This document, Fact Sheet 2024-19, includes 18 questions and answers on topics such as taxation and reporting, repayment, and how SECURE 2.0 specifically updates the disaster rules that have been in place since 2017. Key clarifications in the document include the following:

For more information on federal disaster distributions and loans under SECURE 2.0, please review our Federal Disaster Distributions and Loans infographic and reach out to your CAPTRUST advisor.

A successful investor maximizes gain and minimizes loss. Though there can be no guarantee that any investment strategy will be successful and all investing involves risk, including the possible loss of principal, here are six basic principles that may help you invest more successfully.

Long-Term Compounding Can Help Your Nest Egg Grow

It’s the rolling snowball effect. Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $46,610. In 25 years, it would grow to $68,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,627. (Of course, this is a hypothetical example that does not reflect the performance of any specific investment.)

This simple example also assumes that no taxes are paid along the way, so all money stays invested. That would be the case in a tax-deferred individual retirement account or qualified retirement plan. The compounded earnings of deferred tax dollars are the main reason experts recommend fully funding all tax-advantaged retirement accounts and plans available to you.

While you should review your portfolio on a regular basis, the point is that money left alone in an investment offers the potential of a significant return over time. With time on your side, you don’t have to go for investment “home runs” in order to be successful.

Endure Short-Term Pain for Long-Term Gain

Riding out market volatility sounds simple, doesn’t it? But what if you’ve invested $10,000 in the stock market and the price of the stock drops like a stone one day? On paper, you’ve lost a bundle, offsetting the value of compounding you’re trying to achieve. It’s tough to stand pat.

There’s no denying it—the financial marketplace can be volatile. Still, it’s important to remember two things. First, the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Though past performance doesn’t guarantee future results, the long-term direction of the stock market has historically been up. Take your time horizon into account when establishing your investment game plan. For assets you’ll use soon, you may not have the time to wait out the market and should consider investments designed to protect your principal. Conversely, think long-term for goals that are many years away.

Second, during any given period of market or economic turmoil, some asset categories and some individual investments historically have been less volatile than others. Bond price swings, for example, have generally been less dramatic than stock prices. Though diversification alone cannot guarantee a profit or ensure against the possibility of loss, you can minimize your risk somewhat by diversifying your holdings among various classes of assets, as well as different types of assets within each class.

Spread Your Wealth Through Asset Allocation

Asset allocation is the process by which you spread your dollars over several categories of investments, usually referred to as asset classes. The three most common asset classes are stocks, bonds, and cash or cash alternatives such as money market funds. You’ll also see the term “asset classes” used to refer to subcategories, such as aggressive growth stocks, long-term growth stocks, international stocks, government bonds (U.S., state, and local), high-quality corporate bonds, low-quality corporate bonds, and tax-free municipal bonds. A basic asset allocation would likely include at least stocks, bonds (or mutual funds of stocks and bonds), and cash or cash alternatives.

There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor—some say the biggest factor by far—in determining your overall investment portfolio performance. In other words, the basic decision about how to divide your money between stocks, bonds, and cash can be more important than your subsequent choice of specific investments.

Second, by dividing your investment dollars among asset classes that do not respond to the same market forces in the same way at the same time, you can help minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, assets in another class may be doing better. Any gains in the latter can help offset the losses in the former and help minimize their overall impact on your portfolio.

Consider Your Time Horizon in Your Investment Choices

In choosing an asset allocation, you’ll need to consider how quickly you might need to convert an investment into cash without loss of principal (your initial investment). Generally speaking, the sooner you’ll need your money, the wiser it is to keep it in investments whose prices remain relatively stable. You want to avoid a situation, for example, where you need to use money quickly that is tied up in an investment whose price is currently down.

Therefore, your investment choices should take into account how soon you’re planning to use your money. If you’ll need the money within the next one to three years, you may want to consider keeping it in a money market fund or other cash alternative whose aim is to protect your initial investment. Your rate of return may be lower than that possible with more volatile investments such as stocks, but you’ll breathe easier knowing that the principal you invested is relatively safe and quickly available, without concern over market conditions on a given day. Conversely, if you have a long time horizon—for example, if you’re investing for a retirement that’s many years away—you may be able to invest a greater percentage of your assets in something that might have more dramatic price changes but that might also have greater potential for long-term growth.

Note: Before investing in a mutual fund, consider its investment objectives, risks, charges, and expenses, all of which are outlined in the prospectus, available from the fund. Consider the information carefully before investing. Remember that an investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporate or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Dollar Cost Averaging: Investing Consistently and Often

Dollar cost averaging is a method of accumulating shares of an investment by purchasing a fixed dollar amount at regularly scheduled intervals over an extended time. When the price is high, your fixed-dollar investment buys less; when prices are low, the same dollar investment will buy more shares. A regular, fixed-dollar investment should result in a lower average price per share than you would get buying a fixed number of shares at each investment interval. A workplace savings plan, such as a 401(k) plan that deducts the same amount from each paycheck and invests it through the plan, is one of the most well-known examples of dollar cost averaging in action.

Remember that, just as with any investment strategy, dollar cost averaging can’t guarantee you a profit or protect you against a loss if the market is declining. To maximize the potential effects of dollar cost averaging, you should also assess your ability to keep investing even when the market is down.

An alternative to dollar cost averaging would be trying to “time the market,” in an effort to predict how the price of the shares will fluctuate in the months ahead so you can make your full investment at the absolute lowest point. However, market timing is generally unprofitable guesswork. The discipline of regular investing is a much more manageable strategy, and it has the added benefit of automating the process.

Buy and Hold, Don’t Buy and Forget

Unless you plan to rely on luck, your portfolio’s long-term success will depend on periodically reviewing it. Maybe economic conditions have changed the prospects for a particular investment or an entire asset class. Also, your circumstances change over time, and your asset allocation will need to reflect those changes. For example, as you get closer to retirement, you might decide to increase your allocation to less volatile investments, or those that can provide a steady stream of income.

Another reason for periodic portfolio review: your various investments will likely appreciate at different rates, which will alter your asset allocation without any action on your part. For example, if you initially decided on an 80 percent to 20 percent mix of stock investments to bond investments, you might find that after several years the total value of your portfolio has become divided 88 percent to 12 percent (conversely, if stocks haven’t done well, you might have a 70-30 ratio of stocks to bonds in this hypothetical example). You need to review your portfolio periodically to see if you need to return to your original allocation.

To rebalance your portfolio, you would buy more of the asset class that’s lower than desired, possibly using some of the proceeds of the asset class that is now larger than you intended. Or you could retain your existing allocation but shift future investments into an asset class that you want to build up over time. But if you don’t review your holdings periodically, you won’t know whether a change is needed. Many people choose a specific date each year to do an annual review.

Source: Broadridge Investor Communication Solutions, Inc.

Flow of 401(k) and 403(b) Cases Continues: More Claims Challenge Underperforming Investments

The flow of cases alleging fiduciary breaches through the overpayment of fees in 401(k) and 403(b) plans continues. Claims challenging the improper retention of underperforming investments are increasing. Following are highlights and language from court decisions to remind plan fiduciaries of the standards against which they are judged.

Goldman Sachs was sued for using its own proprietary funds. Plan fiduciaries won in the district court and the appeals court agreed, with the court saying:

Fiduciaries of the CMFG Life Insurance Company were sued for imprudently retaining the BlackRock LifePath Index Funds, which had allegedly underperformed. Dismissing the case, the judge noted the following:

AllianceBernstein fiduciaries were sued for utilizing their own proprietary target-date funds that consistently underperformed. The case was dismissed, with the judge noting the following:

Recordkeeping and Investment Fees Cases: Process Wins and Attorney’s Fees Clipped

Fiduciaries of Hy-Vee’s 401(k) plan were sued for overpaying for recordkeeping fees. The plan’s fiduciaries followed a diligent process, and the judge found in their favor, noting:

Fiduciaries of the Juniper Networks’ 401(k) plan were sued for, among other things, using managed account services that were more expensive and essentially mimicked the available target-date funds.

The suit was settled for $3 million. The plaintiff’s counsel initially requested $900,000 in legal fees, which the judge rejected. The request was reduced to $750,000, which was also rejected. Ultimately, fees of $375,000 were awarded—approximately double the amount of fees actually incurred.

Similarly, an initial request was made to pay $5,000 to each named class representative, which was denied. A reduced request for $4,000 was also rejected, and the class representatives were awarded $2,000. Reichert vs. Juniper Networks (N.D. Cal. Feb. 2024). Under the settlement, the average participant will receive approximately $370.

Xerox Corporation’s plan fiduciaries were sued for utilizing their own firm’s recordkeeping services and allegedly overcharging plan participants. The case was settled for $4.1 million. The plaintiff’s counsel initially requested $1.37 million in legal fees, 33 percent of the settlement amount. The judge rejected this amount and instead awarded legal fees of 25 percent of the settlement amount—nearly 4.5 times the amount that class counsel spent on the case. Carrigan vs. Xerox Corporation (D. Conn. April 2024). Under the settlement, the average participant will receive approximately $85.

ESG Caution: American Airlines ESG Suit Will Continue

As previously reported, plan participants sued American Airlines for including funds in their 401(k) plan that advance environmental, social, and governance (ESG) causes. The complaint broadly alleged that ESG funds violate ERISA because they support objectives other than plan participants’ financial security in retirement. Initially, it appeared that the challenge may have been to the availability of ESG funds in the plan’s self-directed brokerage window, but that claim has been dropped from the case.

The plaintiffs are challenging the use of BlackRock funds in the plan. Reportedly, BlackRock has embraced ESG factors in its investment approach, and the plaintiffs allege that it is a breach of ERISA’s fiduciary responsibilities to use these investments. Plan fiduciaries filed a motion to dismiss the case, which was denied. So, the case will proceed.

In denying American Airlines’ motion to dismiss, the court acknowledged and appeared to accept the general proposition that ESG investments underperform their non-ESG peers. The judge also noted that ESG investments are not exclusively focused on financial gain to plan participants. Finally, the judge observed that American Airlines’ corporate commitment to ESG initiatives supports the argument that ERISA’s duty of loyalty was breached by the plan fiduciaries. Spence vs. American Airlines, Inc. (N.D. Tex. Feb. 2023).

New DOL Guidance: Expanded Fiduciary Definition and Automatic Portability

Expanded Fiduciary Definition: Undeterred by previous regulations being struck down by the courts, the Department of Labor (DOL) has issued another rule attempting to expand the range of providers who are required to act in their client’s best interests.

It is well settled that ERISA fiduciaries are required to act in plan participants’ best interests. However, ERISA applies only to plan assets. Once assets leave a plan, participants are no longer protected. Therefore, without additional regulation, individuals like stockbrokers and insurance agents can act in their own or their company’s best interests rather than in their clients’ interests.

The DOL’s new fiduciary rule is intended to protect retirement savers as and after assets leave retirement plans. It applies to those who provide investment advice for a fee as a regular part of their business in circumstances where the client believes the advice is tailored to their situation and is in their best interests. Alternatively, providers can also acknowledge that they are acting as a fiduciary under ERISA. The new rule is scheduled to take effect on September 23, 2024. However, litigation is expected.

Automatic Portability: The SECURE 2.0 Act enabled automatic portability services that cause a terminating plan participant’s account to follow the participant to a new employer’s plan. This can be used for small account balances of $7,000 or less. Both the terminating employer and the new employer must be enrolled in the portability service. Transfer between plans is a three-step process.

  1. The distributing plan initiates a mandatory rollover distribution into an individual retirement account (IRA) for the participant.
  2. The default IRA holds the rolled-over assets, pending direction by the portability provider to move the assets to the new employer’s plan. The portability provider tracks default IRA accounts and the accounts in potential receiving plans for matches.
  3. The receiving plan receives the assets from the default IRA when the owner is matched by the portability provider with an account at a participating plan.

For plans that participate in an automatic portability program, there are some responsibilities:

Divorced Couple’s Notarized Agreement Ignored: Plan Documents Prevail

Diann and Boyd Badali were divorced. Their divorce documents did not address Boyd’s employer-provided life insurance. Boyd remarried, then died 15 months after his remarriage. Following his death, both Diann and Renata Badali, Boyd’s wife at the time of his death, claimed his life insurance proceeds.

Before Boyd remarried, he and Diann had entered into a signed and notarized agreement to “update and clarify their divorce decree.” The agreement provided that Boyd would “keep Diann as beneficiary on the employer-provided life insurance policy.”

The plan document provided that, if there were no beneficiary designation, the death benefit would go to the surviving spouse. No beneficiary designation could be located, so Renata Badali, Boyd’s wife at the time of his death, was awarded the death benefits.

The court noted that equitable considerations like Boyd’s intent, as included in the notarized agreement, cannot come into play in an ERISA-covered plan when the plan language is clear, as it was in this situation. Metropolitan Life Insurance Company vs. Badali (D. Utah Feb 2024).

Valuation discounts, which are commonly used for business appraisals for private investment partnerships, minority interests in limited liability companies (LLCs), and family limited partnerships (FLPs), are immensely beneficial for gift and estate tax savings. In fact, applying discounts can reduce valuations for estate tax purposes while simultaneously allowing you to gift your children a percentage of the business, LLC, trust, or FLP at a reduced rate.

It’s important to know that the standard of valuation for gift and estate tax purposes is defined as fair market value. This is the price at which the business, LLC, trust, or FLP would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. Fair market value is the sale price that a hypothetical buyer and seller would reach, not the price that the actual owner would agree to or the price an actual buyer might be willing to pay.

Part of Every Gift and Estate Tax Savings Strategy

To be eligible to receive valuation discounts, an individual may choose to split up ownership of their business, LLC, trust, or FLP, especially for family-owned or closely held assets. Although it is best practice to craft an estate strategy based on the assets you own during your lifetime, these same valuation discounts would also apply to someone’s estate. For instance, in the event that a person passes away while still owning a business and leaves all of their assets to their six children, all six children would be entitled to many of these discounts.

Common Valuation Discounts

The most common valuation discounts are those for lack of marketability, lack of control, minority share, and future interest discounts. These discounts can range from 10 to 45 percent, depending on several factors.

Lack of marketability: This refers to the discount that can be applied when valuing a company that is not publicly traded. Determining lack of marketability often means calculating the value of a closely held businesses or of restricted shares of public companies. The idea is that a discount exists between a stock that is publicly traded (and therefore has a market) and a privately held stock, which often has little if any marketplace. In other words, because a privately held stock does not have clear market value (the way that a publicly traded stock does), it deserves a discount.

Lack of control: This refers to a reduction in a company’s share value due to a shareholder’s lack of ability to exercise control over the company. In this circumstance, a business interest is considered to be worth less than a controlling interest in a company, since business decisions, like determining compensation, setting policies, deciding to sell or liquidate, and declaring dividends, are all out of the shareholder’s hands. Thus, when noncontrolling or nonvoting shares are valued for a private company, a discount for lack of control is often applied.

Valuation Discounts Sidebar

Minority share: You can obtain minority interest discounts by making each gift of an interest in the business small enough to qualify for the minority share discount. The minority share discount, also called a minority interest discount, reflects the idea that a partial ownership interest may be worth less than its pro rata (proportional) share of the total business. For example, ownership of a 30 percent share in the business may be worth less than 30 percent of the entire company value. This is because a 30 percent ownership may be limited as to the scope of its control over critical aspects of the business, such as management, financial or accounting oversight, regulatory or legal issues, and even hiring and firing decisions.

Future interest: Future interest discounts are common when setting up trusts like qualified personal residence trusts that entitle the beneficiary to the asset a specified number of years in the future. Since it is a gift of future interest, the asset can be discounted based on an assumed interest rate of growth.

Determining the Discount

Individuals will need a qualified business appraiser or skilled valuation analyst to determine an appropriate discount based on an analysis of the assets held by the entity and their condition, the size of the interest being gifted, and restrictions outlined in the operating agreement.

Many factors enter into a business valuation, and specific facts surrounding the transfer will weigh heavily into the discount. These restrictions often significantly limit the power of minority interest holders to vote, participate in management, replace managers, force distributions, liquidate assets, and transfer or sell their ownership interest.

If individuals are making gifts over a period of years, experts recommend undertaking a valuation with each gift, as closely to the time of transfer as possible.

Current Tax Law and Valuation Discounts

Under the current tax law, individuals can give $13.61 million per person or $27.22 million per married couple in gifts over the course of their lifetimes without having to pay gift taxes. However, this provision is set to expire at the end of 2025. Based on the many tax proposals currently being discussed, it is possible the threshold may be reduced to a lower number even sooner.

To take advantage of possible grandfathering for transactions completed before the effective date of any proposed regulations, individuals already engaged in transfer planning with family limited partnerships and LLCs should complete the process in a timely manner, while those seeking to rely on existing laws should begin planning immediately.

Previous Definitions

The new definition of an investment fiduciary replaces a five-part definition from 1975 which said fiduciary advice needed to:

In the new rule, these provisions have been reworked. This broadens the impact of the new rule to include many transactions that were not covered under the 1975 guidance, such as rollovers from workplace retirement plans to individual retirement accounts (IRAs), recommendations regarding many commonly purchased retirement annuities, and recommendations to plan fiduciaries.

How This Impacts CAPTRUST Clients

CAPTRUST already serves as a fiduciary when providing investment advice to retirement plan sponsors and participants. Therefore, this rule does not change how CAPTRUST interacts with its clients, nor does it change the services CAPTRUST provides to retirement plan sponsors or retirement plan participants.

The New Fiduciary Rule

The 476-page Retirement Security Rule defines an investment fiduciary under the Employee Retirement Income Security Act (ERISA) as a person who renders investment advice for a fee or other compensation, direct or indirect, under one of the following contexts:

1. The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business, and the recommendation is made under circumstances that would indicate to a reasonable investor that the recommendation:

a. is based on review of the retirement investor’s particular needs or individual circumstances;

b. reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances; and

c. may be relied on by the retirement investor as intended to advance the retirement investor’s best interest; or

2. The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both, with respect to the recommendation.

Given that the rule defines investment advice fiduciaries, it generally applies to service providers like recordkeepers, financial advisors, and investment managers, as opposed to retirement plan sponsors.

One new element of the final rule is that communications from employees of the plan sponsor—even if they could be interpreted as investment recommendations—would not cause employees to be defined as investment advice fiduciaries so long as those employees are not investment professionals.

The final rule also contains a provision that investment education can occur without subjecting anyone to ERISA fiduciary status.

Plan sponsors should be aware that service providers who currently provide investment recommendations, including IRA rollover advice, to their plans or plan participants could be subject to the new rule. Additionally, service providers that currently deliver education to participants may need to reevaluate their processes, services, and product offerings under this new rule.

For more information about this rule or other recent legislative and regulatory changes that may impact retirement plan sponsors, contact a CAPTRUST financial advisor.

Originally, the DOL had intended to gather the necessary information for this database from IRS Form 8955-SSA, since that form already captures the data needed. However, the Internal Revenue Service (IRS) does not believe it is allowed to share form 8955-SSA data with the DOL. 

In the proposed procedure, the DOL places the burden of data collection and reporting on plan administrators. Administrators would be required to provide necessary data to the DOL via Form 5500s each year, perhaps starting with the 2023 5500s that are due in 2024. Because, for most plans, the collection of 5500 data is almost always outsourced to a third-party administrator (TPA) or bundled recordkeeper, these will be the entities that would presumably provide required data to the DOL via the 5500s of the individual plan sponsors.

The DOL is asking plans to provide the following for vested separated participants: 

Plans must also indicate if a participant has been unresponsive to contact. 

At first glance, the reliance on voluntary data collection from plan administrators via a highly segmented process such as that that exists around Form 5500s appears to be administratively difficult. The comment period for this proposal is open until June 17, 2024, and is expected to receive pushback from many organizations in the retirement plan industry.

Interest rates have a similar effect on economies. When financing costs rise, business decisions about new projects, growth, and expansion become more complex—and risky. For consumers, big-ticket purchases become more expensive. Across the economy, higher interest rates can cause a broad slowdown as individuals try to conserve energy for the uphill climb. This is why interest rates are such a powerful monetary policy tool for combating inflation.

However, despite the Federal Reserve’s aggressive rate-hiking campaign over the past two years, the U.S. economy has not only maintained its pace on the uphill climb—it has accelerated. As shown in Figure One, real gross domestic product (GDP), the combined output of the U.S. economy, grew at an annual rate of 3.4 percent during the fourth quarter of 2023, easily outpacing the trend growth rate over the past 20 years of approximately 2 percent.

Figure One: Real GDP and Long-Term Trend Growth

This graph shows real GDP from Q3 2022 through Q4 2023 with a 2 percent trend of growth.

Sources: U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis, CAPTRUST Research. Trend growth represents the average, seasonally adjusted annual growth rate over the past 20 years.

The stock market has likewise continued to climb, with the S&P 500 Index closing the first quarter of 2024 at an all-time high, surpassing its previous high-water marks 22 times during the quarter. What’s also impressive is the consistency of the ascent, with the index marking 277 consecutive trading days without a one-day decline of 2 percent or more.

So far, the U.S. has demonstrated economic athleticism in the face of rising rates. But with expectations now favoring a higher-for-longer scenario, with a Fed that is in no hurry to reduce interest rates in the face of sticky inflation, investors must consider whether the economy is strong enough to sprint across the finish line, or if its legs risk giving out just short of the goal.

Market Rewind: First Quarter 2024

U.S. large-cap equities continued to power higher during the first quarter. The S&P 500 returned 10.6 percent, its best start since 2019, driving the one-year trailing return of the index to nearly 30 percent. All S&P sectors but one were positive. Those most closely aligned with the artificial intelligence (AI) boom continued to lead the market, including communication services and technology, which delivered returns of 15.8 percent and 12.7 percent, respectively.

Despite the continued strength of these sectors, markets also displayed a healthy expansion of participation during the first quarter. The much-talked-about Magnificent Seven mega-cap technology stocks were responsible for 60 percent of index returns in 2023, but their contributions fell to about 20 percent of index performance in March. Contributions from a broader swath of stocks is considered a sign of health in equity markets.

Figure Two: First Quarter 2024 Market Recap [1]

This chart shows Q1 2024 returns for U.S. large-cap stocks (10.6%), U.S. small-cap stocks (5.2%), U.S. bonds (-0.8%), real estate (-1.2%), international developed market stocks (2.4%), international emerging market stocks (5.8%) and commodities (2.2%).

Value-oriented sectors, including financials, industrials, and energy, showed strength as well. In stark contrast to its lagging results during the fourth quarter of 2023, the energy sector showed a healthy return of 13.7 percent as oil prices rallied on strong demand expectations, supply constraints, and continued geopolitical concerns.

U.S. small-cap stocks rallied late in the quarter to erase their early losses and deliver a return of 5.2 percent. This represents a continuation of a three-year trend of underperformance relative to large- cap stocks. Investors continued to prefer mega-cap technology firms with higher profitability and showed a preference for less interest-rate-sensitive corners of the market.

Growth conditions also improved outside the U.S. during the quarter, with various sentiment and economic activity indicators on the rise. International developed market stocks returned 5.9 percent. Their emerging market counterparts trailed with a 2.4 percent return as the Chinese economy continued to face headwinds. Returns were particularly strong in Japan, where market-friendly regulatory reform pushed the Nikkei index past its all-time high, set more than 30 years ago.

The bond market proved less sanguine about the prospect of higher-for-longer interest rates. The yield on the 10-year Treasury climbed from 3.9 to 4.2 percent, leading to slightly negative returns for core bonds, along with higher mortgage rates and borrowing costs. Corporate credit spreads continued to tighten during the quarter, offering investors little incremental compensation for taking credit risk.

Gaining Momentum

Given the powerful impact that interest rates have on the economy and financial markets, it’s no surprise that the rapid rise of the federal funds rate in 2022 coincided with the largest stock market selloff since 2008’s global financial crisis. Since then, however, markets have shown remarkable tenacity.

Several strong tailwinds have supported economic resilience in the face of high and plateauing interest rates, including robust consumer spending, a healthy but not overheating labor market, strong expectations for corporate earnings, election year fiscal support, and optimism for an AI-driven productivity boom.

Consumer Spending

Consumer spending, which grew at an inflation-adjusted rate of 3 percent in the fourth quarter, was the largest contributor to the stronger-than-expected GDP growth at the end of that year. Consumers continued to spend despite ongoing inflation fatigue and higher debt servicing costs. This is largely due to the purchasing power provided by after-inflation wage increases.

Consumers were also more reliant on credit to fund purchases, with credit card balances rising by 13 percent, even as credit card interest rates reached 30-year highs, according to Federal Reserve data. As shown in Figure Three, the result was a spike in the amount of non-mortgage interest paid by U.S. consumers. However, the increase was more than offset by rising real wages, allowing overall debt servicing costs to remain well below historical averages. This suggests that the tailwind of consumer spending may have more room to run.

Figure Three: Consumer Interest Payments and Share of Disposable Income

This charts shows interest payments plummeting in 2020 and rising to 10% in 2024. It also shows household debt service as s share of disposable income, which has skyrocketed in 2023 and 2024 to almost 14%.

Sources: U.S. Bureau of Economic Analysis, Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.

Labor Market

A robust labor market underpins the continued strength of consumer activity. The non-farm payroll jobs report presented a pleasant surprise in March, with the economy adding 303,000 jobs versus an expected 214,000. This degree of outperformance caught even the most bullish economists off guard. The unemployment rate fell to 3.8 percent, marking the 26th straight month that unemployment has remained below 4 percent.

The report was overwhelmingly positive. Still, there were subtle clues that momentum may be slowing. Employment in non-cyclical sectors, such as health care and education, was a larger driver of job growth than employment in more cyclical and economically sensitive sectors. Also, temporary employment declined, another potential indicator of future weakness. The ratio of job openings to unemployed workers continued to soften from its 2022 peak, and the quits rate remained at its lowest level since 2020, indicating that workers left jobs at a slower pace.

Earnings Growth

In 2023, equity market returns were closely tied to interest rate-cut expectations, and price gains came mostly from the expansion of price-to-earnings (P/E) multiples. Even with a strong fourth quarter, when S&P 500 earnings grew at a rate of nearly 4 percent on a year-over-year basis, calendar year 2023 earnings growth for the index was essentially flat, even as the S&P 500 returned more than 26 percent.

With a forward P/E ratio near 21 for the S&P 500, stock market valuations are expensive by historical standards, and returns from here will rely more on earnings growth than valuation multiple expansion. This represents a potential inflection point for equity investors as fundamentals come into greater focus. It also offers the potential for a lower degree of market concentration if businesses of all shapes and sizes are rewarded for strong financial results.

Expectations for 2024 earnings are robust, with analysts forecasting approximately 11 percent growth for the year. Corporate balance sheets are healthy, with high levels of cash as businesses prepared for a 2023 recession that never materialized. This excess cash now represents dry powder that could be deployed for investment and expansion or returned to shareholders. It could also provide a liquidity buffer in the event of a negative economic surprise.

Fiscal Support and Election-Year Dynamics

Another potential tailwind for markets this year is fiscal support from the federal government. This could come from both the continued rollout of already-enacted programs and election-year influences.

A range of in-process government programs will continue to provide economic support, including additional grants from the CHIPS and Science Act, the resumption of the Employment Retention Credit program, and student loan forgiveness. Restocking depleted weapons stockpiles will also create a tailwind for defense-related companies.

Federal election years have historically been favorable for markets, particularly when incumbent presidents are running for reelection. The economy is a consistent, top-of-mind issue for voters, encouraging market-friendly policy actions. As shown in Figure Four, the S&P 500 has ended the last 10 election years with an incumbent running for reelection in positive territory, with an average return of 17.4 percent.

Figure Four: S&P 500 Election Year Returns with Incumbents Running for Reelection

This chart shows an average 17.4% S&P 500 Index return for election years with incumbents running for reelection, from 1964 to 2020.

Sources: Morningstar Direct, CAPTRUST Research

AI-Driven Productivity Boom

Rapid and accelerating advancements in the AI field offer the potential for enormous productivity gains across industries. Productivity is an essential driver of economic growth and prosperity, and AI offers the potential to turn nearly every company into a technology company by automating and expediting tasks, anticipating problems, and making workers more productive.

The growth of an economy can be evaluated by assessing the total number of workers and the amount of economic output per worker. While workforce growth has decelerated amid slower population growth, per-worker productivity could increase meaningfully as AI automates a greater number of tasks and speeds up innovation and processing times. Some economists estimate that AI will increase productivity by 0.5% annually over the next decade, equating to an additional $1 trillion in GDP.[2]

The Course Ahead

While expectations for a dovish Fed pivot fueled late 2023 returns, the first quarter of 2024 delivered strong results despite a pullback of those hopes. At the beginning of the year, investors were predicting as many as six rate cuts during 2024, but by the end of March, that number had dropped to three, in line with the Fed’s own projections.

Recent data reiterates that the final leg of the inflation course may take longer than expected to complete, with more volatility. The Consumer Price Index rose 3.5 percent in March from a year earlier, well ahead of the Fed’s 2 percent target, as both goods and services showed continued price pressures. The Fed is reluctant to cut interest rates too soon for fear of an inflation resurgence, and the strength of economic data provides more room for them to wait.

We remain optimistic that the economy will continue to show resilience amid a higher rate environment. Solid economic activity, including a robust labor market and continued consumer and business spending, has diminished recessionary fears. However, we are also aware that equity prices and investor sentiment reflect this optimism as well, posing risks of a pullback if economic activity begins to falter or expected earnings growth fails to materialize. There are also continuing concerns about potential vulnerabilities within the commercial real estate market and the threat of geopolitical flare-ups that could pose risks to supply chains, trade agreements, and energy prices.

Market participants must now brace themselves for a longer uphill stretch than hoped. For runners, pacing is critical to a strong finish. It’s smart to leave some gas in the tank for the last mile. For the economy, the prospect of higher-for-longer interest rates means the distance to the finish line has likely grown. As always, investors would be wise to evaluate how the strong market results of the past six months have affected their portfolios and financial plans to ensure they are well diversified for the uncertain course ahead.

[1] Asset class returns are represented by the following indexes: Bloomberg U.S. Aggregate Bond Index (U.S. bonds), S&P 500 Index (U.S. large-cap stocks), Russell 2000® (U.S. small-cap stocks), MSCI EAFE Index (international developed market stocks), MSCI Emerging Market Index (international emerging market stocks), Dow Jones U.S. Real Estate Index (real estate), and Bloomberg Commodity Index (commodities).

[2] “New Work, New World,” Cognizant and Oxford Economics, 2024

Today’s evolution is not only a response to the financial pressures of shrinking margins but also a tactical shift toward offering a more comprehensive suite of products. It’s a shift that could make recordkeepers feel less like third-party vendors and more like strategic, mission-aligned partners.

These changes signal a new era for retirement plan sponsors and participants, one where the choice of a recordkeeper goes beyond basic recordkeeping to include a broad spectrum of financial wellness, technology, and personalized advice solutions. It also necessitates a change in the advisor’s role, with advisors now acting as guides or researchers to help plan sponsors understand and make decisions about each recordkeeper’s unique products, services, revenue streams, and outsourcing arrangements.

Navigating Continued Consolidation

In recent years, the retirement plan industry has witnessed a significant trend toward recordkeeper consolidation. This movement has been driven by a confluence of factors, including the pursuit of greater efficiency, the need to invest in and leverage advanced technology, and the desire to expand service offerings. As profit margins tighten and regulatory complexities increase, smaller recordkeepers find it challenging to compete, leading to mergers and acquisitions by larger entities.

It’s a drastic shift, but not a new one. “The recordkeeping landscape has shrunk dramatically from about 400 providers 15 years ago to only about 50 today,” says Mike Webb, CAPTRUST senior manager of plan consulting. “Consolidation is reshaping the whole industry of retirement plan services.”

For retirement plan sponsors, recordkeeper consolidation could lead to a more streamlined selection process as fewer, more capable providers dominate the market. However, the trend also raises concerns about reduced competition, the potential for higher costs over time, and the need for a sponsor to conduct due diligence to ensure their chosen recordkeeper aligns with their plan’s unique needs, goals, and values.

“Moreover, consolidation impacts the level of personalized service that sponsors and participants have come to expect,” says Webb. “As companies merge, there is a risk of service disruption or a decline in service quality during the transition period. Plan sponsors must be vigilant in managing these transitions to make sure their participants’ needs continue to be met without interruption.”

The average transition can take between six and 18 months, Webb says. Throughout that time, there are multiple fiduciary considerations to be aware of. “For plans where the current recordkeeper is the acquiree, sponsors should exercise the same degree of fiduciary due diligence in determining whether to remain with the new recordkeeper as they took to select the existing recordkeeper,” he says. “For plans where the current recordkeeper is the acquiror, sponsors should verify that the acquisition will not impact the recordkeeper’s ability to provide best-in-class service.”

The implications of consolidation also extend beyond the immediate operational aspects. Specifically, consolidation signals a shift in recordkeeper ethos, one where “recordkeeping itself is considered a fundamental expectation,” says Audrey Wheat, CAPTRUST manager of vendor analysis, while innovation, scale, and integration have become key competitive advantages. For plan sponsors, deciding how to move forward requires a keen understanding of their plan’s needs, their participants’ desires, and their recordkeeper’s strategic direction.

Strategic Partnerships and Outsourcing

“More than ever before, recordkeepers have to achieve economies of scale in order to sustain their margins,” says Wheat. “Downward pressure on fees has spurred a relentless pursuit of scale through consolidation and strategic partnerships. Essentially, recordkeepers are redefining their value propositions from traditional recordkeeping to a more holistic suite of services.”

For plan sponsors, this redefinition presents opportunities and challenges. The wider scope of products and services now available from recordkeepers can significantly enhance plan value and participant engagement. However, the variability in how outsourcing arrangements are implemented requires plan sponsors to thoroughly vet and understand the range of recordkeeper services available and their potential impact on service delivery and participant experience.

“On the recordkeeping side, there are typically three options: build, buy, or partner,” says Wheat. “For every new product or service, recordkeepers are asking themselves: Do we want to build this in house, acquire a company that’s already doing it well, or outsource the offering and provide it through a third-party partnership?”

While some recordkeepers now outsource nearly all their operations, others opt to outsource specific business functions, leaning into their strengths while tapping partners to help in areas where they aren’t as strong. “This varied approach to partnering or outsourcing—especially in areas like back-office processing or call center operations—allows recordkeepers to streamline their operations, focus on their core competencies, and leverage external expertise for non-core functions,” says Wheat. Outsourcing is one way for recordkeepers to refine their offerings and create internal efficiencies.

But these new services also introduce new risks for the plan sponsor, including fiduciary and cybersecurity concerns, which necessitate an additional layer of scrutiny and due diligence. How is the recordkeeper using plan data? Are they sharing personally identifiable information (PII) with their technology partners? And do those partners have the same level of data security as the recordkeeper? Plan sponsors are increasingly relying on advisors to help understand the answers to these questions.

Service Diversification

In the race for a competitive edge, recordkeepers are also diversifying their revenue streams by offering a suite of products and services that go beyond traditional recordkeeping. “Every recordkeeper has a side job,” says Wheat. “Differentiation increasingly hinges on supplementary offerings related to financial wellness, technology, or communication tools. Managed accounts, participant advice, health savings accounts (HSAs), and student debt management solutions are other common offerings.” These elements now serve as pivotal decision-making factors for plan sponsors.

Financial wellness programs have become a cornerstone of this differentiation strategy. By integrating financial wellness programs, recordkeepers not only provide a valuable service that extends beyond the basics of retirement planning but also offer a suite of solutions addressing the broader financial challenges that participants face. According to PwC’s 2023 “Employee Financial Wellness Survey,” when included as part of an employee’s benefit package, financial wellness programs may increase employee satisfaction, productivity, engagement, and retention.

“Financial wellness programs encompass a range of services, from personalized advice provided by financial advisors to account aggregation technology to manage net worth to educational content on budgeting, retirement readiness, and managing student loan debt,” says Chris Whitlow, CAPTRUST senior director of advice and wellness. “These tools can be critical to employees to help build their financial confidence and well-being.”

Technology and communication tools are also important. The deployment of user-friendly platforms that facilitate easy access to account information, educational resources, and personalized advice directly influences participant engagement and satisfaction. Recordkeepers that lead in technology innovation are offering participants features they value, such as mobile apps, artificial intelligence (AI)-driven financial planning tools, and interactive educational content.

“These advancements don’t just democratize access to financial information,” says Whitlow. “They also empower participants of all ages and incomes with the knowledge and tools they need to make informed financial decisions.”

The rise of these value-added services underscores a change in the recordkeeping business model. With recordkeeping fees compressed to near break-even points due to competitive pressures, recordkeepers are increasingly relying on their side jobs—that is, additional products and services—to sustain profitability.

“Plan sponsors know that recordkeeping fees have been compressed, and they see that the recordkeepers are offering a wider range of services,” says Wheat. “Naturally, they also want to understand how their vendor partners are making money.” That’s where an advisor can be especially helpful.

Advisors as Guides

As recordkeeper services have expanded, so too has the role of the financial advisor. “Advisors are rarely ever just managing investments now,” says Jennifer Doss, CAPTRUST senior director and defined contribution practice leader. Instead, they’re often helping plan sponsors understand how recordkeepers generate revenue and the implications for their retirement plans. “They navigate the nuances of each provider’s strengths, aligning them with the plan sponsor’s mission and the specific needs and desires of their participants.”

“The advisor’s job is to know the client,” says Doss. “Then they can use their expertise and client-specific knowledge to recommend the best solutions for that particular sponsor and their participants while also ensuring the recordkeeper’s fees are reasonable for the services offered.”

When navigating the choice between multiple recordkeepers, the best place to start is by naming what the plan sponsor values most, whether that means cutting-edge technology, extensive financial wellness programs, or a focus on participant education and advice. In making these decisions, the plan sponsor’s mission becomes a guiding light. It encapsulates the employer’s vision for employee welfare and drives the selection of benefits packages that align with both organizational goals and participant aspirations.

As recordkeepers evolve—embracing new roles and offering innovative solutions—the role of plan sponsor becomes ever more complex, yet ripe with opportunities. Navigating its nuances requires a discerning eye, one that can identify the true value behind enhanced technology platforms, comprehensive service offerings, and the promise of a better retirement planning experience for participants. With the guidance of a financial advisor and a clear understanding of their organizational goals and participant needs, plan sponsors are well positioned to make informed choices that align with their missions and values.

In the future, it seems the ecosystem of relationships between plan sponsors, recordkeepers, and advisors will continue to play a pivotal role in shaping a retirement planning environment that is both robust and responsive to the changing needs of the modern workforce.

The 2020 census revealed some surprising facts about the American population, including the second lowest growth rate in U.S. history and an aging populace. It also confirmed what many people already suspected: America is now more diverse than ever, especially when it comes to race and ethnicity.

For nonprofit leaders, this demographic data is evidence of the need to engage with donors across multiple cultures, generations, and backgrounds to be sure their organizations reflect the diverse communities they are trying to serve. Now and in the future, successful nonprofits need a diverse group of committed supporters to sustain themselves and thrive. Plus, there are other benefits to engaging a wider donor base, including increased funding, improved brand recognition, and access to new perspectives and ideas. By connecting with a broad and varied donor population, nonprofit leaders can also foster a more inclusive philanthropic community at large.

However, it should come as no surprise that simply asking new donors for money does not create a diverse donor population. Authentic donor engagement requires an intentional, strategic, and long-term approach.

Develop a Strategy

“Reaching new donor groups starts by understanding why the organization wants to make changes in the first place,” says CAPTRUST Financial Advisor Kevin Yoshida. For some nonprofits, the answer lies in a mismatch between their existing donor base and their community demographics. White donors and older generations are often overrepresented compared to their national—and sometimes local—population percentages. The risk here is that population incongruities may create an emotional disconnect between the organization and the community it serves.

Other nonprofits may need diverse donors in order to meet urgent fundraising needs. “When things are going well, it’s easy to become stagnant about your donor population,” says CAPTRUST Financial Advisor Paul Schreder. But as the saying goes, the best time to fix a roof is when it’s sunny.

To get started, consider performing a benchmark analysis of current donor demographics. Look for strengths and gaps. Which groups does the organization excel at attracting, and which groups are underrepresented compared to local population statistics? Consider not just race and ethnicity but also different genders, ages or generations, socioeconomic groups, and more.

Next, review the internal diversity represented by the organization’s board and staff. Then consider how to align internal and external demographics. For instance, Yoshida says, “If the community served is mostly women, but the nonprofit’s donor base plus staff and board members are mostly men, it may be smart to consider targeted campaigns to reach more women.”

Once the nonprofit has a clear picture of where it is starting from, leaders can begin to develop a specific and achievable vision of their ideal donor base and compose a diverse donor engagement strategy to get there.

Diversify the Organization

For organizations that discover a mismatch between internal demographics and their communities, one next step is to focus on recruiting a more diverse staff and board. “Diverse organizations may be better equipped to understand and engage with donors from various backgrounds,” says Schreder. “Plus, diverse leaders can use their personal connections to help the nonprofit create authentic connections.”

Yoshida points to one client who has been particularly successful with this approach. “The organization recently appointed a new board chair who is Hispanic,” he says. “By using her personal connections, the chair is helping improve the organization’s access to events and spaces where Hispanic communities gather.”

Another example: Imagine a nonprofit with a board of directors composed entirely of people over age 50 and an average employee age of 45 years old. By adding younger members to its board and younger employees to its staff, this nonprofit stands a greater chance of attracting younger donors as well. When people see themselves reflected in an organization, they are more likely to feel connected and to give.

However, it is important to acknowledge that diversifying an organization will take time. As Schreder says, “Nonprofits often have a hard time finding diverse staff—especially fundraising staff.” The pool of candidates is limited, so hiring can be highly competitive. But, he says, “long-term investment in people is almost always worth the effort.”

“If the organization is intent on building a diverse team, it can demonstrate that commitment by mentoring and training people who already have a passion for the work, although they may not yet have the necessary level of expertise or experience yet,” Schreder says. This applies to board recruitment too. It is beneficial to have a structured board training and onboarding program so that new members who don’t have prior board experience know they can get up to speed.

For more information on how to diversify your endowment or foundation’s board of directors, watch this short video: Building a Diverse Board Pipeline.

Grow Real Relationships

The next step is to build authentic relationship with the various communities the nonprofit has identified in its diverse donor engagement strategy. “Through these relationships, nonprofits can learn about the unique values, habits, and priorities of different demographic groups, then adapt tactics accordingly,” says Schreder.

Although it’s important to stay attuned to recent data about diverse groups, be careful not to rely too heavily on third-party research and reports, which can create a sense of insincerity in messaging. Remember that even the best surveys are designed to extract generic data from unique individuals, so it’s easy to draw false generalizations from oversimplified survey results.

For example, although researchers often try to decipher philanthropic trends by racial group, the Blackbaud “Diversity in Giving” study shows that “income and religious engagement are far more significant predictors of giving behavior than race or ethnicity.”

It is the combination of research and relationships that creates cultural competency.

But how can nonprofits with limited internal diversity cultivate these authentic relationships? Some ideas include focus groups, volunteer days, and hiring diverse content creators or content reviewers to help with donor engagement campaigns. Or consider partnering with local nonprofits that have diverse leaders and find ways each organization can support the other. Two other ideas are to create an advisory board comprised of diverse individuals who receive the organization’s services or ask representatives from the community to serve on your board of directors.

The “Everyday Donors of Colors” report produced by Indiana University’s Lilly Family School of Philanthropy gives four additional recommendations:

The report emphasizes that supporting wealth creation is especially important because “the capacity for ‘big gift’ philanthropy within some communities of color is constrained by wealth inequality.”

Although these recommendations focus specifically on race- and ethnicity-related diversification, they also apply to other demographic groups. For instance, if the organization wants to reach more baby-boomer donors, consider replacing the phrase “donors of color” in each of these bullet points with “donors from the baby-boomer generation.”

As nonprofit leaders have likely experienced throughout their careers, authentic relationships are the foundation of successful and sustainable donor engagement. By building trust and demonstrating genuine interest in diverse communities, organizations can create lasting connections that lead to long-term support.

Create Custom Campaigns

Once the organization has developed a diverse donor strategy and increased its cultural competency, it’s time to create personalized campaigns that reach new audiences in new places. One-size-fits-all fundraising campaigns will not resonate with all donors. Instead, nonprofits should consider creating tailored campaigns that speak to the unique interests and values of specific donor communities.

This starts by diversifying the organization’s brand imagery and learning best practices for inclusive language. It’s also a good idea to examine the organization’s current programming calendar to be sure it aligns with diverse holidays. Vary the types of events offered and when they will occur. Tie each piece of programming back to the organization’s donor research and engagement strategy, and make sure to involve people from the targeted community in the event-planning process. For instance, if the organization is pursuing more LGBTQ+ donors, celebrating Pride Month could be a good idea, but only if the celebration authentically benefits the LGBTQ+ community and involves LGBTQ+ community members as organizers and leaders.

Another way to tap new and diverse sources of support is to expand the search for donors beyond traditional advertising channels. By attending local events and leveraging social media platforms, organizations can connect with donors who may not have been reached through print or radio.

As an example, Schreder says he has seen increased interest in reaching younger donors from the Millennial and Gen Z generations. “These donors rarely respond to physical mail and are often more interested in donating time than money, at least at first,” he says. “But by creating connections with them now, nonprofits are building lifelong relationships for the future.”

Read more about connecting with younger donors in this article: “The Charitable Millennial.”

When deciding which platforms to leverage, remember to meet people where they are. Explore multiple social media apps, try both in-person and virtual events, and don’t be afraid to leverage tried-and-true advertising tools, like word-of-mouth marketing and door-to-door canvassing. Also consider using multiple fundraising software options. Complement organization-wide donor platforms like those offered by Blackbaud or Salesforce with other direct payment options like Venmo or GoFundMe.

By recruiting diverse board members and staff, building authentic relationships, and creating custom campaigns, nonprofits can build lifelong connections with diverse donors across multiple demographic groups. But this won’t happen by making small adjustments to existing engagement tactics. Instead, it means embracing a comprehensive strategy that prioritizes genuine connections and long-term support for diverse communities.

Each year, CAPTRUST releases its “Endowment and Foundation Survey” in an effort to identify nonprofit investment trends and concerns. The goal of this survey is to find out what nonprofits are doing and why, then share these findings to arm decision-makers with clear and actionable information that can help them make a positive impact. Responses in each section provide sector insights that can help inform growth, strategy, and internal practices.

In 2023, a shorter survey and a narrower scope of questions allowed for more responsive perspective sharing within the nonprofit community. Questions were focused on investments and asset allocation, and results showed two key takeaways: increasing interest in alternative investments and the continued rise of OCIOs. Both these findings reiterate multi-year trends.

Optimism Abounds

Survey results indicate that nonprofit investors are feeling decidedly more optimistic about this year’s investment landscape than they were at the end of 2022. Across the board, fewer nonprofits reported feeling concerned about future return expectations, market volatility, or inflation.

Buoyed by that optimization, endowments and foundations are now interested in increasing allocations to all investment types and reducing cash reserves.

As shown in Figure One, 75 percent of organizations that are planning to shift their asset allocations said they anticipate increasing their allocation to alternative investments. This marks the fifth consecutive year that organizations planning for reallocation named alternative investments as their largest predicted area of change.

Figure One: Expected Changes to Asset Allocation

This chart shows the percentage of nonprofts expecting to increase and decrease various asset allocations: cash, fixed income, domestic equity, international or emerging market equity, and alternatives or other. Only cash shows an expected decrease, and alternatives show the highest expected increase.

Source: CAPTRUST Research

Why Alternatives?

Alternative investment strategies vary greatly and can be used to meet a variety of organizational goals. In CAPTRUST’s 2023 survey, endowments and foundations that are turning to alternatives reported two common objectives: diversification (86 percent) and increased portfolio returns (64 percent), as shown in Figure Two.

Figure Two: Alternative Investment Objectives

This chart shows the reasons why nonprofits are pursuing alternative investments. In order of most popular to least popular, they are: diversification, portfolio performance, inflation hedging, unique exposure, and current income.

Source: CAPTRUST Research

Diversification occurs primarily via exposure to different asset classes. In this case, it seems nonprofits want asset classes in addition to cash, stocks, and bonds. Furthermore, “since private markets are not correlated to traditional public market investments, they may offer a diversification strategy that potentially reduces portfolio risk,” says Pat Burkett, a manager on CAPTRUST’s investment research team.

Two additional potential benefits: Alternative investments may offer higher expected returns than traditional investments, and private market valuation practices may help mitigate market volatility.

With these benefits in mind, it is not surprising that most nonprofits investing in alternatives are choosing to invest in private equity (68 percent) and other private markets strategies, such as real estate (50 percent), infrastructure (36 percent), and credit (32 percent), as shown in Figure Three.

Figure Three: Alternative Investment Strategies

This chart shows the ways nonprofits intend to pursue alternative investments. In order of most to least popular, they are: private equity, hedge funds, private real estate, private infrastructure, private credit, other, and public real estate.

Source: CAPTRUST Research

“While each strategy differs, all these types of private markets investments can provide access to unique opportunities but will also have unique risks,” says Will Volkmann, an investment research specialist at CAPTRUST.

For instance, many of these investments, such as private equity and private real estate, can be illiquid and challenging to sell quickly. “Investors in private markets may be rewarded with higher expected returns in exchange for committing to a longer time horizon,” says Volkmann. “But they’ll need to be sure that these long-term, illiquid investments are balanced by other, more traditional assets in case they need money in a pinch.”

Lack of regulation can also be a risk, as these investments may be subject to less regulatory oversight than stocks or bonds. Also, alternative assets can be subject to significant price fluctuations and higher fees compared to traditional assets. These risks are inevitable but can be mitigated.

Endowments and foundations considering alternative investments should make sure to do their due diligence or hire a professional with alternative markets expertise to vet the opportunity set.

Complexity and the Rise of OCIOs

Considering the time, effort, and expertise required to decipher alternative market opportunities, it is likely that this trend toward alternative investments is intertwined with another key finding from our “2023 Endowment and Foundation Survey”: the continued rise of OCIOs.

An OCIO is a professional advisor or advisory firm hired by a nonprofit to manage its investment portfolio and make strategic investment decisions on the organization’s behalf. Typically, an OCIO provides day-to-day management of the organization’s investment program, allowing nonprofit leaders to focus on their mission.

“The OCIO is directly accountable for portfolio performance and has investment discretion,” says Volkmann. That’s why the OCIO relationship is also sometimes called discretionary portfolio management or simply discretion.

This short video explains more: “OCIO for Nonprofits.”

As shown in Figure Four, by the end of 2023, nearly half (48 percent) of endowments and foundations reported utilizing an OCIO—a percentage that has doubled in only four years.

Figure Four: Percentage of Organizations Utilizing an OCIO

This chart shows an increase in nonprofits hiring OCIOs, from 24 percent in 2020 to 28 percent at the end of 2023.

Source: CAPTRUST Research

Many nonprofit board members believe delegating the investment manager search process to outside professionals will yield the best outcomes. However, Burkett says, “Perhaps the biggest benefit of hiring an OCIO is that it frees up time for internal staff to concentrate on other priorities.”

Nonprofit organizations often have no full-time staff members dedicated to investments. With an OCIO at hand, they have a full-time investment professional focused on their organization’s unique needs and objectives.

“Another benefit of the OCIO relationship—especially as it concerns alternative investments—is having someone else available to handle capital calls and distributions, and to fill out subscription documents, which can sometimes be time-consuming and cumbersome,” says Burkett.

However, engaging in OCIO may not be the right move for every organization. Those with well-resourced internal investment teams might not need one, and institutions that prefer direct control over investment decisions could find the discretionary relationship less appealing.

Looking Forward

Ultimately, these findings highlight the dynamic nature of the nonprofit investment landscape, where shifts in asset allocation and investment management often reveal evolving priorities and opportunities. By staying attuned to these trends, nonprofit leaders can proactively identify emerging challenges and take advantage of new avenues for growth and impact.

Whether it’s seizing opportunities for diversification through alternative investments or optimizing investment management processes through OCIO partnerships, a keen awareness of sector dynamics can empower nonprofit organizations to navigate uncertainty with resilience and foresight.

But paying attention to sector trends isn’t just about staying competitive. It’s about fulfilling the fiduciary duty to steward resources effectively to achieve the organization’s mission. In a rapidly changing environment, the ability to anticipate and adapt to shifts in investment strategies and practices can make all the difference in driving sustainable outcomes and maximizing social impact.

Written by James Stenstrom and Ben Smiley