A widely anticipated executive order from President Donald Trump could soon make it easier for employers to include private market assets in retirement plans.
Most notably, the move is expected to offer employers protection from lawsuits if they add private investment options to their 401(k) plans.
It also has a lot of financial advisors weighing in on the executive order’s potential impact to the wealth management industry which is already experiencing a multi-year trend toward opening up private market access to individual investors through evergreen structures and lower minimums.
Joy Torrealba, investment advisor at Jackson Square Capital, for one, believes adoption will be minimal - at least to start - should the order be signed. In her view, the big difference is whether existing target date funds can add alternatives to allocations. If so, she believes adoption will be nearly instantaneous.
“What’s more likely to happen is that new target date funds will need to be created to reflect the new risk profile. In that instance, investment committees will need to evaluate those new target date funds, which will have no track record, creating friction for adoption,” Torrealba said.
Rory O’Hara, founder and senior managing partner of Ausperity Private Wealth, agrees that adoption will likely be slow due to fiduciary liability concerns, as well as the need for better education around these investments. Still, he calls it a “meaningful step” toward broader access, especially given how evergreen structures and lower investment minimums have already begun democratizing private markets.
Elsewhere, Kevin M. Pearly, founding partner at SkyPath Private Wealth, points out that every publicly traded company started as a private company, with early investment opportunities only open to a select, well-heeled few. By allowing access to private markets in 401k plans and giving everyday 401k participants a chance to invest early in the process, that would break down that barrier.
“The number of publicly traded companies in the US has declined by close to 50% over the past 30 years, with more companies staying private longer. Providing 401k plan participants with the ability to invest in private companies and to create long term value within a 401k plan, will be a welcome and much needed upgrade to the retirement plan industry,” Pearly said.
Added Pearly: “That said, I’m realistic knowing there are operational and legal hurdles that will slow widespread adoption, at least initially.”
The inclusion of private market funds would likely increase the cost of a target date fund, which is a big consideration for retirement plan offerings, and has been cited by the DOL as a reason certain products are not considered suitable for retirement savers.
According to Torrealba, adding private market exposure can increase the risk-adjusted returns within a balanced portfolio and can have the effect of smoothing portfolio returns over market cycles, but security selection, as always, is critical.
“Lack of liquidity and lack of transparency are additional concerns with private market investments. Target date funds should be able to manage cashflows appropriately, but the lack of transparency may be an issue for reporting and compliance,” Torrealba said.
Ausperity’s O’Hara echoes Torrealba’s thoughts, pointing out that when “done thoughtfully, private alternatives could enhance long-term returns and reduce volatility,” especially given their historical lower correlation and smoother pricing. But O’Hara adds that “improper allocation or lack of transparency” could backfire, so structure and execution are paramount.
SkyPath’s Pearly is also in agreement, saying the addition of private market companies to target date funds should improve their performance over longer periods of time.
“As these private companies grow and hopefully one day go public there is an opportunity to create real wealth and value for retirement plan investors,” Pearly said.
When it comes to protections or plan design features that advisors might want to see in place before recommending private alternatives in a retirement plan, O’Hara would be looking for robust manager due diligence, clear liquidity provisions, and transparency in pricing and fees.
“For retirement plan sponsors, education and built-in guardrails are key to making this work responsibly and aligning with fiduciary duty,” O’Hara said.
Pearly, meanwhile, is most concerned with lock-ups and illiquidity, which are common within private markets, yet would need to be worked though for private investments within retirement plans.
“A retiree who needs access to their funds, or a participant under certain situations cannot be told they cannot access the funds in their account. By having the sponsor of the investment having the obligation to step in when necessary to provide liquidity, just as a Specialist on the NYSE would do, is one such way to address this issue,” Pearly said.
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