Alternative investments don’t belong in defined contribution savings plans, argues Jeffrey Hooke, a retired private investment executive, author, and academic, who co-authored a comment letter to the Department of Labor explaining why. The DOL is preparing new rules following an executive order issued by President Trump to allow alternatives in defined contribution plans.
Hooke, who is also a former finance lecturer at Johns Hopkins University, and Michael Imerman, an assistant professor in finance at the University of California, Irvine, have laid out a scathing 11-page critique that addresses problems with valuation, excessive fees, liquidity, complexity, and institutional incentives in arguing that alternatives are unsuitable for most retirement savers.
“I'm asking the DOL to NOT allow alt investments in 401(k) plans,” Hooke wrote in an email to Institutional Investor.
The bottom line, according to the authors, is that alternatives have failed to outperform traditional 60-40 investment strategies over time.
Some 70 percent of defined benefit plans invest in alternative investments with many state pension plans putting up to 30 percent of their portfolio in private equity, hedge funds, private credit, and infrastructure, the authors noted.
They estimated that more than 95 percent of state plans underperform a diversified U.S. public market 60-40 index over long stretches of time.
Hooke and Imerman cite the example of the California Public Employees’ Retirement System, which is considered a bellwether among pension allocators, to make their case.
They wrote that over the 10‑year period ended December 31, 2025, CalPERS posted an annualized return of 8.3 percent, roughly 120 basis points below the 9.5 percent return of Vanguard’s large-cap blended index fund that tracks a 60‑40 allocation.
As fiduciaries prepare to offer these products, Hooke and Imerman argued that the DOL should look closely at several practices, including fund managers’ method of valuing their unrealized gains. “Thecredibility of these marks, particularly in 2026, is dubious given the widely publicized overhang ofunsold deals in private equity.” (Private credit is also failing to beat appropriate benchmarks and has not returned capital to investors even for funds that are 10 years old, according to a study by the authors published late last year.)
They noted that “the self-reported portfolio values are rarely audited by” third parties and when managers do use external valuation consultants to provide input the models they use “are neither generally accepted nor publicly documented.”
The authors also criticize the widespread use of internal rate of return (IRR) as the preferred metric for investment performance. IRR “has been shown for decades to be an unreliable measure due to it being easily manipulated as well as being subject to unrealistic reinvestment assumptions,” they wrote.
Despite the lackluster performance, “a combination of institutional incentives, governance structures, and peer benchmarking dynamics may have contributed to the increased adoption of complex alternative investment strategies by pension funds over the last 20 years,” they said.
Fiduciaries and investment advisers may prefer alternatives because complex portfolios generate higher fees. That is well known both to investment industry practitioners and has been studied in theacademic literature as the “active-versus-passive asset management debate,” Hooke and Imerman argued.
They added that consultants are only doing “minimal due diligence” and mostly take fund marketing documents at face value. And they suggested the DOL investigate how much fiduciaries are paying, if anything, to independently verify valuations.
The higher fees for alternatives may account for some of the underperformance. Including fixed fees andcarried interest, fees can eat up to “15 percent to 20 percent of capital invested, and therefore the high fees will have a significant impact on returns,” according to the authors.
“Policymakers, including the DOL, might reasonably ask why many public pension plans allocate significant capital to complex, alternative-heavy portfolios rather than relying more heavily on low-cost index strategies that have historically delivered strong risk-adjusted returns,” they said.
Before promulgating the regulation, they suggested, the DOL should “intensely” study that question. A combination of institutional incentives, governance structures, and peer benchmarking dynamics may have contributed to the increased adoption of complex alternative investment strategies by pension funds over the last 20 years, even where net-of-fee benefits are uncertain, their letter said.
These investments have “led to one of the greatest wealth transfers in U.S. history, from taxpayers and retirees to a relatively small group of alternative investment fund managers,” Hooke and Imerman told the DOL.
