder that there ARE fiduciary considerations in making that choice — something that purveyors of that option have been known to gloss over.

As I was recently scanning these — it occurred to me that these admonitions could — and should — be broadly applied to pretty much any new plan option — and not just for small employers.

To that end, consider the following as a fill-in-the-blank template, replacing the word PEP with, say — alternative investments, cryptocurrency, retirement income, or a managed account. Consider:

The Considerations

1. Consider what ________ [i] has to offer you and your employees.

The PEP-focused explanation emphasizes an opportunity to leverage economies of scale, as well as to free up time for plan fiduciaries to run their business “…while simultaneously providing your employees with an opportunity to save and achieve retirement security.”  While that buries the lead a bit, it’s a reminder that your actions need to be prudent and in the best interests of plan participants and beneficiaries” — but mostly a reminder to consider the benefits and costs of the service(s) under consideration.

• Make sure you understand the type of ____________ under consideration.

The PEP-focused explanation notes that, while this option has certain things in common, they aren’t all the same, and don’t operate in the same way — that plan fiduciaries should consider the needs and best fit, and the importance of considering several before making a choice. The same thing is true with pretty much every option that might be under consideration, as the labels retirement income, alternative investments, and managed accounts are widely applied to very different products and operational considerations.

• Make sure you consider the experience and qualifications of the _______.

While the pooled plan provider (PPP) is mentioned here, every service offering is delivered by a provider of some type, and as this tip reminds, “understanding the experience and qualifications” of this entity “…is one of the most important — if not the single most important — aspects….” That means you need to ask and understand “questions relating to the quality of their services, customer satisfaction, prior litigation or government enforcement matters…” as well as “the number of employers and participants in the plan and the amount of its assets….” Basically, you want to make sure that the entity is capable — and has a track record — to fulfill the promises that have been made, and the needs of your plan.

• Make sure you ask questions about ________ fees.

This one really doesn’t need any more explanation, other than a reminder not only to find out what the fees are and who pays them, but also who is getting paid, notably any third parties — or third parties that might be providing compensation to the provider you’ve hired.

• Make sure you understand the investment options.

Of course, for some of the possibilities noted above, this (alternative investments, crypto) is the investment option under consideration and definitely should be understood. Ditto retirement income, which comes in many shapes and sizes (and was recently included in the executive order regarding alternative investments).

• Ask questions about your exposure to fiduciary liability for investments.
• Ask questions about your exposure to fiduciary liability should you join _____.
• Don't forget to monitor ________ on an ongoing basis.

One of the interesting call outs in the PEP document was that “under federal law, employers joining a PEP are legally responsible as fiduciaries for the proper selection of investment options for their employees unless the pooled plan provider hires an investment professional to act as a fiduciary with respect to investment selection.”  Interesting in that, again, some of the purveyors of those options have tended to gloss over/downplay this aspect.

That said it’s good to remember that, barring some kind of special provision, you are personally liable for the prudent selection and ongoing monitoring of all plan investments and services. All of which are embodied in the three tips listed above.

• Make sure you fully inquire about the implications of exiting _____.

I’ve heard it said that it’s a lot easier to get INTO a PEP than to get out of it (though that may just be a nasty rumor, and is doubtless a function of the PEP you have gotten into) — but the same could apply to any number of the other services outlined above, notably retirement income and alternative investments.

The tip here notes that it’s good to ask about any timing or penalty-imposed restrictions from a PEP, but similar impediments might, of course, be found with retirement income or different types of alternative investments. The bottom line here is that while you may not need to exercise an “exit” strategy, you need to know what the implications for the plan and participants would be if it came to that.

In Sum

So there in a nutshell you have it. For any/every product service being considered, make sure you know what benefits/costs it brings to the plan/participants, the capabilities/sustainability of the entity providing it, the fees (and who’s getting them), the process/costs for exiting — and that you have an ongoing personal liability/responsibility for monitoring the services, once engaged.

• Nevin E. Adams, JD

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[i] Just fill in the blank with the applicable service/product under consideration: managed account, retirement income, alternative investments, crypto, etc.