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Many defined contribution plan sponsors have concerns about offering alternative investments in their 401(k) menu, but a supportive regulatory environment may shift the tide.

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Bill Ryan, a partner in and defined contribution leader at NEPC, argues that the industry has already administratively solved for the issue of incorporating alts into DC plans. For example, he said Washington has, for the past five years, put private equity into the state’s DC plan through target-date funds, and the University of California Retirement Plan historically had private equity target allocation in a target-risk fund.

“Most large-cap active growth managers have less than 5% in a private placement or private equity in their mutual funds already, so private equity and private markets are in DC plans and are fully functioning,” Ryan says.

However, Ryan says there is an “asymmetric risk” to the fiduciary when offering any sort of alternative investment option because the reported fees tend to be the highest when the investment performs the best.

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“It’s not that we can’t administratively deliver private markets,” Ryan says. “It’s these ancillary things that are hangnails that intimidate plan sponsors from doing it.”

Ryan emphasizes that higher fees are not necessarily a bad outcome for participants, but it can be risky for the plan sponsors because such fee disclosure often leads to litigation.

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Overall, Ryan says private markets are in DC plans today, and more adoption is anticipated.

“Access is extremely important, especially with a very [pro-alternatives] administration, and we anticipate an uptick in flows and adoption, but it should be mindful, with the appropriate governance around it,” he says.