BlackRock CEO Larry Fink believes that blending public and private markets can be a great investment for retirement plans. Private assets, such as credit and equity in private firms, make up less than 1% of assets in defined contribution plans currently. However, some major asset managers and plan administrators are pushing for change.
“We are seeing institutions worldwide blend public and private markets, and in many cases, it’s been a great investment,” Fink said at a recent summit on retirement sponsored by BlackRock. The company manages $11.6 trillion in assets, with a substantial portion in retirement products. Fink and other proponents argue that including private assets in the $12.5 trillion workplace retirement plan market is essential for greater portfolio diversification.
Over the past 20 years, the number of publicly traded companies has declined while firms backed by private equity have grown. In the U.S., about 87% of companies with annual revenues over $100 million are now private, according to the Partners Group, a Swiss-based global private equity firm. Ed Murphy, CEO of Empower, the second-largest U.S. retirement services company, asks, “So, how do we give 128 million Americans in the defined contribution system exposure to those asset classes?” Empower administers 88,000 retirement plans and serves 19 million individual investors.
Blending markets for retirement plans
The company supports efforts to add private assets to retirement plans as part of target-date funds or managed accounts rather than stand-alone investments. However, private equity comes with greater risk.
Plan sponsors need to be assured about investing in private assets because of high fees, lack of transparency, liquidity risk, and increased volatility. Olivia Mitchell, a professor at the University of Pennsylvania and executive director of the Pension Research Council, said, “Private equity can pay higher returns than traditional public market investments, but with greater risk for retirement savers. This could mean more exposure to volatility, which is not ideal for people nearing retirement.”
Employers offering 401(k) plans must act as fiduciaries, serving the best interests of participants.
They are responsible for selecting and monitoring investment options, ensuring fees are reasonable, and providing participants with sufficient information to make informed decisions. BlackRock recently announced plans to build out analytics to provide transparency and help investors understand risk in private markets. Fink said, “If we could do that, we could then go to our regulators, whether it’s the Department of Labor or the Securities and Exchange Commission, and show that these can be sensible instruments for a retirement product.
Our job is to provide much better transparency and analytics to get that done.”
He added, “If we achieve that, then I think we’re going to have a credible opportunity to add these types of instruments to retirement products.”
Photo by; Nastuh Abootalebi on Unsplash