Private Markets Push Plan Advisers, Sponsors to Rethink Investment Approach

While there is not an exact timeline for when the Department of Labor will release its final rule on alternative assets, industry experts say defined contribution plan decisionmakers should begin shifting their mindsets ahead of the anticipated changes.

The rule recently proposed by the DOL, which received more than 40,000 industry comments, clarified that its proposed safe harbor would apply to investments held in professionally managed accounts.

Top of mind for plan sponsors is the growing complexity of liquidity, valuation and governance in private markets, according to Katie Klingensmith, chief investment strategist at Edelman Financial Engines and moderator of the company’s recent webinar, “Private Assets in DC Plans: Questions Plan Sponsors Are Asking.”

Complexity is a key hurdle when addressing private asset investments, according to Neil Gilfedder, the chief investment officer at Edelman Financial Engines and a webinar panelist. To break down such complexity, Gilfedder recommended sponsors evaluate the different kinds of private investments, the vehicles through which those investments will be delivered, and the appropriateness of both aspects for participants.

These evaluations present a significant opportunity for plan advisers to step in.

“From a managed accounts perspective … private assets should come with some kind of advice,” Gilfedder said during the webinar. “Illiquidity is a different type of risk. … The idea that there are situations where you might not be able to get your money back immediately is of interest to people, and this is where I think having advisers to help is important.”

Thinking Like an Institution

While liquidity and complexity concerns are prevalent for private market investments, other experts say the diversification has proven to bring significant returns for institutional investors who have long been invested in private markets.

Much like institutions, retirement savers have a long investment horizon and the need for a diversified portfolio. Because of this, the move into private markets makes sense to Blackstone President and Chief Operating Officer Jon Gray, who spoke at a recent fireside chat, “Investors First: Mastering the Language of Public and Private Markets,” with Morningstar CEO Kunal Kapoor. Gray also pointed to the recent performance of private markets to argue for investors’ potential success.

“I would say one of the key benefits, of course, is access,” Gray said. “If you look at the last week or two with SpaceX, you could only get that in the private markets. OpenAI, Anthropic, most of the real estate in the United States … you want access to those investments.”

But access to such investments may call for a different approach that advisers are not used to using with current retirement plan investments, according to Gray.

“As an adviser, what you’d say to yourself and for your clients is, ‘How do I give them exposure to [private market investments]?’ Not thinking about it as a short-term product sale, but as ‘I’m going to be like an institution,’” Gray said. “I’m going to have exposure to real estate and private credit and infrastructure and private equity. I’m going to do it over time, and [the client is] going to have the benefit of this ballast.”

According to Gray, allocations do not need to be large. “Maybe it’s 10% or 20% of an individual’s investing portfolio, and over time, they can get the return benefits and the diversification benefits,” he said.

Shifting the typical product sales mindset for advisers, according to Gray, helps establish the importance of an asset allocation strategy for clients.

“If you take that mindset, what ends up happening is you look at this not as, ‘This is the hot product, I’m going to jump from real estate, to credit, to private equity and so forth,’ but ‘I’m building a portfolio exactly like an institution,’” Gray said.