Private market investments in 401(k) plans: Let’s weigh the risks

The executive order would instruct the Department of Labor and the Securities and Exchange Commission to provide guidance to employers and plan administrators on including investments like private assets in 401(k) plans. In June, the SEC announced in its Report to Congress that it would prioritize the risks and benefits of “Private Market Investments in Retirement Accounts” as an objective for 2026.

In corporate America, private market investments in retirement plans have become a huge topic of discussion, as Larry Fink, CEO of BlackRock — the world’s largest asset management firm with more than $11 trillion in assets under management in 2024 — called for more private assets in 401(k) plans, in his annual letter to investors in April.

In May, Empower, the nation’s second largest 401(k) plan provider, launched a new program that will pave the way for private markets investments to be included within DC plans. 

Earlier this month, retirement services provider Voya Financial and Blue Owl Capital, a $273 billion credit-focused alternatives manager, partnered to develop private markets investment products in all-in-one target date fund program for employer-sponsored retirement savings plans.

The pluses

More than one-third (36%) of investors participating in a 401(k), 403(b) or 457 workplace retirement savings plan would invest in private equity and private debt investments if their plan provided access to these assets, according to a Schroders Survey.

“Private investment offerings and alternatives have been overlooked in DC plans for some time,” said Jeremy Stempien, portfolio manager and strategist for PGIM DC Solutions. “The importance of these investments is as great as ever given the size of the DC market, the increased focus on investors nearing or in-retirement, and some of the key risks such as inflation that are more present than we’ve seen in decades.”

“Private markets offer significant opportunities to diversify retirement portfolios and enhance long-term returns,” said Cheryl Nash, president of APL at InvestCloud. “Because retirement plans are designed for long-term wealth accumulation, they can tolerate the longer lock-up periods common in private markets.”

The safety warnings

“Private markets are more complex and less transparent and have different characteristics than traditional investments,” said Nash. “This is why we need more education and better infrastructure, not less. Technology enables industry to grow, providing speed, efficiency, automation, and precision, while also simplifying access and delivering an educational experience. Technology and digital platforms must play a central role in providing plan sponsors and investors with the data and analytics they need to make informed decisions that lead to better outcomes.”

However, Sen. Elizabeth Warren, D-Mass., ranking member of the Senate Banking, Housing, and Urban Affairs Committee,is a known critic of private equity investing and has been vocal about the potential risks of private market investments. She wrote a letter to Empower’s CEO in June, asking what safeguards the plan provider will put in place to protect its plan participants who choose to invest in private markets through its new offering.

She said she wants answers about the company’s efforts to “push retirement savers contribution plans into private equity and private credit, and the threats that these investments pose to Americans’ retirement savings.” 

Warren has asked Empower to respond to a series of questions about the company’s partnerships with private equity firms — including providing details about how the company will continue to “maintain high investor protection standards” and “educating plan sponsors on the risk of investing in the private markets.”

Education is key. Empower participants can only access private investments through a managed account adviser, who will ensure that allocations are aligned with an individual’s risk tolerance, time horizon and financial objectives. Private asset allocations will typically be in a range from 5% to 20%, depending on participant’s age, the firm says.

Similarly, at Voya, private asset investing will only be available through advisor-managed accounts on Voya’s retirement platform and through target date solutions managed by Voya Investment Management. 

“For employers, the inclusion of private market investments in retirement plans creates an opportunity to offer a more competitive and differentiated benefits package to attract and retain top talent,” said Nash. “For employees, it is about gaining access to asset classes once reserved for institutional … investors.” However, “employers and plan providers need the right digital tools, infrastructure, and fiduciary oversight to empower employees with the knowledge and confidence to make smart decisions.”

Perhaps the recent dismissal of a 6-year Intel lawsuit that alleged the inclusion of alternative investments in the company’s two defined contribution plans was a breach of the chipmaker’s fiduciary duties is a plus for other employers considering offering private assets in their plan. However, “fiduciaries may still hesitate absent an express statutory or regulatory safe harbor for including professionally managed, diversified fund options in which private market investments are a component,” according to law firm Debevoise & Plimpton. “There is no one-size-fits-all approach to asset allocation or investment options that can be made available in participant-directed defined contribution plans.”

Private market investing in retirement plans is happening, but employers — and employees — may need to take a slow and steady approach until more safeguards are firmly in place.