Last week, news echoed through the financial world that President Donald Trump is expected to sign an executive order seeking to ease 401(k) pension plans' access to alternative assets. This decision recognizes that individual investors should also benefit from the illiquidity premium that has been captured for years by institutional investors. This has been driven by large fund managers that manage private market assets, in order to access the market for defined contribution plans with $12.4 trillion in assets.

Until now, 401(k) plans - the most popular voluntary pension savings plans in the U.S. - only allow investments in traditional instruments such as stocks and bonds. But this measure opens up the possibility that target-date funds and balanced funds - the most widely used vehicles within these plans - can gradually include diversified and professional alternative strategies. It is not a matter of a worker directly buying a private equity fund, for example, but participating indirectly through structured funds managed by sophisticated players.

In the case of the 401(k), the worker contributes a percentage of his or her salary and many companies match or supplement those contributions. The money is invested in a portfolio selected by the worker from a limited "menu". Traditionally, the options have been conservative, but the sophistication of the offerings has been increasing, especially with target-date funds, which automatically adjust the risk profile according to the age of the participant.

What does this have to do with Chile?

Quite a lot. In Chile, the pension reform proposes to create generational funds, which will group members according to their age and investment horizon. This represents an opportunity to improve the efficiency of the system and, as in the U.S., opens the door to better long-term diversification. At the same time, these funds offer significant potential to contribute to the country's economic development by channeling investments into key sectors such as infrastructure, energy, technology and other assets that drive sustained economic growth.

This type of vehicle would allow for a more natural incorporation of alternative assets such as private debt, infrastructure or private equity, especially in funds aimed at younger generations, whose investment horizon can tolerate less liquidity. In addition, by not requiring liquidity to switch between multifunds, as is currently the case, the inclusion of these assets would be facilitated.

In an environment of lower returns and more volatile public markets, it is crucial to reconsider the limits on alternative assets. Although the Central Bank has already taken the decision to increase the percentage allowed according to a set timetable, the discussion is still focused on whether it should be increased further. Experience shows that, with good governance and a robust structure, alternative assets can improve the risk-return profile of pension funds.

The U.S. decision sets a relevant precedent: even the most decentralized pension system in the world is recognizing the value of alternatives for workers. In Chile, generational funds open the opportunity to do the same.

Vicente Dourthé, CFA
Portfolio Manager Private Debt Fynsa AGF