(Bloomberg) — An industry group that advocates for putting private assets in the roughly $12.5 trillion held in 401(k)s called for plan administrators to evaluate such investments with the same standards used for traditional ones like stocks and bonds.
The Defined Contribution Alternatives Association, which counts Apollo Global Management Inc., KKR & Co. and BlackRock Inc. among its members, released principles for weighing the investments, according to a document shared with members, which could be used as a blueprint for future advocacy efforts.
The group is in the early stages of crafting legislation that would ensure 401(k) plan managers aren’t penalized for accessing a broader set of asset classes, including private investments.
That legislation and the new principles are part of a bigger push to expand alternative investments in defined-contribution plans. Unlike defined-benefit plans such as pensions, 401(k)s have mostly been confined to stocks and bonds, in part due to concerns that private assets come with litigation risks.
But Donald Trump’s return to the White House has made the private equity industry hopeful that his administration will introduce regulations and push for legislation that will make 401(k) administrators more comfortable adding alternatives to their lineup. Earlier this week, Bloomberg reported that the White House is finalizing an executive order that would pave the way for those plans to invest in private equity.
The new principles from DCALTA are “clearly a road map for how fiduciaries and participants can have access to broader set of asset classes to enhance retirement outcomes,” Jonathan Epstein, the group’s founder and president, said in an interview.
Alternative asset managers have been keen to tap individual savers as some institutional investors such as pensions and endowments have begun to rein in their allocations to private equity.
The Department of Labor under the first Trump administration said retirement plan administrators wouldn’t violate their responsibilities if they included private equity in their portfolios, but the Biden administration rolled back that guidance. Private equity firm Partners Group has asked the Department of Labor to revert back to the earlier stance.
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Proponents of alternatives in 401(k)s say they offer better returns and greater diversity as more companies stay private. Skeptics say those assets are more opaque and come with higher costs, greater risks and less liquidity.
In an effort to address some of these concerns, DCALTA put together the set of principles for evaluating whether to include private investments in 401(k) lineups. The guidelines are the result of a months-long consulting process between DCALTA’s members, which include alternative asset managers, traditional asset managers, consultants, plan sponsors and others in the defined-contribution industry.
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Plan sponsors shouldn’t only consider costs when evaluating investments, and they should compare alternatives to equivalent investments, according to the principles. Private investments should be evaluated based on their role in a broader portfolio, and liquidity should be weighed as part of a balanced approach, the document said.
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