My junior advisor asked a good question over lunch about a possible looming crisis in the private credit markets. What really hit home was how interrelated private credit markets are with the overall credit markets. A tightening of private credit market could lead to higher interest rates, companies experiencing financial hardship, and investment companies facing capital ratio problems. No wonder that private credit (and equity) markets are for institutional investors and/ or high-net-worth individuals.
It was against that backdrop that I read with some puzzlement the latest from Empower, the second-largest US retirement plan record keeper. Empower stated that it will allow its 19 million participants to invest in private markets—including private equity, credit, and real estate—through workplace retirement plans. This access, previously reserved for institutions and high-net-worth individuals, will be enabled via partnerships with major asset managers like Apollo, Goldman Sachs, and PIMCO.
Empower CEO Ed Murphy highlighted the move as a step toward democratizing private market access in defined contribution (DC) plans, citing performance advantages and growing investor interest. The offering will be available through managed accounts, requiring employer approval and advisory support to align with individual risk profiles and financial goals.
To address traditional barriers like liquidity and fees, investments will be structured through collective investment trusts (CITs). However, Murphy emphasized the need for regulatory support and safe harbor protections from the Department of Labor and SEC for broader adoption.
Overall, Empower positions this as a major evolution in retirement investing, giving defined contribution participants exposure to previously inaccessible growth opportunities.
And yet, I find myself hesitant in this arena. As discussed, managed accounts can, in themselves, have higher fees which means that returns need to be better to overcome the fees and produce comparable returns. I also ponder how valuations are determined on private credit and equity. Participants are used to seeing their balance online at any time. Could a frozen market cause the balance to be shown with an "*"? And what happens if a 2008 credit crisis happens again? Finding out what could go wrong is not something I want to see in a person's retirement plan which might be their largest asset.
The Parting Glass
My feeling is that much needs to be done before the 401k advisor community is comfortable with this idea. Beyond that, once 401k advisors are able to explain the ideas in straight-forward language to their clients, it will be a steep climb (!) before risk-averse sponsors cotton to the idea. Then and only then... maybe adoption will happen. I, for one, will not be rushing headlong into this.