Investors are seeking new ways to expand their options beyond equities and fixed income, yet when it comes to allocating private investments, retail investors have had fewer options than their institutional counterparts.
This has been particularly true within defined-contribution plans—a $10 trillion market comprising nearly 30% of all retirement savings—which typically limit retirement savers to narrow investment options in equity and fixed-income mutual funds.
However, through a combination of structural shifts in the economy, new regulatory guidance, and product innovation such as collective investment trusts (CIT), the retirement market is finally opening up access to private markets via defined-contribution plans. We believe this change will ultimately benefit retirement savers by expanding market access and increasing exposure to a growing number of privately held companies that drive innovation, jobs, and growth across multiple industries.
The Department of Labor clarified its long-standing position on private market assets—defined as assets not publicly traded—in 401(k) plans in 2020, giving guidance on fiduciary and suitability standards for retirement plans for the first time. In many ways, the shifting regulatory landscape, as evidenced by the letter, opened the door to private markets in retirement planning and is a nod to a changing economy.
Though public markets have traditionally been the dominant mechanism for capital-raising, today only 15% of companies in the U.S. with annual revenue of more than $100 million are public. That means 85% of mid- to large-size companies in the U.S. are privately held and, as a result, effectively unavailable to retail investors. Add the fact that equity indices have steadily concentrated in fewer companies and fewer industries and it becomes increasingly difficult to argue that public markets offer investors diverse exposure to the real economy.
Critics argue that private markets lack proper liquidity and oversight, and typically underperform. They also say allowing them into 401(k)s raises lock-up concerns.
On the contrary, offering private market investments via defined contribution plans provides an option to access the portion of the market that is becoming more mainstream. In an August 2021 report, the Urban Institute found that private equity has outperformed public stocks for the last three decades. Research from Partners Group has shown the inclusion of private market assets in target-date funds increases diversification, reduces drawdown, and typically improves overall risk-return profiles.
Furthermore, as outlined in the DOL guidance, private market inclusion in 401(k) plans is appropriate for professionally managed accounts, meaning that plan sponsors have the security of oversight by portfolio management teams.
Greater access to private markets is already driving change in the defined-contribution market. This pace of change in the retirement market is poised to accelerate rapidly in the coming years with even more innovation, as pooled employer plans (PEPs) gain in popularity. Introduced as part of the Secure Act of 2019, PEPs allow plan sponsors to pool participants and plan assets with other plan sponsors, giving way for the delegation of fiduciary responsibilities to these third parties.
As private market assets continue to make up a growing share of the economy, the defined-contribution channel represents one of the only ways for everyday investors to gain access to private markets, which historically has been available only to high-net-worth or individuals or institutional investors. With new programs like PEPs taking hold, the future of defined- contribution plans will continue to include more options, greater diversification, and increased exposure to the real economy—all of which can benefit the retail investor.
Robert Collins is head of Partners Group’s New York office and a member of the firm’s global executive board. He leads Partners Group’s U.S. private wealth and defined-contribution practice and is president, portfolio manager, and member of the board of managers of Partners Group Private Equity (Master Fund). He also chairs Partners Group (USA)’s investment committee. He joined the firm in 2005 as a member of the private-equity investment team and has 23 years of industry experience. Prior to joining Partners Group, he worked at UBS Warburg and Salomon Smith Barney.