Hot Topic - Private Assets/Private Equity in 401ks Plans

As a plan sponsor, you've likely heard in the news about 401k providers beginning to allow access to Alternative Assets such as Private Equity and Private Assets within 401K plans. We've received some inquiries from our clients on this topic too so I thought I’d share some insight.

Capital Group/America Fund has teamed up with KKR. Voya Retirement Service has partnered up with Blue Owl, and Empower Retirement has announced programs with Apollo and Goldman Sachs; just to name a few. For Private Investment firms, this represents a significant opportunity with trillions of dollars in 401k retirement accounts that were previously inaccessible to them.

My advice on including Alternative Assets as an investment option in your company’s retirement plan is to be cautious.

While I believe Private Assets can be part of a diversified portfolio, I would be cautious about adding Private Asset Funds to a 401K plan due to their typical restrictions on redeeming (selling) shares, often on a quarterly basis or longer. This might lead to dissatisfied employees who were unaware o

f the restriction when they chose to invest in that option.

I also recall the events of 2008. Many plan sponsors may not remember the impact The Great Recession of 2008 had on their company’s 401k plans, but I do, thanks to over 20 years of experience with 401k plans.

In 2008, I remember many 401k plans included a Real Estate Fund as an investment option. When the real estate market crashed in 2008 and participants wanted to exit these investments, many Investment Management Companies (Mutual Funds) imposed redemption restrictions, freezing all distribution requests. I recall one 401k provider had a Real Estate Fund that was inaccessible for over 2 years, forcing investors to endure the steep decline in the fund's value.

I can't tell you the number of phone calls we had from current and terminated participants wanting to exit these funds, but we could do nothing until the restriction was lifted. Even then, redemptions were processed on a pro-rata basis, taking multiple quarters to complete.

The reason for these restrictions was that real estate, like Private Asset investments, is not a “liquid asset.” You can't sell your position as easily as with public stocks or bonds. With so many liquidation requests, losses in those funds would have been exacerbated.

This is why I would be cautious about adding Private Equity or Private Assets to your 401K lineup. They are not as liquid as other types of investments, which could increase your liability.

If you'd like to talk further about Private Equity options and if they are a suitable investment for your 401k plan, please don't hesitate to reach out.