A new executive order anticipated from President Donald Trump could soon make it easier for employers to include private market investments in 401(k) plans, according to a new analyst note from PitchBook.
While the move is expected to address some legal concerns that have kept private equity and venture capital out of defined contribution plans, industry observers say significant obstacles remain for widespread adoption.
The executive order, which has been the subject of a flurry of news coverage – at the epicenter of which was a report by the Wall Street Journal on Wednesday, which cited anonymous sources – is expected to offer employers protection from lawsuits if they add private asset options to their retirement plans.
Beyond the yet-to-be revealed details of the reported executive order, the PitchBook analysis outlined numerous questions and challenges for any agenda to place private-market investments in 401(k)s.
It pointed to a 2020 Department of Labor letter, which clarified that employers would not breach their fiduciary duty by including private equity in 401(k) options, provided they considered factors such as cost, complexity, and expected returns.
“While asset managers are salivating over the idea of tapping in to a portion of the $12.5 trillion in defined contribution assets, we believe adoption will be slow due to cost, transparency, and complexity,” the report authors wrote.
Another stumbling block is the liquidity mismatch between private assets and the structure of 401(k) plans. Unlike traditional investment accounts, 401(k)s receive contributions every pay period and allow participants to change allocations frequently. This requires fund options with enough liquidity to handle regular inflows and redemptions.
“A fund that was 100 percent private markets would not be well suited to these sorts of cash flows, as the money coming in every pay period may not coincide with the fund manager identifying a new investment opportunity,” the report noted.
To address liquidity concerns, the Securities and Exchange Commission caps illiquid investments in mutual funds at 15 percent. As a result, most proposals envision target-date or asset allocation funds that include a modest allocation to private assets alongside more traditional holdings. Asset managers have shown enthusiasm for this approach, especially since many employers now automatically enroll new workers in target-date funds.
However, cost remains a sticking point. Private market investments typically involve higher fees than public market funds, and these costs are often passed on to plan participants, whose apparent fee sensitivity has helped drive a decades-long trend of declining expense ratios, according to a new analysis by the Investment Company Institute.
The PitchBook analysts observe that “many, quite rightly, will wonder if higher expenses are justified by the potential, not the certainty, for improved returns.”
Legal risk is another major concern for employers, many of whom have adopted a cautious approach to retirement plan management in light of ongoing lawsuits over plan administration. Even with new legal protections, the report suggests that inertia and a lack of investment expertise among employer committees could limit demand for private asset options.
"The 401(k) market is currently concentrated, as employers have appreciated the cost savings of platforms from Vanguard, BlackRock, T. Rowe Price, Capital Group, and Fidelity Investments," the PitchBook report said. "None of these asset managers built their reputations on private market investing, so we expect to see more mergers, acquisitions, and partnerships between these managers and those hailing from the private market arena."
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