Fueled by a recent governmental nudge, the move to more broadly offer private market investments as an option in 401(k) plans has opened up a whole new avenue of opportunities for both advisors and plan sponsors.
The Aug. 7 executive order from the White House to open DC accounts to private market investments, followed by Securities and Exchange Commission (SEC) and Department of Labor guidance to help offer specific protection to plan participants, has accelerated interest and action in DC plan integration.
And while private market investments have long been a part of defined benefit plans, their role as a measured component of DC offerings means many advisors are now gauging the risk and the best ways to navigate the complexities, higher fees and potential fiduciary liabilities associate with private funds.
On the upside, the potential of higher returns—not to mention the perceived equity of finally allowing traditional 401(k) investors access to the private assets previously reserved for institutions and affluent investors—has piqued some interest, even if the typical 401(k) saver isn’t banging on an employer’s door demanding in-plan access.
The financial community has responded in kind, with companies including Blackstone recently establishing new units devoted to managing private investment business in the 401(k) space. Recordkeeping giant Empower also announced it will allow private credit, equity and real estate in some of its 19 million retirement accounts.
A New Avenue, Using an Old Model
For industry veterans who’ve already had ongoing involvement in private investments, the move to the mainstream is an exciting opportunity.
“In a way, this is the longest overnight sensation in the business,” said Drew Carrington, Managing Director, Alternatives in Retirement Portfolios at iCapital. Carrington noted that private real estate CIT funds have been offered as a form of private market investment for nearly 20 years, with DCALTA, a trade association promoting alternative investments, recently marking its 10th anniversary.
Private market investments, which range from private capital to infrastructure and real estate, as well as venture capital, are more than just private equity, he added. With that full range of asset classes, there can be more risk reduction at the portfolio level. Now, it’s a matter of better incorporating these into the operational complexities of DC plans.
“Advisors are definitely looking at these options as a way to differentiate their offerings to plan sponsors, though they’re not for every advisor or every plan,” Carrington said. “I would say they’re a mixture of cautious and excited, especially about taking the appropriate fiduciary steps. Private investments offer a long-horizon, tax-advantaged way of accessing institutional portfolios with fiduciary oversight and professional management, so advisors and plan sponsors should have access to the full toolkit.”
Active Management and Long-Term Investments
Research by Vanguard suggests that portfolios incorporating private assets (with a 10%-20% split between private debt and private equity), built into target date funds and aggressively managed, could boost retirement wealth by 7%-22% and overall, post-fee retirement wealth by 5%-15% over a 40-year period, which could aggressively help with projected retirement shortfalls.
Fiona Greig, Vanguard’s global head of Investor Research and Policy, said those projections are predicated on a few absolute necessities when discussing private asset investment with plan sponsors.
“For that to be the case, you need to believe in three things: you have a long investment horizon, you have access to top-tier managers, and that you believe the end investor can stomach that active manager risk, relative to benchmarks like a standard index target date fund,” she said. “Plan sponsors will have to ask, ‘is this a good fit for me and my plan population?’”
Active managerial expertise is critical as private market investments are “like active on steroids,” Greig said, with many actively managing the companies themselves.
“The degree of influence these managers have by virtue of actually engaging with the companies is much more significant. They may have more dry powder than they have the capacity to deploy right now, so they may be more selective about their investor base and pricing power—and they may also be able to charge the highest premium for their services.”
Another issue is investor patience and the relatively short lifespan of a dedicated 401(k) investment, Greig noted. American workers, on average, only hold TDF policies for four to five years, so the longer-term investment strategies at the core of private investments may not be the best fit.
“Each time you switch jobs, you are potentially switching holdings, selling everything and buying it back … and that doesn’t matter so much when it’s an S&P 500 vanilla TDF. In private, you can’t presume that you will have access to the same haystack of investments. If you are forced to sell low, you may not also be able to buy low.”
Fees can also be a potential dealbreaker, she added, as private asset fees range from 1.5% to 5%, versus the 0.06% to 0.60% fees found in traditional TDFs.
Carrington said he hopes the larger focus on net risk-adjusted returns in the Aug. 7 executive order can help mitigate some of those fee concerns, just as the traditional fiduciary framework of 408(b)(2) disclosures will continue to provide necessary fee transparency, as private market funds make their ways into 401(k) offerings.
Starting the Private Market Discussion
Jared Gross, head of Institutional Portfolio Strategy at J.P. Morgan Asset Management, said sponsors should enter the private asset conversation by reinforcing the idea that a well-designed modern DC plan already offers an effective platform for building retirement wealth.
“The addition of private investments should be seen as a complement to—not a replacement for—the traditional building blocks of stocks and bonds,” Gross said. “It will also be important to present a realistic description of how much private investing makes sense, and what the benefits are likely to be.”
As it stands, participant demand for similar innovations in their 401(k) plans has been muted. According to an Aug. 7 Harris Poll conducted by The Wall Street Journal, only 10% of respondents felt they were openly dissatisfied with their current 401(k) options and would like access to more nontraditional offerings, including private markets or cryptocurrencies. An even split—45% of respondents—said they were either satisfied with their current 401(k) options, or would like minor add-ons including mutual funds or ETFs.
Along with Carrington and Greig, Gross admitted that asking participants to evaluate individual alternative asset classes and making relative judgements across private and public strategies is more likely to pose challenges.
“Private equity can provide powerful benefits to long-term investors but is also among the most difficult categories of private markets to evaluate, given the elevated level of manager dispersion, limited benchmark transparency, illiquidity and higher fees,” he said.
To help build interest, Gross suggested building a case for private market investments that emphasizes the additional benefits possible from a scaled mixture of alternative investments: Private equity’s high relative returns, the risk diversification offered by real assets and the high yields offered by private credit.
“Higher after-fee returns, compounded across long time horizons, could increase account values at retirement, and reduced downside risk in volatile markets could smooth performance across time,” he added. “Any resistance to private strategies will likely be limited when the participants are presented with the option to invest in a liquid and diversified investment vehicle that can deliver improved long-term performance.”
TDFs as a Safer Vehicle for PE Investment
TDFs will likely be the best avenue for DC plan sponsors to help balance risk to align with participants’ investment horizons, while maintaining diversification and liquidity over time. Skilled TDF management is critical to make it work, especially a manager with expertise in top-down asset allocation and bottom-up manager selection.
“A manager needs the ability to access long-term potential returns, risks and correlations across the full asset allocation using unbiased capital market assumptions,” Gross said. “It will also require experience in rebalancing across public and private markets, and within private market sectors.”
Using TDFs as a tool for PE integration can take some of the stress off sponsors, as the responsibility for asset allocation and manager selection resides with the fund manager. But private markets also require a shift away from the notion of passive investments, which have been the norm for many DC plan sponsors. Benchmarking is also a different model here, he added.
“The benchmarks in private markets generally represent the aggregated performance reported by the managers themselves, making benchmark performance an unattainable ‘average’ outcome that may vary widely from actual experience,” Gross said.
Plan Design Will Help Guide Private Investment Success
In order to capture the most value provided by private market funds in a 401(k) plan, Greig suggests plan sponsors consider default enrollment options for participants.
“Plan design can encourage longer holding periods by enrolling workers immediately upon hire, and allowing them to remain invested in the plan, even as they switch jobs or retire. Making plans more of a destination for all of a worker’s retirement assets could help participants realize the benefits of private assets.”
“… you need to make the case that these new private investments will be well-diversified, actively managed and balanced, and help participants achieve their objectives.”
Drew Carrington
As a default option, participation jumps and there is more liquidity pooling, helping to mitigate risk. Standalone options, which currently account for only 7% of managed accounts, continue to present more liquidity risk as participants need to more actively make allocation choices, she added.
“Just like TDFs, we didn’t go out and actively sell them to participants,” Carrington said. “We made them available as a collective default option for those who were auto-enrolled, and we talked about their high-level benefits. So you need to make the case that these new private investments will be well-diversified, actively managed and balanced, and help participants achieve their objectives.”
Gross said the move to private investments in 401(k)s is very much a work in progress, but says that industry and expert research resources can help advisors and plan sponsor make those first steps.
“The amount of work required to add private investments can be considerable, but this will depend to a large extent on the type of vehicle chosen,” he said. “Sponsors should move carefully, and where they lack internal skill to manage the process, they should seek external advice.
EDITOR’S NOTE: This article appears in Issue 3, 2025 of 401(k) Specialist Magazine. Read the complete digital issue here.
SEE ALSO:
• SEC’s Uyeda Pushes for Private Markets in 401(k) Plans
• Private Markets and 401(k)s: Invesco’s Greg Jenkins on What Comes Next