Private Markets and Retirement Plans: What you need to know

President Trump signed an executive order instructing the Department of Labor and the Securities and Exchange Commission to guide employers and plan administrators on how to include private assets into defined contribution plans (think 401(k)s and other mainstream retirement accounts). Potential alternative investment examples include private equity, private credit, real estate investment trusts, hedge funds, and cryptocurrencies. Previously, some retirement plans already had limited exposure to alternative investments. Now, more retirement plans are rolling out private market offerings.

FAQ

What are the potential pros?

• Alternative investments have the potential for higher returns than equity and fixed-income markets.
• Alternative investments offer diversification, which could help guard against volatility.
• Alternative investments often have long time horizons, which could work well in retirement plans (especially for younger participants).

What are the potential cons?

• Alternative investments often have higher fees than traditional retirement plan assets like mutual funds or collective investment trusts.
• Alternative investments are often illiquid, meaning money is locked up, often for a decade or more.
• Plan sponsors may face increased litigation.
• Alternative investments often have fewer disclosures and less financial reporting than publicly traded assets.
• There is concern that institutional investors will still have priority and access to the most attractive alternative investment opportunities, leaving retirement plans to pick through what is left.
• Alternative investment returns are often lower than public market returns in a higher-rate environment.

Our views.

Adding private market assets (alternative investments) to retirement accounts is a new trend. Many major investment management firms have begun offering Target Date Funds (TDFs) with private-market sleeves. This idea is appealing because the long time horizons for alternative investments and retirement plans align. However, the TDFs offering private market investment sleeves lack sufficient history to properly assess them relative to traditional TDFs.

Our assessment of the risk-versus-net-reward dynamics offered by private capital investment vehicles that are becoming accessible to ERISA-qualified plan participants leads us to approach these new opportunities with caution rather than eagerness. We will continue to monitor this space and update our views as the investment landscape evolves. Our firm will only recommend these options if and when they align with our clients’ best interests and our high standards of due diligence.

Please reach out with any questions as we navigate this evolving landscape.