Don’t hold your breath for alternative investments, such as private equity or credit, to show up in 401(k) plans. According to the April edition of the Cerulli Edge: U.S. Monthly Product Trends report from consulting firm Cerulli Associates, the higher fees, lower transparency, and less-certain outcomes for these asset classes make defined contribution plan managers reluctant to include them.
While corporate pension plans do allocate to alternative investments, reaching 12.4% in 2022, Cerulli analysts noted that defined contribution plans face greater constraints under the Employee Retirement Income Security Act of 1974. ERISA rules don’t explicitly prohibit the use of private funds. However, they emphasize the plan managers’ fiduciary duty to offer the best possible investment options with the lowest possible fees. As a result, private funds’ lack of liquidity, opacity, and typically higher fees can open managers to legal liabilities.
When Cerulli asked investment managers who focus only on defined contribution plans if they planned to add private equity to their multi-asset-class products, such as custom target-date funds, in the next 12 months, 46% answered “No.” Twenty-three percent said they would consider it if they were approached by consultants, advisors, or plan sponsors. Another 15% said they were still in the “fact-finding” stage for private equity investments. Only 8% said they already include private equity in multi-asset-class products, while another 4% planned to add it in the next 12 months.
