How many of the participants in that 401(k) you sold last year,last month or last week are accredited investors?

That’s a question advisors should give serious thought toanytime they’re pitching alternatives to their employerclients.

There’s no disputing the popularity of alts, but there’s also nodisputing that some of the investments in this asset class areilliquid and can be risky andexpensive.

Investments by public pensions in hedge fund plays, real estate, commoditypools and other alts more than doubled between 2006and 2012, from 11 percent to 23 percent. Retirement plans and otherinvestors have nearly $300 billion committed to alt assets at themoment.

But what might be appropriate for a multibillion-dollar state ormunicipal pension, or a high-net worthinvestor, may be wholly inappropriate forthe bulk of the nation’s considerably smaller employer-sponsored401(k) plans.

An accredited investor – typically someone earning high sixfigures with $1 million or more in assets – can suffer the loss ofprincipal far more readily than the average American worker.

Alts in DC plan design stirred a good deal of discussion at theFinancial Research Associates DCIO Forum in New York earlier thismonth.

Not surprisingly, the panel members in a session on the topicall said that alts can play a role in 401(k)s.

The moderator noted that 2012 saw over $25 billion in netinflows to alts, that 78 percent of all retail advisors use alts,and that advisors allocate an average of 11 percent of their bookto alts.

So far, so good, right?

But here’s the kicker.

Seventy-five percent of advisors, he said, also admit they’re notas knowledgeable as they would like to be about alts.

A survey by Natixis Global Asset Management offers corroboratingevidence, finding that only 31 percent of financial advisers feltthey understood alternative funds "very well" and that 53 percentbelieved the funds were "often too complex to explain."

Read also: Natixisuncovers unrealistic expectations

So, in that light, just imagine how little sponsors, let aloneparticipants, might really understand about the investments meantto secure their retirements.

To their credit, the panelists in New York, while asserting altsaren’t as risky as their rap, issued a number of warnings toadvisors. Among them:

• Make sure participants don’t have access to standalone alts.It’s better to package them in a custom target date fund orexchange traded fund;
  
  
• Alts can get easily misused, so try very hard not toover-indulge;
  
  
• Pick your plan sponsors very carefully, preferably those withsophisticated investment committees, not just an overtaxed HRdepartment down the hall;
  
  
• Don’t forget how bad things got in 2008. Next time there’s amarket crash, there’ll be no way for older participants to recoverunless they substantially delay their retirement date; and
  
  
• Finally, obviously alts are more expensive. To justify them, doa back test. Go back to see what would have happened to your planif you had added alts in 2005. Would it have dampened the effect ofthe downturn? If the answer is affirmative (a likelihood), it’seasy to justify the higher fees.

Alts are only going to grow. Let’s just not allow ignorance andgreed ruin a good thing.

Also read:
DC plans urged to consider private equity
DCIO market consolidating, maturing