This past July, Massachusetts' top securities regulator, Secretary of the Commonwealth William Galvin, began an investigation into how 25 alternative mutual funds, including the Principal fund, have been recommended by registered investment advisors to investors. Strategic Insight noted in its research that legal fears may be among the reasons retirement fund series have been slow to add alternative investments.
But Tyler said Principal's Global Multi-Strategy fund is intended to reduce overall volatility, and that "is precisely why its use in a target-date context makes sense." He gave as an example the now-common use of emerging markets as part of diversification, but which if used excessively can make for a very risky portfolio.
"The trick is to know how much," Tyler said. "In a target-date fund, we have the benefit of mixing various components in the appropriate weights to produce a desired level of expected return for an expected level of risk. I cannot control what an RIA will say about the fund, but we are very clear in how we communicate about our use of alternatives," Tyler said.
The debate over alternatives raises an important question for investors choosing to "set it and forget it" with their retirement investing through target-date funds:
- Do you know if your retirement fund series is using alternatives?
- If so, to what degree?
- How is it defining alternatives in the first place?
Investors should take a peek at how their retirement plan is approaching alternatives, but Blanchett said investors should not be overly concerned about the current low level of alternatives fund usage in target-date funds. "Overall, I'm not that worried about the current low allocations to alternatives," Blanchett said. "I think we'll see the allocations continue to increase in the future, especially as more providers enter the target-date space and try to differentiate themselves from their competitors."
—By Joe D'Allegro, special to CNBC.com