Private equity is coming to 401(k) plans—and it’s happening even quicker than anticipated, with a major reveal today from Denver-based recordkeeper Empower.
“Empower is announcing today a profound new move to broaden the investing universe for retirement savers. In alignment with top investment managers, we are now offering private markets investments within defined contribution retirement plans,” Empower President and CEO Edmund F. Murphy III wrote this morning on LinkedIn. “This landmark initiative gives investors the ability to invest in an asset class that has the potential to diversify portfolios and help grow retirement savings.”
To execute the new strategy, Empower has aligned with top-tier private investments fund managers and custodians, including Apollo, Franklin Templeton, Goldman Sachs, Neuberger Berman, PIMCO, Partners Group and Sagard.
Private investments offered through these firms may be implemented through collective investment trusts (CITs), providing limited exposure to diversified pools of private equity, private credit and private real estate, a structure that is designed to provide liquidity protection and reduced fee exposure.
This landmark initiative is designed to provide individuals with access to a broader range of investment options, enabling them to further diversify their portfolios and potentially maximize their retirement savings.
“These new opportunities offered under an advice model deliver the guardrails necessary to help an entirely new investor class access private investing.”
Ed Murphy
“Empower is making a profound move on behalf of American retirement investors who should have the ability to invest in an asset class that has the potential to diversify their portfolios and offer opportunities for returns in new ways,” Murphy said in a press release. “Like any investment, we believe in the importance of advice and risk mitigation for every investor. These new opportunities offered under an advice model deliver the guardrails necessary to help an entirely new investor class access private investing.”
The Wall Street Journal reported today that Empower partnership funds are likely to charge fees ranging from 1% to 1.6% of the portfolio balance annually, and noted that the average target-date mutual fund fee is about 0.28%, according to Morningstar Direct.
The private investments will be offered only through some managed account services on Empower’s platform. Murphy told the WSJ five employers have signed on to offer private investments in their 401(k) plans when they become available through Empower in the third quarter, but didn’t name the companies.
If an employer decides to allow private investments in its plan, the managed-accounts adviser will determine how much of each investor’s portfolio to allocate to them. Murphy told the WSJ the typical amount might range from 5% to 20%, depending on factors including age.
Momentum has been building
The move to integrate private markets into 401(k)-type plans comes in response to growing interest from investors seeking to include so-called alternative assets in their retirement plans. Traditionally, private markets investing has been restricted to institutional investors and high-net-worth individuals. In his annual letter to shareholders released on March 31, BlackRock CEO Laurence Fink emphasized the importance of expanding access to private equity for everyday investors, including those saving in 401(k) plans.
Earlier this month, T. Rowe Price Chair, CEO and President Rob Sharps said it’s only a matter of time until private market alternatives gain access to defined contribution plans—and if research indicates it would result in better outcomes for DC plan participants, that T. Rowe Price will offer it.
Investment Company Institute President and CEO Eric J. Pan also spoke recently about providing retirement investors with access to private markets, noting that it was one of ICI’s strategic priorities and was “definitely” grabbing interest from the White House.
Pan said he sees “a lot of support for the idea” across the regulatory landscape in the Trump administration. During the first Trump administration, the Department of Labor issued guidance confirming that 401(k) plans can offer private equity in a diversified portfolio, such as a target-date fund. Further guidance is expected to reassure employers of its permissibility.
“By offering private market assets through defined contribution plans, we’re providing Americans saving for retirement the opportunity to access to some of the most dynamic and growth-oriented investments available.”
Franklin Templeton CEO Jenny Johnson
Then comes today’s announcement from Empower that it is making private equity investments accessible to the broader US workforce.
“We work with 19 million Americans investing for retirement through the workplace retirement system who should have the opportunity to make investments that are outside of public markets. This move is designed to provide more robust retirement options for those who want to take a new approach to their retirement savings,” Murphy said.
“As a leader in private markets, democratizing alternative investing is one of our firm’s biggest priorities,” said Franklin Templeton CEO Jenny Johnson. “By offering private market assets through defined contribution plans, we’re providing Americans saving for retirement the opportunity to access to some of the most dynamic and growth-oriented investments available. We’re proud to partner with Empower to help clients build secure and prosperous futures, and we’re excited to be at the forefront of this transformative change in retirement planning.”
Sagard-managed strategies via CITs
Sagard, a global alternative asset manager with over US$27B of assets under management, also issued a press release about the initiative this morning.
As part of this new program, Sagard-managed strategies will be made accessible via collective investment trusts in coming years. These structures are designed to bring the benefits of private market investing—such as diversification, potential for enhanced returns, and exposure to less correlated assets—to retirement plan participants in a cost-efficient and liquidity-aware manner.
“Partnering with Empower in this groundbreaking initiative aligns perfectly with our objective to broaden access to high-quality alternative investments in the U.S.,” said Paul Desmarais III, Chairman and CEO at Sagard. “Private markets have historically been limited to institutional and high-net-worth investors. We’re excited to democratize these investment strategies by making them available to a wider population saving for retirement.”
Highlights of the initiative
• Access to Private Markets Investments: Participants will be able to invest in private equity, private credit and private real estate funds through their workplace plans, gaining access to investment types that were previously limited to institutional investors and ultra-wealth investors.
• Diversification for Retirement Portfolios: Private markets have the potential to provide returns from new investment sources compared to publicly traded equities or bonds. By offering access to private markets, Empower enables retirement plan participants to further diversify their retirement portfolios, potentially altering their risk profile and offering new growth opportunities.
• An Advisory Requirement: Retirement plan participants can only access private market investments through Empower if their employers allow these investments to be made available. Employers must work with an advisor to offer these investments through a managed account platform created in conjunction with Empower. The managed account requirement is offered to match the investment against an individual’s risk tolerance and long-term financial goals, among other factors.
• Enhanced Investment Structure: This offer will complement existing investment choices available in the plan’s investment menu. The private investments offered through private investment managers may be accessed through CITs, a structure that provides limited exposure to pools of private equity, private credit or private real estate providing participants with enhanced liquidity features while helping mitigate fee exposure.
A 2023 report from Georgetown University’s Center for Retirement Initiatives found that U.S. defined contribution plans are missing out on potential returns of $35 billion a year by not incorporating private equity and real estate investments like defined benefit plans do.
SEE ALSO:
• Private Equity in 401(k)s ‘Will Happen’ says T. Rowe Price’s Rob Sharps
• BlackRock’s Fink: Democratize Investing by Expanding Access to Private Markets
• 401(k)s Miss Out on Billions by Not Adding Private Equity, Study Finds
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.