Private market investments in retirement plans are the talk of the retirement planning community, especially now that President Trump has signed an executive order that eases the path for private assets in 401(k) plans.
Traditionally, private markets have been leveraged and offered only to institutions and ultra-high net-worth individuals, but that is now evolving, and retirement savers are enthusiastic about the concept of reaping the benefits of this investment class. According to recent research, "more than seven in 10 American workers want access to private assets in their retirement plans." With the market volatility stocks have experienced and the lack of IPOs, private markets offer a new investment vehicle outside of public markets. For retail investors, it is about accessing investments that have otherwise been limited to a group or sector and finding new ways to build wealth. This is echoed in the recent research, with 72% of respondents "agreeing that having professionally managed private investments in retirement plans helps level the playing field for everyday investors."
While private equity (PE) investments in 401(k)s can bring benefits and a new wealth stream for retail investors, they come with risks due to their illiquid nature, higher fees, and lack of regulations and reporting requirements. The risks do not only pertain to retirement savers; the danger also falls heavily on the shoulders of employers offering and managing retirement plans.
Planning is a must
Employers that manage 401(k) and other retirement plans, often referred to as plan sponsors, have a significant responsibility to assist participants in managing their investments in 401(k) plans. Under Employee Retirement Income Security Act (ERISA), plan sponsors are obligated to act in the best interests of plan participants. To safeguard plan assets, the U.S. Department of Labor requires an ERISA fidelity bond, which only protects the plan against losses due to theft or fraud. Now, with the complexity of private assets, the ERISA bond is not enough. The inherent lack of transparency in private markets can pose challenges for plan sponsors.
Additionally, PE investments add a layer of administrative burden – from record keeping, educating plan participants effectively and communicating, navigating and monitoring investments that often lack transparency, to ensuring investment options fit with plan needs. Private market investments can further complicate an already complicated role. To add pressure, plan sponsors and employers have to toe the line of their work, as there has been a recent boom in ERISA-based litigations. Records indicate that in 2024, there were 136 cases of ERISA-related lawsuits.
For employers looking to ensure they are equipped with the best processes and operations as private markets interest persists, risk management mitigation should be a top priority. Oftentimes, this only looks at internal processes from education and communication efforts to educating participants to streamlining administrative tasks. Still, to truly have a robust plan in place, fiduciary liability insurance should be considered.
What fiduciary liability brings to the table
With plan sponsors responsible for monitoring and managing investment options, controlling costs, and ensuring participants have the education needed to make informed decisions, their role carries significant complexity and responsibility. One small oversight or error can snowball and have a substantial impact on participant plans and consequently put the organization in danger of a fiduciary breach. Fiduciary liability insurance protects plan sponsors and their companies in the event of an actual or alleged breach of duty. It covers the legal defense costs and a plan sponsors personal liability for actual or alleged breaches of fiduciary duties in connection with employee benefit plans. With the prevalence of ERISA lawsuits and with staggering defense costs required to defend those suits, fiduciary liability insurance is necessary because while the ERISA bond covers the plan for any loss by theft, it does not cover fiduciaries for lawsuits brought by third parties.
Looking at the needs of today to plan for the changes of tomorrow
As market turmoil continues, retail investors are seeking new avenues for longer-term financial growth. The impact? Retirement plans will continue to change. Plan sponsors that revisit the structure of their plans to support plan participants better and implement enhanced processes to mitigate risks will be in a better position to be agile with the incoming retirement changes. It is essential for plan sponsors to have a solid protection plan in place, which should include two insurance products, fiduciary liability insurance and ERISA fidelity insurance. Without these protections in place, the consequence can be grave - from personal exposure, damage to organizational finances, and beyond.
