New Cerulli research finds plan sponsors show meaningful interest in private market assets within defined contribution (DC) plans, specifically when used within a target-date product or managed account. However, converting the interest of plan sponsors will take education, time, and partnership with plan consultants and advisors to identify plan sponsor prospects, according to the latest Cerulli Edge—U.S. Retirement Edition.

Cerulli’s research finds that 37% plan sponsors are very interested in learning more about the pros and cons of target-date and managed account option that allocate to private market assets. Much of this interest comes from the large market—plans with $250 million to $1 billion in assets, of which 57% of sponsors are very interested in learning more.

Asset managers and DC consultants predict that in five years, about 7% of plan sponsors will have a target-date or managed account that allocates to private market assets. By 2035, an estimated 15% to 20% of plans will have a target-date product or managed account that allocates to private market assets. Larger plans may be the first adopters due to experience with private market assets some possess. However, in conversations with Cerulli, several noted concerns over litigation that weigh heavily on decisions about plan investment lineups.

“Interest does not equal immediate adoption,” says Chris Bailey, director. “Sponsors tell Cerulli they are concerned about fees and the risk of litigation over adding such investment options to their plan menus. In addition, sponsors rarely change their target-date manager. According to DC consultants, fewer than 5% of plans changed their target-date investment in the past 12 months.”

Cerulli believes target-date products will likely be the first investment option allocating to private markets to achieve widespread adoption. Plan sponsors are already familiar with the products, as 78% already use one as a qualified default investment alternative.

To win over plan sponsors, Cerulli recommends asset managers focus on education. The industry must shift the conversation about plan investment lineups from a pursuit of the lowest fees possible to one oriented around participant outcomes.

“If a plan sponsor wants to add private markets assets to their lineup, professionally managed, asset allocation solutions are ideal to provide participants with allocations and asset classes aligned with their situations. Asset managers can start the conversation by addressing concerns, emphasizing how participants are not going to directly invest in private equity through their retirement plans, and the potential for improved outcomes. Quelling these concerns could open the door to constructive conversations about the new products managers are bringing to market,” concludes Bailey.

Source: Cerulli