But what might be appropriate for a multibillion-dollar state or municipal pension, or a high-net worth investor, may be wholly inappropriate for the bulk of the nation’s considerably smaller employer-sponsored 401(k) plans.

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

Alts in DC plan design stirred a good deal of discussion at the Financial Research Associates DCIO Forum in New York earlier this month.

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

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

So far, so good, right?

But here’s the kicker.

Seventy-five percent of advisors, he said, also admit they’re not as knowledgeable as they would like to be about alts.

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

Read also: Natixis uncovers unrealistic expectations

So, in that light, just imagine how little sponsors, let alone participants, might really understand about the investments meant to secure their retirements.

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

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

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

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