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Attach the word “private” to something, particularly an investment strategy, and it’s sure to get people interested. It’s an almost Pavlovian response to wanting something that’s perceived as unattainable.
That’s certainly the case with private credit and private equity. Today’s retail investors are increasingly sophisticated and aware of private equity. Many know that this is the territory of institutional investors, other professionals and only the most well-heeled of individual investors. All of that creates desire among the so-called masses.
That desire is something advisors should be aware of. Consider the findings in the Schroders 2024 U.S. Retirement Survey. The survey indicates that 36% of those participating in employer-sponsored retirement plans, such as 401(k)s, want access to private equity and private debt.
When accounting for the demand to get in on asset classes perceived as off limits, that data point isn’t necessarily surprising. Perhaps what is surprising is that 80% of those polled by Schroders said they’d consider boosting contributions to their workplace retirement plans if they could tap private equity strategies.
Expect More Access to Alts in 401(k)s
Currently, most employer-sponsored retirement plans feature bland menus comprised of the basics of domestic and international stocks, bonds and target-date funds. There’s nothing wrong with that per se. After all, these vehicles aren’t meant for risk-taking, but they also lack exposure to alternative asset classes, which can act as important portfolio diversifiers.
While there may not be inklings as to when more employer-sponsored retirement plans will open the door to alts, including private credit/equity, it’s going to happen at some point and advisors need to be aware of that trend.
“Alternative investments such as private equity and private debt have long served as important portfolio diversifiers in defined benefit plans,” said Deb Boyden, Head of US Defined Contribution, Schroders. “Given the evolution of the asset class in recent years, it’s a matter of when, not if, these investments will become more common in defined contribution plans.”
Exposure to alts, including private equity, is something employees want. Forty-two percent of those polled by Schorders said they allocate 10% to 15% or more than 15% to private equity/credit in a 401(k) if they had the opportunity.
Yes, Advisors Matter
The level of involvement an advisor has in a client’s 401(k) is up to the client, but advisors still figure prominently in the private credit/equity equation because they are sources of access and education. Advisors should focus on the education part of that scenario.
Schroders said more than half of respondents don’t understand the benefits of adding alts to portfolios while nearly two-thirds think alts are too risky. Point is education matters and advisors can provide it.
“This knowledge gap among plan participants isn’t limited to alternatives, as 52% of participants report they don’t know how to manage risk in their retirement portfolio and 59% wish they received more guidance from their employer on how to invest their workplace retirement plan assets,” concludes Schroders.
Related: How to Leverage Life Insurance for Optimal Portfolio Diversification