DC plans aren’t diving into the private markets

investmentnews.com:

As popular as private market investments are, particularly in the institutional space, nobody should expect them to become a staple fixture in people’s retirement plans anytime soon, according to new research from Cerulli.

The new report from Cerulli notes that 401(k) plans typically offer a narrow range of investment options, with target-date funds being the most prevalent. This limited selection often forces participants to choose from options that may not fully align with their investment preferences or level of financial knowledge.

DC plans generally include 20 to 25 investment options, with a heavy emphasis on target-date funds designed for long-term retirement outcomes. This often results in participants being restricted in a sense, limiting their exposure to potentially more diverse investments.

“On the other hand, plan sponsors often feel trapped, afraid of including funds that could be interpreted as overpriced and underperforming, with litigation being a frequent outcome,” the report said.

Legal challenges are a significant concern, particularly those related to excessive fees charged by recordkeepers or within the plan’s investment options. Under ERISA, fiduciaries are required to offer the best investment options at the lowest feasible cost.

That makes including alternative investments like PE a thorny business, as those funds typically come with higher costs and significant operational expenses, in contrast to the lower costs associated with target-date funds. In some of the worst cases, administrators who failed to meet those requirements have been sued for breach of fiduciary duty.

Furthermore, the inherent characteristics of some private market assets, such as their illiquidity and lack of transparency,