As private markets gain traction in defined contribution plans, WTW Investments is betting that professionally managed portfolios that maintain conservative allocations and daily liquidity will make the asset class more appealing to investors and advisors.
"You can't just offer private markets in a 401(k) portfolio and expect the average participant to know how much to allocate to it — that would be dangerous," said Rich Joseph, U.S. growth leader for investments at the London-based advisory firm, which has its primary U.S. offices in Chicago and New York City.
For example, "If somebody were to put 50% or 60% of their holdings into our private markets, nobody would recommend that," he said. "The structures that we're building, and being able to put it inside things like target dates, where they're professionally managed, and the allocation is conservative, is very valuable. And so I think most financial advisors see the benefit of it. The risk comes in if it's utilized incorrectly."
WTW Investments recently announced a partnership with Oaks, Pennsylvania-based SEI to develop private market offerings for 401(k) plans and others in the U.S. defined contribution market. The companies' goal is to help plan sponsors and participants get access to more diversified investments. There is increased demand for institutionalized structures so defined contribution plans can include alternative investments with the necessary oversight, governance and operational support, the companies said.
WTW Investments said it has been integrating private markets into defined contribution plans since 2018. SEI, a financial technology, operations and asset management service provider, touts a low custody fee that starts at 0.10% and serves a base of 654 advisory firms with $138 billion in assets under custody or administration.
"The ongoing convergence of public and private markets is fueling new opportunities for more diversified investment solutions through flexible, efficient [collective investment trust (CIT)] vehicles," Sean Lawlor, head of public markets for SEI's Investment Managers business, said in a statement. Collective investment trusts are a type of investment vehicle that pools multiple investors' accounts and is maintained by a bank or a trust company.
Under the firms' partnership, SEI will facilitate CIT structures in some WTW retirement products.
Will more alts emerge as options for 401(k) plans?
Although the U.S. Department of Labor's proposed rule that would create a safe harbor for offering alternative investments to 401(k) plan participants has not yet been finalized, Joseph of WTW Investments said the key is making sure assets have sufficient liquidity. 401(k) plans require daily liquidity, he said, so building a multi-asset strategy is important.
In public comments to the DOL, some CFPs have warned that investors' money will be at risk, with private credit funds going to workers' retirement savings for sources of capital.
"You need education on the asset class itself and what it's used for and most appropriate for," Joseph of WTW Investments said. "Then you need help in determining what might be a smaller subset of good opportunities. Then you want to make sure it has the appropriate rigor. So, I think, depending on where you fall on that spectrum and what your comfort level is, you're going to have a different view. I think every financial advisor and every plan sponsor is trying to make sure that they can get the appropriate level of performance for the right level of risk, and this is no different than any of those asset classes."
In a recent analysis, Deloitte estimated that private assets could make up about 6% of assets in defined contribution plans, such as 401(k) plans, or about $1.1 trillion by 2030. Even just by 2028, the analysis predicted these assets could be $500 billion of defined contribution plan assets.
"Beyond [target-date fund] integration, private capital can be incorporated into new or enhanced product structures, such as multi-asset, income-oriented, or capital preservation strategies, to introduce incremental yield or diversification while managing liquidity constraints," the
