Private equity firms increasingly target the $12.5 trillion workplace retirement plan market. Despite making up less than 1% of assets in defined contribution plans, private equity’s presence has grown significantly over the last two decades. Complexity, lack of transparency, and higher fees have made plan sponsors cautious about incorporating private equity investments into retirement plans.
However, Apollo Global Management, Blackstone, and KKR strive for a more significant role in workers’ portfolios. “It’s a train that’s already been gearing up, and folks are starting to hop on,” said President Jonathan Epstein, Defined Contribution Alternatives Association. The private equity industry argues that incorporating such investments could offer retail investors more diversification and potentially higher returns.
However, concerns about liquidity and risk remain. “It’s typically not easy to cash out the assets in a hurry,” said Olivia Mitchell, a professor at the University of Pennsylvania. “This could be a big challenge for 401(k) plan participants who either simply want to access their money or wish to readjust their portfolios as they near and enter retirement.”
Many large employer-sponsored retirement plans offer private equity investments as an alternative option within target-date or model portfolio funds.
Private equity looks to workplace retirements
When private investments are added to retirement solutions, the results are not just a little bit better; they’re 50% to 100% better,” proclaimed Marc Rowan, co-founder and CEO of Apollo. MissionSquare Investments offers private equity investments in retirement plans it manages for public service employees.
“What we find is there’s an outflow in the public stock and bond [markets] and an inflow into the private markets, but participants can’t get access to private markets,” said Douglas Cote, senior vice president and chief investment officer for MissionSquare. Despite enthusiasm from some quarters, the push for private equity in 401(k) plans faces opposition. The law covering these plans requires fiduciaries to act in investors’ best interests, considering risk and potential gains.
During President Trump’s first term, guidance was issued stating that private equity might be a “prudent investment” as part of a professionally managed asset allocation fund in a 401(k) plan. However, subsequent administrations have been more cautious, noting that these investments aren’t “generally appropriate for a typical 401(k) plan.”
Some plan sponsors are against this initiative to make direct investments to private equity available through the defined contribution plan,” said Bridget Bearden, research and development strategist at the Employee Benefit Research Institute. “They think it’s pretty illiquid and perilous and don’t really see the return for it.”
Four main factors contribute to plan sponsors’ conservative approach to private equity: complexity and lack of transparency, liquidity and valuation challenges, and high fees.
As private equity’s influence grows, there is ongoing debate about the prudence of these investments in retirement plans. While some see opportunities for diversification and higher returns, others remain concerned about the associated risks and complexities.
Photo by Harli Marten on Unsplash