Defined contribution retirement plans need the non-traditional investment solutions that traditional pension plans offer.

That’s the gist of BNY Mellon’s latest white paper. The report argues that DC retirement plans could improve their risk-adjusted returns, reduce volatility and provide better protection against inflation by broadening their investment options to include real assets, emerging market equities and debt, and liquid alternatives.

"Traditional DC plans do not provide the level of diversification and risk balance that plan participants require to achieve their retirement goals,” Robert Capone, executive vice president of the BNY Mellon Retirement Group and author of the report, said in a statement.

The limited range of investment options is the primary reason the plans are unable to match the performance of traditional pension or defined-benefit plans, which tend to incorporate a range of non-traditional assets, according to the report.

“We believe that applying the best DB practices to DC plans would reduce equity risk and home country risk as well as thoughtfully incorporating alternative investments to increase diversification, return potential and downside risk management,” Capone said.

If DC plans were constructed more similarly to DB plans, approximately 20% of the DC plan assets would be allocated to non-traditional strategies, such as real assets, total emerging markets and liquid alternatives, according to the report.

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