PE Industry Considers Move to Enter 401(k) Market

Private Equity With President Trump just days away from his second term in the White House, private equity firms are eyeing the massive 401(k) market with renewed interest.  While this development could present new opportunities for plan sponsors and participants, it also raises critical administrative, cost, and fiduciary considerations.

Private equity investments have traditionally been the domain of institutional investors and high-net-worth individuals.  However, recent developments suggest the possibility that the PE industry could lobby the U.S. government to allow these alternative investments into retirement plans, particularly within target-date funds and other asset-allocation vehicles.

The appeal is obvious: private equity investments have historically offered the potential for higher returns compared to traditional public market investments. Some academic research supports this perspective.  A 2023 study from Georgetown University’s Center for Retirement Initiatives, quoted in a recent InvestmentNews article, suggested that a 10% allocation to illiquid assets (split between private equity and real estate) could lead to better financial outcomes for participants in 82% of cases.

However, as Carol Buckmann, founder and partner in the ERISA and employee benefits practice at law firm Cohen & Buckmann, pointed out in InvestmentNews (article linked above), there are significant challenges to consider.  “There are lot of ERISA issues, and they need to be carefully addressed by any plan fiduciary that wants to make private equity available,” Ms. Buckmann said.

Additionally, the DOL has been back and forth on the issue.  In 2020, it said that the use of PE investments in retirement plans was acceptable under certain circumstances for some asset allocation strategies.  Under the Biden administration, however, the DOL said that it did not endorse the use of PE within most 401(k)s.

Before considering private equity investments, plan sponsors should evaluate several key factors:

  • Valuation challenges: Private equity investments can be difficult to value accurately, unlike publicly traded stocks within mutual funds.  This complexity adds an extra layer of fiduciary responsibility for plan sponsors.
  • Liquidity concerns: PE investments are inherently less liquid than traditional mutual funds, which could pose challenges for plan administration and participant asset allocation.
  • Fee structure: Private equity typically comes with higher fees than traditional investment options, requiring careful cost-benefit analysis.
  • Participant education: As Ms. Buckmann noted in InvestmentNews, “It does require a lot of expertise to evaluate these investments, and I don’t think your average plan participant is really in a position to do that.”

While private equity in 401(k)s remains relatively rare today – with less than 1% of even the largest plans including PE components in custom target-date strategies – the landscape has the potential to shift.  The most likely path forward appears to be through professionally managed vehicles like target-date funds rather than as standalone investment options.

Plan sponsors considering the possibility of offering PE investments should work with experienced ERISA counsel and investment advisors.  They should also monitor regulatory developments closely, as any changes could significantly impact the viability of private equity in retirement plans.

The key is to maintain a balanced perspective: while private equity might offer diversification benefits and potentially higher returns, it’s important to weight these benefits against the complexity, cost, and fiduciary obligations that come with offering these investments to retirement plan participants.

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