Alts Move Closer to Main Street as Washington, DC, Focuses on DC Plans

Back to it after an August that was anything but a lazy slumber at the end of summer, thanks in part – at least to the close alt watchers – to new developments (and ongoing debates) around private markets and US retirement funds.

So first a quick review: Until recently, only certain target-date or asset-allocation funds could incorporate alternatives as an investment option if they met certain ERISA fiduciary standards. The practice is by no means widespread or direct.

However, last month, President Trump signed an executive order called “Democratizing Access to Alternative Assets for 401(k) Investors,” which in short is designed to reduce barriers for private-market managers so they can more easily offer private equity and other alt investments to defined-contribution plans – a walloping $12-trillion market.

To be clear, the order does not change any existing regulations. Instead, it sets up a specific review process with the intent of broadening the opportunity through further guidance from government agencies. After all, pension funds have been investing in PE for quite some time, so some retirees have already been indirect investors.

With a door to a new market cracked open, the product-framework machines and retail tutorials are full speed ahead. And as to be expected, the executive order set off a stack of articles offering differing predictions on the order, from “about time” to “caveat emptor.”

A recent survey sheds a bit of light on one side of this debate. According to Empower, the retirement behemoth, in a July poll of financial advisors, approximately 68 percent said they use private-market investments in their “wealth-advised or high-net-worth accounts.”  That includes private equity, private real estate and private credit. What’s more, some 58 percent of those advisors said they would recommend private-market investments in retirement plans. (It increases substantially to 78 percent of advisors who work with pension or defined-benefits plans and 43 percent of advisors overall, which indicates momentum.)

And the biggest benefits the advisors claim? Diversification, higher returns, lower correlation to the public markets.

But not everyone is all in. Detractors cite a lack of liquidity (longer hold periods with money tied up more than may be desired); higher fees (above low-index funds) and a need for greater performance to match traditional investments; and a complex landscape (less disclosure, more opaque markets) as their list of concerns. All are valid points, but education, regulatory clarity and product innovation can alleviate them in time, proponents say. And certainly, adding further doubt are recent PE returns, which have been lagging the explosive stock market for the past three years, lending credence to the “follow-the-money” argument. But over the long haul, private equity returns vastly outperform public equity.

Is this a move by advisors and asset owners for profit or a move to better serve investors?

“As regulatory guidance develops, we see advisors playing a pivotal role in helping plan sponsors evaluate private investment options,” said Edmund F. Murphy III, President and CEO of Empower. “Professionally managed accounts and prudent exposure limits can help mitigate risk while offering retirement savers access to a broader investment universe.”  His survey showed that 66% of advisors said that greater ERISA/regulatory clarity would increase their likelihood of recommending private markets in retirement plans, a good sign for an “all systems go” once the policy environment takes shape and product frameworks set. The alternative race continues!

Mark Kollar’s monthly Letter from America can be read at The Alternative Investor.