
Plan governance The new cyber reality: Tips to help participants protect their retirement assets
Learn what steps plan sponsors can take to help participants combat cybercrime and protect their retirement plan savings.
Private markets allow DC plans the opportunity to leverage added diversification with the potential for higher returns.
Plan fiduciaries should follow a prudent process when selecting investment options that include a private markets component.
Private markets can be part of an investment menu as a component of a professionally managed portfolio.
Hearing about private markets for 401(k) plans? You’re not alone. What was once more limited to the defined benefit (DB) space is now getting more attention in the defined contribution (DC) market.
Private markets refer to those financial asset types that are not traded on the public market. This includes real estate, private equity, and private credit, among others. This update will focus specifically on:
The US has the most diverse public and private markets in the world, yet most US retirement plans have not been able to leverage the performance and diversity of private markets on their home field, except for in DB plans.
However, recent shifts in the public markets — and innovations in the private markets — create new considerations. From 1996 to 2020, there has been a 50% decline in the number of publicly traded companies.1 As public companies are consolidating, investible opportunities are shrinking. At the same time, private markets may be able to provide:2
Despite the potential benefits, there has been reluctance to leverage private market options in DC plans for several reasons:
For ERISA-covered retirement plans, the same framework applies for private markets that applies to other investment types in the plan. This means that the duty to diversify, duty of loyalty, and duty of care under ERISA Section 404 applies. It also means that in circumstances where a plan fiduciary lacks the requisite expertise to understand and assess the universe of investment types (particularly as they increasingly seem more and more complicated), the plan fiduciary is allowed (and should), engage the services of an investment consultant or investment manager to assist with the selection and monitoring process.
While the notion of including private markets as a standalone investment option in DC plans has been discussed over the years, adoption has been rare — and for good reason based on those points covered above.3 However, similar to mutual funds, private markets can be part of an investment menu as a component of a professionally managed portfolio, specifically managed accounts or target date funds (both custom and off-the-shelf).4 In cases where the plan seeks to include private markets as a sleeve of a professionally managed portfolio, such as a managed account or target date fund, key considerations may include:
In December 2021, the DOL published a statement (which was a follow-up to a prior letter it issued on the topic in 2020). In that update, the DOL stated that a plan fiduciary would not violate the fiduciary’s duties under ERISA sections 403 and 404 solely by reason of offering a professionally managed asset allocation fund with a private equity component as an investment offered in the investment line-up (also known as a DIA) subject to the conditions set forth in the letter. The DOL confirmed that as with any plan investment, plan fiduciaries must determine that an investment that includes private equity is, among other things, prudent and made solely in the best interest of the plan participants and beneficiaries. While the DOL specifically addressed private equity in this series of letters, it is largely understood in the marketplace that the DOL was referring to private equity as well as other private markets and similarly situated investment options.
In the same publication, the DOL also expressed the view that plan fiduciaries of smaller plans typically will not have the expertise necessary for the complex evaluation required to determine the prudence of private equity investments in participant-directed plans. However, there was not a set asset or participant level defined as a smaller plan that was “required” to avoid private equity.
It is important to note that although the current administration’s DOL5 is expected to soon issue guidance promoting the use of private markets in DC plans, plan fiduciaries should proceed with the current guidance and monitor closely for the guidance that may be forthcoming.
While the same prudent process framework applies, private markets may feel more daunting to retirement plan fiduciaries. Plan fiduciaries may want to consider these next steps when evaluating their overall investment menu design and how private markets may be considered as a part of their next plan governance and investment menu review.
Engage your partners and determine what next steps may be appropriate based on the needs of the plan and its participants.
Learn what steps plan sponsors can take to help participants combat cybercrime and protect their retirement plan savings.
The impact of Loper Bright Enterprises v. Raimondo and the potential implications on DC plan litigation in a post-Chevron world.
DC plan committees can help reduce litigation risk by establishing and following proper plan governance policies and procedures.
Important information
NA4640027
Reprinted with permission from Bonnie Treichel. While Invesco believes the information presented in this article to be reliable and current, Invesco was not involved in writing the article and cannot guarantee its accuracy. This article is provided for educational and informational purposes only and is not an offer of investment advice or financial products. Invesco is not affiliated with Bonnie Treichel, Endeavor Retirement or Endeavor Law.
This material is for illustrative, informational, and educational purposes only. It is not intended to be legal or tax advice or to offer a comprehensive resource for tax-qualified retirement plans. Any products referenced are not intended to represent any specific Invesco products.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Diversification does not guarantee a profit or eliminate the risk of loss.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies, and their shares may be more volatile and less liquid.
Alternative investment products, including hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for hedge funds and private equity, and none is expected to develop. There may be restrictions on transferring interests in such investments.
A target date fund identifies a specific time at which investors are expected to begin making withdrawals, e.g., now, 2025, 2030. The principal value of the fund is not guaranteed at any time, including at the target date.
Direct Lending is represented by Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs.
Private Real Estate Debt is represented by Giliberto-Levy High-Yield Real Estate Debt Index (G-L 2) which measures total return and its components for many forms of high-yield CRE debt, such as high-yield commercial mortgage debt performance for high-yield loans, such as mezzanine loans, preferred equity and "B" notes.
High Yield is represented by Bloomberg US Corporate High Yield Bond Index which measures the USD-denominated, high yield, fixed-rate corporate bond market
Senior Loans is represented by Morningstar LSTA US Leveraged Loan 100 Index which is designed to measure the performance of the 100 largest facilities in the US leveraged loan market.
Private Real Estate Equity is represented by NCREIF Property Index (the “NPI”) on the basis that the NPI is the broadest measure of private real estate index returns. The NPI is published by the National Council of Real Estate Investment Fiduciaries and is a quarterly, composite total return (based on appraisal values) for private commercial real estate properties held for investment purposes including fund expenses but excluding leverage and management and advisory fees. NCREIF data reflects the returns of a blended portfolio of institutional quality real estate and does not reflect the use of leverage or the impact of management and advisory fees.
Corporate Bonds is represented by Bloomberg U.S. Corporate Value Unhedged USD Index which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
Commercial Mortgage Backed Securities (CMBS) is represented by Bloomberg US CMBS Investment Grade Index which measures the market of US Agency and US Non-Agency conduit and fusion CMBS deals with a minimum current deal size of $300mn.
Investment Grade Bonds is represented by Bloomberg US Aggregate Bond Index, an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
U.S. Equities is represented by S&P 500 Index, an unmanaged index of the 500 largest stocks, weighted by market capitalization and considered representative of the broader stock market.
An investment cannot be made into an index.
This link takes you to a site not affiliated with Invesco. The site is for informational purposes only. Invesco does not guarantee nor take any responsibility for any of the content.