Can active management beat the market? Plan sponsors think so

Most workplace plan sponsors still believe active management can outperform the market, according to new research by money manager BlackRock. Advisors are skeptical.

In a survey of 459 plan sponsors conducted in February and March, 80% said they believe active managers can consistently beat the market. An even larger share — 86% — agreed that actively managed target date funds can help soften the impact of volatility on participants.

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BlackRock's report suggests that "active approaches can help uncover value, manage risk and adapt to changing conditions," but researchers and advisors alike caution that such benefits rarely materialize consistently for retirement investors.

An appealing idea that rarely delivers

Advisors like Jared Gagne, assistant vice president at Boston-based Claro Advisors, say that while active management can feel intuitive in volatile markets, it rarely delivers over the long term.

"The challenge is that while you might see short-term outperformance, I don't believe there's any sustainable alpha to be found in public markets over the 20-plus year horizons that retirement savers face," Gagne said. "Paying for active management in that context simply doesn't add up."

Years of research back up that skepticism. In 2024, 65% of actively managed large-cap U.S. equity funds underperformed the S&P 500, according to S&P Indices versus Active (SPIVA) U.S. Scorecard. Over a 10-year period, that figure jumps to 84%.

The story isn't much different outside of large-cap funds. After fees, at least 80% of equity funds and over half of fixed-income funds lagged their benchmarks across all fund types over the 10-year period ending Dec. 31, 2024, according to the SPIVA U.S. Scorecard.

Still, that doesn't stop many investors from signaling interest in active products. Across 1,300 plan participants surveyed for BlackRock's research, 80% expressed interest in using an actively managed fund for their retirement savings.

Gagne said that investors lack an understanding of active products.

"Investors need to understand that these options often come with higher costs, and higher costs eat into long-term returns," Gagne said. "The irony is that in trying to protect participants from volatility, sponsors may be introducing strategies that leave them with less money in retirement."

BlackRock's own data backs that up. In their survey, just 15% of investors said that they are extremely familiar with active investing strategies.

An alternative spin on active management

Adding to complications around active management strategies is the growing interest in alternative investments among plan sponsors.

Nearly 1 in 4 plan sponsors said they are considering adding alternative assets to their plans, most often through target date funds. President Trump's recent executive order could help translate that interest into real changes to the investment options offered in 401(k)s and 403(b)s.

Last month, Trump signed an executive order directing regulators to clear the path for workplace retirement plans to include private market investments and cryptocurrencies.

The order directs the Secretary of Labor to review past and current guidance on fiduciaries' responsibilities when including alternative investments in asset-allocation funds, like target date products. By next February, the Department of Labor must clarify how fiduciaries should balance the higher costs of these investments against potential long-term returns and diversification benefits.

BlackRock research has calculated that the integration of private assets into target date funds could generate an additional 15% return over a 40-year period. Speaking at the Future Proof Festival in Huntington Beach, California, the head of BlackRock's U.S. wealth advisory business, Jaime Magyera, said that integrating alternative assets into retirement plans is essential as life expectancy continues to improve.

"If people are living to 90 and 100, public markets are not going to get them there alone," Magyera said. "And so you need private assets, but done in the right way, strategically, through a glide path, through a target date fund."

BlackRock is leading that movement. In July, the company announced that it's developing a plan to launch a proprietary LifePath target date fund with private assets.

Advisors like Kristin Pugh, a partner at Creative Planning in Overland Park, Kansas, take that involvement as an issue when it comes to surveying plan sponsors.

"I think a survey being conducted by BlackRock regarding adding alternatives to employer retirement plans contains an inherent conflict of interest," Pugh said.

Staying focused on the fundamentals

Discussions of active management and alternative assets can take up an outsized part of the conversation when it comes to retirement planning, advisors say.

"For the average retirement saver, broad-based, low-cost index funds remain a powerful foundation," Gagne said. "Alternatives and active management may play a role at the margins, but they shouldn't distract from the fact that compounding works best when costs stay low and portfolios remain disciplined."

For young investors with long time horizons, Gagne said that a small allocation to illiquid, diversifying assets could improve outcomes. But it's important to understand the drawbacks that come with such investments.

"The trade-off is complexity, opacity and higher fees," Gagne said. "At the end of the day, fees and simplicity still matter most."