In DB plans, a single asset pool and flexibility in handling portfolio liquidity allow plan sponsors to diversify investment exposures across many strategies, including some that benefit from a substantial liquidity premium. As a result, many plan sponsors have reduced total plan volatility without compromising the level of return. Even better, the larger asset base also supports lower fees through sliding fee schedules and lower-cost vehicles.

These advantages could clearly also benefit DC plan participants. And with the recent growth in target-date funds, which hold investments based on a target retirement date, and pooling of strategies in these funds, the traditional benefits of asset pooling are now increasingly available. However, before further improvements can happen, regulations and the emphasis on the perceived benefits of daily valuation and daily liquidity need to reflect something more akin to global best practices.

This paper discusses these views in more detail, beginning with the benefits of asset pooling and illiquid investments, before addressing impediments to change.