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Currently, private assets represent a minimal fraction—under 1%—of the total assets held in 401(k)s and other defined contribution plans. However, leading asset managers and plan administrators are advocating for an increase in this allocation.
At a recent retirement summit hosted by BlackRock, Larry Fink, the firm’s chairman and CEO, noted, “Globally, institutions are integrating public and private markets, often resulting in substantial investment returns.” He highlighted that over half of BlackRock’s $11.6 trillion asset management portfolio is linked to retirement products.
Advocates argue that incorporating private assets into the $12.5 trillion market for workplace retirement plans is essential for enhancing portfolio diversification.
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In the past two decades, the number of companies listed publicly has dwindled, while businesses sustained by private equity have flourished. According to Partners Group, a Swiss-based private equity firm, approximately 87% of U.S. companies generating more than $100 million in annual revenue are now privately held.
Ed Murphy, CEO of Empower—the second-largest retirement services provider in the U.S., responsible for 88,000 retirement plans—poses the question of how to give the 128 million Americans participating in defined contribution plans an opportunity to invest in these asset classes.
Murphy advocates for the inclusion of private assets in retirement strategies through mechanisms like target-date funds, managed accounts, or collective investment trust funds, instead of positioning them as standalone investments. He expressed optimism about ongoing efforts in the industry to create seamless integration that would build employer confidence.
Navigating the Risks of Private Equity
For many plan sponsors, the journey toward incorporating private assets is not without its hurdles. Key concerns include elevated fees, the clarity of asset information, liquidity risks, and heightened market volatility.
Olivia Mitchell, a business economics and public policy professor at the University of Pennsylvania, cautions that while private equity can generate returns that surpass those of conventional public market investments, they come with added risks. “For individuals approaching retirement, the associated volatility could pose challenges,” she noted.
Employers administrating 401(k) plans are required to act as fiduciaries, prioritizing the best interests of plan participants. They bear the responsibility for ensuring financial literacy among participants, a task that may become complicated when introducing less familiar investment options.
As financial advisor Robert Burnette points out, an investment is only wise if the purchaser fully understands it. He emphasizes the importance of informed decision-making in retirement planning.
Employers are responsible for selecting and overseeing investment options, ensuring that associated fees are fair, and equipping participants with sufficient information regarding their retirement savings strategies.
Recently, BlackRock finalized its acquisition of Preqin, a provider of insights into private markets. Fink indicated that the company’s objective is to enhance its analytics capabilities to promote transparency and assist investors in comprehending the risks associated with private investments.
Fink expressed, “Demonstrating sensible investment opportunities to regulators, including the Department of Labor and the Securities and Exchange Commission, is critical as we aim to expand these offerings in retirement products.” He added, “Our role is to enhance transparency and analytics to facilitate this process. Achieving this will create viable avenues for incorporating such instruments into retirement plans.”
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