Alternative assets in retirement accounts: What’s next?

President Donald Trump signed an executive order in August that aims to expand 401(k) options to include private equity and other alternative assets.

A panel recently looked at what this executive order means to retirement benefits during the Employee Benefit Research Institute’s Virtual Policy Forum.

The executive order directs the Department of Labor and other federal agencies to review guidance and determine the necessary regulatory changes to facilitate these investments, which are currently reserved for wealthy investors. While supporters believe this could boost diversification and returns for everyday savers, experts caution about the inherent risks, higher fees and lack of transparency associated with alternative assets.

“Many refer to the inclusion of private market assets in 401(k) and other defined contribution plans as democratization,” said Barb Marder, EBRI president and CEO. “It’s a leveling of the playing field for 401(k) investors, since private market investments have been available to high net worth investors and institutions, including as part of pension plan assets, for more than a decade.”

Marder cited a study showing that allocating 10% of company-sponsored and self-directed individual retirement accounts and 401(k) plans to alternatives has the potential to shift $3 trillion from traditional asset classes to alternatives over the next decade.

Surveys show there is some demand for alternative asset investments from the public, she said. Nearly three-quarters of the public supports Trump’s executive order, 73% of retirement plan participants want their 401(k) and retirement investment menu to look more like the investment options available to institutional investors and many participants believe some private market exposure could improve their long-term retirement outcome.

Demand for alternative investments is there

“The demand seems to be there, but on the other side there are consumer groups and some politicians that believe this is just a bad idea,” she said. “Concerns range from higher fees, lack of transparency, regulation, illiquidity and wanting to protect the end investor from fraud and bad actors.

“Those in the middle ground say let’s let plan fiduciaries decide. Private markets in defined contribution plans shouldn’t be mandated and they shouldn’t be banned. Fiduciaries should be able to offer these investments in their plans if they believe they are prudent.”

The Employee Retirement Income Security Act does not have a set of rules for what a prudent fiduciary considers for a defined benefit plan versus a defined contribution plan, said Kevin Walsh of Groom Law Group.

A retirement plan fiduciary has two basic responsibilities, he said.
“The first is to act like a prudent expert. If you aren’t a prudent expert, go find one. The second is you must act solely in the interest of your plan participants.”

An ERISA plan “sets the bar at its highest level for the firms that want to enter this space,” said Jonathan Epstein, president and founder of DCALTA- Defined Contribution Alternatives Association. ERISA also mandates transparency and diversification, he said.

Epstein said one myth surrounding alternative investments is that participants will invest directly in private equity funds on core menus.

“That’s not how the industry is viewing this,” he said. “Private markets will be available through professionally managed solutions. They are multiasset in nature so that helps with the liquidity requirements. They will be diversified and they will be within a modest allocation.”

Katie Hockenmaier, partner with Mercer’s US Wealth Practice, said her organization has seen more questions from plan sponsors since the executive order was issued. In addition, she has seen more interest in alternative investments from financial services firms.

“Many of these firms want to learn more about it and how to go about implementing it,” she said. “I think we are at more of the educational stage on this versus the actual pursuit of implementation.”

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