Alts are Coming to 401(k)s, but the Retirement Industry Should Move Forward Thoughtfully
The U.S. Department of Labor is pushing forward with its plan to ease regulation around alternatives in 401(k) plans, but employees shouldn’t expect a speedy or straightforward path to investing their retirement savings in real estate or private equity. Retirement providers will likely need to navigate significant roadblocks before introducing these opportunities to employees.
Over the past few years, with credit and equity both struggling to deliver returns amid persistent inflation and higher interest rates, financial advisors have turned to alternatives as an effective tool to deliver uncorrelated returns. According to UBS, the global private markets assets under management (AUM) of private equity, private debt, and real assets have grown nearly 50% between 2020 and 2024 and are expected to double by 2029 to a projected $20.7 trillion.
401(k) Realities You Can’t Ignore
While alternatives offer the benefits of diversification, many investments are illiquid. This poses issues for workplace accounts:
- What happens to a 401(k) if an employee leaves their job and needs to roll over their account?
- What if they want to use their money for a down payment on a house or otherwise need to cash out early?
It’s far easier to cash out of a liquid mutual fund than a real estate or private equity investment.
Meanwhile, splashed across the headlines is Blue Owl’s move to restrict redemptions in one of its popular credit funds—a timely reminder that liquidity risk in private markets can quickly become a concern under ERISA (the Employee Retirement Income Security Act). If participants can’t access their money, due to gating of funds, ERISA scrutiny isn’t far behind.
A Better Way to Make Alts Work
As the retirement industry grapples with many uncertainties, one potential way to integrate these assets into employee-sponsored plans is to focus on a narrower set of opportunities.
More liquid hedge funds may be the cleanest on ramp given that they offer a natural entry point for alternatives in 401(k)s.
More liquid hedge funds may be the cleanest on ramp given that they offer a natural entry point for alternatives in 401(k)s. Many long-short hedge fund strategies have structural similarities to mutual funds, and their underlying holdings consist of similar publicly traded positions.
For that reason, hedge funds won’t struggle with the same problems as closed-end, registered funds in private equity and some areas of private credit, which have to contend with a liquidity mismatch between their privately held underlying investments and the redemption allowances in their fund structures. And because many of these hedge fund strategies involve more high-frequency trading that tends to generate more tax inefficient short-term gains, housing these types of investments in a tax deferred plan like 401(k)s would benefit more investors.
Unlike illiquid private equity investments, asset-backed-lending credit strategies typically offer floating rates and significant cash flows and may also be favorable options. These investments have provided historically better protection than traditional bond funds with their floating rates and uncorrelated income streams.
The Risk in a No-Alts Approach
Most Americans with 401(k)s invest via target-date funds, which start with higher risk levels earlier in careers and gradually shift toward more conservative allocations as retirement approaches. While risk levels naturally evolve, investors nearing retirement should not automatically rule out private market investments.
Alternative investment strategies bring important diversification, which becomes even more crucial as people approach retirement and begin drawing down on their savings. Hedge funds and asset-backed lending are especially well-suited for this phase. These approaches may offer lower correlation to traditional equities while still generating income and helping to stabilize portfolio outcomes.
Rethinking the 60-40 Portfolio
Despite ongoing uncertainty around alternatives in 401(k)s, the proposed rule change is spurring a larger conversation around the shifting nature of portfolios. The traditional 60/40 stock-bond portfolio is obsolete in an economic environment where stocks and bonds increasingly move in unison during times of stress.
Allocating a small sliver of assets to private markets may generate stronger returns. While retirement providers would be smart to take a slow and steady approach to adding these investments to retirement accounts, advisors should seize the opportunity to talk to their clients about the role of these assets and the importance of creating diversification in an increasingly volatile financial climate.
EDITOR’S NOTE: The views and opinions expressed in this op-ed are solely those of the author and do not necessarily reflect the views, positions, or editorial stance of 401(k) Specialist.
Disclosure: For educational purposes only. The views and opinions expressed in this document should not be construed as recommendations, an offer to sell, or a solicitation of an offer to acquire any security, investment product, or service. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed accurate. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy.
SEE ALSO:
• Plan Sponsors Express Interest in Private Market Assets
• Rep. Neal Pushes GAO to Investigate Private Assets in 401(k) Plans
Frank Burke is Chief Investment Officer at PPB Capital Partners, a full-service alternative investment provider that helps wealth advisors harness strategic opportunities in private markets. He leads the firm’s fund development strategy and provides guidance to the wealth advisor community as they implement alternative investments in their portfolio construction, asset allocation and manager sourcing tactics.