A growing number of retirement savers will soon gain access to private market investments within their portfolios.
Empower, a leading 401(k) provider, is set to permit investments in private credit, equity, and real estate across certain accounts this year. The announcement, made on Wednesday, highlighted a collaboration with seven firms, including prominent players such as Apollo Global Management and Partners Group.
Financial institutions on Wall Street are increasingly pushing to introduce private investment options to individual investors, with the $12.4 trillion 401(k) market viewed as pivotal to driving this transformation. Empower currently manages approximately $1.8 trillion in 401(k) plans for around 19 million participants, making it the largest provider to incorporate these private investments into its offerings.
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Ed Murphy, CEO of Empower, noted that many private asset managers view significant potential in this space. “We believe there are tremendous opportunities for retirement investors in private investing,” he asserted.
However, incorporating these asset classes into 401(k) plans is complex, as they traditionally consist of publicly traded stocks and bonds. The challenge lies in the fact that private investments tend to be less liquid and more challenging to value. Additionally, employers, who play a crucial role in deciding on the investment options for their employees, often hesitate to embrace high-fee investments due to potential legal implications.
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Empower’s partnership funds are expected to incur fees between 1% and 1.6% of the portfolio balance each year, compared to the average fee of approximately 0.28% for target-date mutual funds, according to Morningstar Direct.
These private investments will be available exclusively through select managed account services on Empower’s platform. Managed accounts consist of professionally managed portfolios customized to align with 401(k) investors’ age, risk appetite, and financial standing.
Murphy revealed that five employers have already committed to offering these private investment options within their 401(k) plans when they become available through Empower by the third quarter; however, he refrained from naming the companies involved.
When an employer opts to include private investments in its plan, the managed-accounts adviser will determine the appropriate allocation for each investor’s portfolio. According to Murphy, the allocation could range from 5% to 20%, depending on individual circumstances such as age.
Asset managers are actively developing products designed for mainstream investors that incorporate private assets.
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Recently, State Street launched a target-date fund that aims to include a 10% allocation in private investments managed by Apollo. These all-in-one funds automatically adjust the balance between stocks and bonds as individuals approach retirement and often serve as default investment options for auto-enrolled 401(k) participants. Although State Street has not yet secured a 401(k) plan to adopt its new fund, it has reported ongoing discussions with several companies.
Advocates argue that investing in private assets can enhance returns while reducing volatility within investment portfolios. For instance, private real estate can provide both income and protection against inflation, as noted by Jenny Johnson, CEO of Franklin Templeton, which is set to offer a private-real estate fund through the partnership.
While traditional private equity funds often impose lengthy restrictions on shareholders regarding the sale of their holdings, the 401(k) versions are designed to allow daily trading. These funds typically include publicly traded securities to enable cash withdrawals for departing investors.
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During the first Trump administration, the Labor Department issued guidance affirming that 401(k) plans are permitted to offer private equity as part of a diversified investment portfolio, such as a target-date fund. On the other hand, the Labor Department under the Biden administration indicated that it “did not endorse or recommend such investments.”
Murphy expressed optimism that the Trump administration may release additional guidance to reassure employers, which could facilitate wider acceptance of private investments within 401(k) plans.
