Do Specialty Funds Belong in a Retirement Plan?

Recent trends in the retirement plan industry reveal an increased expansion of offerings from plan providers. Not only are plan providers offering more investments, but also a broader range of investments. Many plan providers offer over 100 different options across a wide spectrum of asset class categories, of which approximately 15 percent are considered specialty funds.¹

What is a Specialty Fund?

A specialty fund is a fund that does not fall into a core asset class (e.g., those most often found in defined contribution plans). Some of the more common specialty funds are emerging markets, science and technology, precious metals, and real estate funds.

Due to their unique focus and characteristics, specialty funds can sometimes be alluring to investors, especially in periods of strong returns. While specialty funds can add value to a portfolio when used properly, they can also be extremely volatile and quickly deteriorate the value of a portfolio if used improperly.

Should a Specialty Fund be Included in Your Plan?

The vast majority of plan participants have limited knowledge about how to properly allocate their contributions into these funds amid their complete lineup of investment choices. Some will simply use the 1/N method and equally divide contributions among all the fund choices. Others will focus on what’s hot and chase past performance, irrespective of risk. These reasons suggest that specialty funds make poor investment options for a retirement plan participant.

What’s more, specialty funds typically hold assets that are already found in well-diversified domestic and international equity and fixed income portfolios. This is generally not clear to participants, who may unknowingly have undue exposure to a certain asset class when investing in both specialty and (more traditional) diversified funds. For example, some participants think gold is a conservative investment. In fact, the volatility (as measured by standard deviation) of the price of gold has been 28.3 percent since 1970, while the S&P 500 has experienced considerably less volatility at 18.1 percent.²

Offering specialty funds in a defined contribution plan can encourage less savvy participants to take excessive risks and reduce the diversification of their investments, thus jeopardizing their long-term objective of funding retirement.


¹RPAG proprietary database


Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Summit Group of Virginia LLP are not affiliated. Additional products and services may be avilable through Summit Group of Virginia LLP that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation. 

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