More individuals saving for retirement are showing interest in incorporating private market investments into their portfolios.
Empower, a major player in the 401(k) sector, will start permitting investments in individual credit, stocks, and real estate for some managed accounts later this year. The company announced a partnership with seven firms, including Apollo Global Management and Partners Group, to facilitate these options.
Wall Street firms are actively encouraging investors to explore personal investments, viewing the $12.4 trillion market for 401(k)-style retirement plans as crucial for growth. Empower currently oversees about $1.8 trillion in such plans, serving 19 million people, making it the largest provider that has not previously offered these investment types in 401(k)s.
Many private asset managers see substantial opportunity in this area, according to Ed Murphy, CEO of Empower, who believes that retired investors can greatly benefit from accessing private investments.
However, integrating these asset classes into 401(k) plans can be challenging. Typically, these plans consist of public stocks and bonds. Private investments are often illiquid and hard to value. Employers hold significant control over whether to include these options, often wary of high investment rates for fear of potential lawsuits.
Empower’s Partnership Funds might impose fees ranging from 1% to 1.6% based on portfolio balance, whereas average mutual fund fees for target-date funds are around 0.28% according to MorningStar Direct.
The option for private investment will be available mainly through selected managed account services on Empower’s platform. These accounts are expertly managed to cater to the specific age, risk tolerance, and wealth levels of 401(k) investors.
Murphy mentioned that five employers have committed to offering private investment options through Empower’s plans once available in the third quarter, though specific names were not disclosed.
If a company chooses to permit private investments, the managed account advisor will assess how much of each investor’s portfolio to allocate to these options, typically ranging from 5% to 20%, influenced by factors such as age.
Investment managers are also developing products that target everyday investors, including private assets.
Recently, State Street introduced a target date fund that allocates 10% to private investments managed by Apollo. These all-in-one funds will transition from stocks to bonds as employees age and are expected to serve as default investments for many 401(k) plans that automatically enroll workers. While State Street hasn’t yet linked the new fund to a specific 401(k) plan, discussions with multiple companies are ongoing.
Proponents argue that private assets can enhance returns and lower portfolio volatility. For instance, private real estate can provide income and inflation protection, as stated by Jenny Johnson, CEO of Franklin Templeton, which manages private real estate funds in collaboration with Empower.
Typically, private equity funds prevent shareholders from selling their stakes for extended periods; the 401(k) versions are structured to allow participants to trade daily in many cases. These funds are generally included in public securities to enable cash-outs for retired investors.
The Labor Bureau during the first Trump administration confirmed that 401(k) plans could incorporate private equity as part of a diverse portfolio, such as that seen in Target Date Funds. In contrast, the Biden administration’s Labor Bureau has not endorsed such investments.
Murphy highlighted that further guidance from the Trump administration aimed to assure employers, potentially paving the way for the broader acceptance of private investments within 401(k) plans.
