Retirement saving strategies may soon witness a shift as Empower, a significant player in the 401(k) domain, reveals its plan to incorporate private investments into the accounts it manages. By teaming up with companies like Apollo Global Management and Partners Group, Empower seeks to provide a diversified investment landscape to its clients. This move is anticipated to open new avenues in retirement portfolios, suggesting potential shifts in investment trends. While the strategy is not without its challenges, the inclusion of private assets might offer varied benefits previously unavailable in traditional retirement savings plans.
Earlier attempts to integrate private market investments into 401(k) plans often faced hurdles due to concerns over liquidity and valuation challenges. Wall Street firms see the massive $12.4 trillion 401(k) market as pivotal for growth, aiming to introduce private assets to individual investors. Empower’s foray into this niche by offering diverse asset classes, including private credit, equity, and real estate, could mark a significant step in this direction.
What Sparks the Interest?
Empower’s move has been influenced by the interests of private asset managers, who see lucrative opportunities in this evolution.
“A lot of private asset managers see tremendous opportunity there,” said Ed Murphy, CEO of Empower.
Despite these prospects, hurdles prevail as introducing private investments in 401(k) plans presents complexities, primarily due to their illiquid nature and high fee structures. Most employers typically refrain from choosing investments with elevated fees owing to litigation risks.
How Will Managed Accounts Adapt?
Managed accounts are central to Empower’s strategy, offering personalized portfolio management based on age, risk appetite, and wealth level. These accounts will now include private investments, with allocation percentages ranging from 5% to 20% of an investor’s portfolio. Ed Murphy mentioned that five employers have already pledged to include such assets in their plans, although their identities remain undisclosed. Such commitments indicate preliminary but tangible interest in diversifying retirement savings options.
Other industry entities have explored comparable initiatives. State Street recently unveiled a target-date fund emphasizing a 10% allocation to private investments. Although it has yet to enroll any 401(k) plans, ongoing discussions with companies are promising indicators of future adoption. Integrating private assets like real estate might offer benefits such as increased returns and reduced volatility.
Offering private-equity funds in 401(k) plans entails making modifications for liquidity, permitting daily trading by participants. Proponents argue that such integration can safeguard against inflation while providing stable income. Innovations in this area aim to maintain accessibility and flexibility for investors.
The Department of Labor, under the Trump administration, permitted 401(k) plans to feature private equity within diversified portfolios, a stance the current administration has neither promoted nor discouraged.
Murphy expressed his anticipation for clearer guidelines: “We believe there are tremendous opportunities for retirement investors in private investing.”
Such clarifications might pave the way for broader acceptance and implementation of private investments in retirement plans.
Empower’s strategy to incorporate private assets in 401(k) plans introduces both opportunities and challenges, reflecting broader trends in investment diversification. Employers, advisors, and investors alike must navigate the complexities of high fees, liquidity issues, and evolving regulatory guidance. Understanding these dynamics could offer valuable insights for sustained growth and diversification in retirement savings. While this move may set a precedent for future strategies in the retirement planning field, diligent consideration of potential risks and benefits remains crucial for all stakeholders involved.
