Right now, private assets make up less than 1% of holdings in 401(k)s and other defined contribution plans, but there’s a push from some big asset managers and plan administrators to change that.
“We’ve observed institutions globally integrating public and private markets, often with impressive results,” expressed Larry Fink, chairman and CEO of BlackRock, during a recent retirement summit hosted by the firm. At BlackRock, about half of their $11.6 trillion in assets under management is tied up in retirement products.
Fink, along with others advocating for this shift, emphasizes the importance of incorporating private assets in the $12.5 trillion workplace retirement market to achieve broader portfolio diversification.
Over the past two decades, publicly traded companies have decreased, while those backed by private equity have flourished. In the United States, roughly 87% of firms with annual revenues exceeding $100 million remain privately held, as reported by Partners Group, a global private equity leader based in Switzerland.
“So how do we enable 128 million Americans in the defined contribution system to access these asset classes?” pondered Ed Murphy, CEO of Empower, the second-largest retirement services company in the U.S., which manages 88,000 retirement plans.
Murphy, with his company serving over 19 million individual investors, supports including private assets in retirement plans through a target-date fund, managed account, or collective investment trust fund instead of standalone investments.
“There’s significant progress within the industry to bring this all together in a practical way, which will hopefully reassure employers,” he noted.
However, before plan sponsors can feel comfortable investing in private assets, several hurdles need addressing, such as hefty fees, asset transparency, liquidity risk, and higher volatility.
“Private equity can indeed yield better returns than traditional public market investments, albeit with increased risk for those saving for retirement. This could translate to greater asset growth, but it also involves more exposure to volatility, which might not be ideal for those close to retirement,” explained Olivia Mitchell, professor of business economics and public policy at the University of Pennsylvania and executive director of the Pension Research Council.
Meanwhile, employers offering 401(k) plans have a fiduciary duty to prioritize the best interests of the plan participants, not their own. Plan sponsors are tasked with providing financial education, a challenge when it comes to explaining less familiar investments.
“If they don’t grasp what they’re investing in, they shouldn’t be plunged into it,” cautioned Robert Burnette, a financial advisor and CEO of Outlook Financial Center in Troy, Ohio.
Employers must choose and monitor investment options, guarantee that the fees are fair, and ensure participants have sufficient information to make informed decisions regarding their retirement savings.
Earlier this month, BlackRock wrapped up its acquisition of Preqin, a company specializing in private market information. Fink shared that BlackRock aims to enhance its analytics capabilities to offer transparency and assist investors in comprehending risks related to private markets.
“If we succeed, we could then approach regulators, whether it’s the Department of Labor or the Securities and Exchange Commission, and demonstrate to them that these instruments can be viable options for retirement products,” Fink stated.
“Our responsibility is to offer superior transparency and analytics to accomplish this,” he added. “Should we succeed, I believe there’s a credible opportunity to incorporate these types of instruments into retirement offerings.”
