With the current U.S. government clearing a path for individuals to invest their 401(k)s in private assets, NEPC’s CEO Michael Manning expects big changes in the defined contribution marketplace within the decade, including a “big potential for alternatives.” However, structural and legal risks could still slow implementation.

Speaking with Institutional Investor a year after Hightower bought a controlling stake in NEPC, Manning expects “to see potential shifts in the DC marketplace” over the next 5-to-10 years, from the use of alternatives in 401(k) plans to the expansion of pooled employer plans (PEPs), which Manning said could help bring institutional-scale benefits to smaller plans.

“All of those have potential to benefit the end participant,” he said. “The question is, how fast will a plan sponsor be willing to do this?”

Alternative investment managers have long sought access to DC plans, but have been blocked by performance issues, unclear liquidity, and litigation threats. But with President Donald Trump signing an executive order in August allowing individuals to invest part of their 401(k)s in private assets, those previously high barriers to entry may have gotten a little lower.

While some argue that illiquid private assets have no place in 401(k) plans, Manning thinks these assets are appropriate for younger participants. “For someone under 50, they’ve got at least a 10-plus year time horizon; they can afford to take illiquidity risk,” he said.

Tim McCusker, chief investment officer of NEPC, likewise acknowledged the rationale for including private assets in retirement plans, noting that the excess returns that can be generated from building illiquid assets over a 20- or even 40-year time horizon “could be pretty powerful.” However, the DC industry is extremely risk-averse, especially when it comes to litigation.

“Fear of litigation is really, really high,” said McCusker. Consequently, despite the benefits and partnerships forming to offer these products, most plan sponsors will hesitate to be early adopters until regulators provide more explicit legal protections and clearer guidelines.

“I think everything that's happening right now is being built around an executive order and not actually legislation,” McCusker said.

Added Manning, “I don’t know how we get from here to there, but I think it’s a trend worth watching.”

 

(An earlier version of this story had misspelled Tim McCusker's name.)