Private Assets Get the In With Long-Sought-After 401(k)s 

The barbarians are at the gate to a $12 trillion industry.

Empower, one of the country’s largest retirement plan providers, is offering private market investments from the likes of Apollo, Franklin Templeton, and Goldman Sachs. The private equity, credit, and real estate allocations would sit inside collective investment trusts used in managed accounts for plans working with advisors, according to the firm. It’s the latest sign of private markets extending their reach well beyond their traditional clientele of wealthy families and institutions. On the retail front, similar strategies have already been worked into ETFs and interval funds. 

Empower’s “profound move” will diversify 401(k) portfolios, Empower CEO Edmund Murphy III said in the company’s announcement Wednesday. But demand is a question. “If you ask participants or plan sponsors, they’re not demanding this,” said Fred Barstein, founder of The Retirement Advisor University. “But then again, they didn’t ask for target date funds.”

Tango with Regulators

Currently, private investments are all but nonexistent within 401(k)s, in part because of the high fees and lack of liquidity. But the private investments industry has long had its eyes on the 401(k) world — it’s an untapped ocean of money. The Department of Labor wrote a private-letter to one firm, Pantheon Ventures, in 2020, clarifying that private investments could be included within asset allocation strategies in defined contribution plans. 

With about 19 million retirement plan participants, Empower is giving a big opportunity to private investments. So far, five employers have opted for the private markets options, Murphy told The Wall Street Journal, noting that allocations to the asset classes could range from about 5% to 20%, depending on the individual investor. The CIT structure can accommodate private investments and still provide liquidity and lower costs, per the announcement.

While pension plans have long used private investments to their advantage, the category historically did not fit as well in 401(k)s, according to research earlier this year by Johns Hopkins University. That paper found:

• Long investment timelines limit liquidity
• Private equity funds lack the transparency of publicly listed securities
• After fees, the performance benefits of private equity are significantly reduced.
• Strategies like leveraged buyout funds add considerable risks.

Winning By Default. While target date funds are often the default investment within 401(k)s, managed accounts are less common, Barstein noted. Still, managed accounts make sense as the structure for adding private investments to 401(k)s, and it could give retirement plan advisors a way to distinguish themselves, he said. 

“Fees are high, disclosure is not as robust, and the holdings are a little bit opaque,” he said. “However, there are a lot of really smart people with trillions of dollars invested in this.”