Do I Want Private Market Assets in My 401(k)?
The industry selling “alternative assets” such as private equity, private credit and private real estate wants to get into your retirement plan. Badly.
About $13 trillion is stashed inside defined contribution plans, the most well known being the 401(k). With many large institutions holding about as much as they want in private market assets, the industry needs someplace new to sell into. The reason such assets should be added into 401(k) plans is, arguably, not as clear-cut.
The pitch: Pension plans, institutions and high-net-worth individuals have been able to invest in private market funds for years. So why shouldn’t 401(k) savers—who may also have the long time horizons these products require—have access? Some target-date funds already include private real estate, but access to private equity and private credit is rare.
Proponents say exposure to younger, potentially faster-growing companies could provide a performance edge and improve diversification to portfolios. Advocates also point out that as many companies stay private longer, they make up a growing chunk of the economy.
It sounds logical. But financial planners tend to be skeptical. “For many savers, trade-offs in areas like liquidity, valuations and fees can outweigh the potential benefits, ” says planner Nathan Sebesta, founder of Access Wealth Strategies.
Cloudy Performance Picture
Do I Want Private Market Assets in My 401(k)? Maybe, but there are potential downsides to consider, including that it’s not clear you’re going to get better returns. How much of a return edge private market assets will bring is up for debate. A June BlackRock Inc. report estimated that adding slices of them to a defined contribution account as part of a diversified target-date fund could result in 15% more money in an account over 40 years.
Returns, however, vary greatly by manager. And academic research isn’t conclusive on whether private markets outperform public markets on the whole, says Marlena Lee, global head of investment solutions at Dimensional Fund Advisors. “Data on the private side of the markets is less available,” she says, “and what’s there isn’t as high-quality as what’s there for public markets.”
It’s also unclear what more competition in private markets means for returns. “When investments initially offered only to institutional and highnet-worth individuals are offered to Main Street, it usually means the biggest profits have already been made, ” says George Gagliardi of Coromandel Wealth Strategies.
Higher Fees
Expenses have been on a long decline in 401(k)-type plans, and private market assets are known for high fees. “There are legitimate questions about whether private investments will consistently outperform traditional market investments after accounting for the higher level of fees, ” says Jon Henshue, director of alternative strategies at Johnson Financial Group.
There are also concerns about how much access savers will have to money held in private market funds. Historically, funds might lock up assets for 7 to 10 years, though newer funds aimed at retail investors offer much more access.
“I’m open to the idea of private market assets in 401(k)s, ” Henshue says, “if it includes strong fiduciary oversight, conservative allocation limits and stringent manager selection.” —S.W.