For years, private equity and other private market investments were largely the playground of wealthy investors, institutions, and defined benefit plans.
That is starting to change.
A recent Invesco survey of defined contribution plan participants found that employees are surprisingly open to private market investments inside their retirement plans. In an earlier survey, 86% said they were either definitely interested or open to the idea if they received more information about the risks and fees. In the latest survey, 93% recognized that private markets generally come with higher fees and potentially higher returns, and 58% of that group viewed the tradeoff positively.
That tells me participants are not automatically scared off by higher fees.
But plan sponsors should not confuse participant interest with fiduciary protection.
Private markets can offer diversification and the potential for higher returns, but they also bring higher fees, less liquidity, more complicated valuation issues, and a much more difficult due diligence process.
Those concerns matter under ERISA.
A plan fiduciary cannot simply say participants wanted access to private markets and assume that ends the analysis. The fiduciary still has to prudently evaluate the investment, understand the fees, monitor performance, and determine whether the option is appropriate for the plan.
One interesting finding is that participants appeared receptive to gaining exposure through professionally managed vehicles such as target date funds. That may ultimately be where private markets gain the most traction in 401(k) plans.
I think private markets are coming. The question is not whether participants are interested.
The real question is whether plan sponsors and their advisers are prepared for the additional fiduciary responsibility that comes with them.
Higher potential returns may get everyone’s attention.
Higher fees and additional fiduciary risk should get their attention too.