BlackRock Wants 5% to 20% of Your Target-Date Fund in Private Assets

Key Points

• With the stock market becoming less balanced and more difficult to navigate, investors are showing increasing interest in alternative investments.
• Although some private equity and private credit investments are available in brokerage accounts and IRAs, investment manager BlackRock is bringing this option to accounts where such offerings remain relatively rare.
• 10 stocks we like better than BlackRock ›

Your employer's 401(k) plan could soon have a brand-new, never-before-offered kind of investment option -- funds that hold a healthy dose of privately owned (as opposed to publicly traded) businesses.

That's the important takeaway from an announcement by investment manager BlackRock (NYSE: BLK) around the middle of this year. As the stock market's risks rise and its rewards shrink -- and as it grows more difficult to navigate -- BlackRock wants to give ordinary investors access to potentially better returns.

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Here's what you need to know.

The how and why

Your retirement savings account's exposure to privately held businesses will still be relatively limited, for the record. Initially, only target-date mutual funds overseen by Great Gray Trust will hold stakes in these enterprises, and even then, only 5% to 20% of these funds' capital will be allocated to private investments. And investors will only be able to access this narrow selection of target-date funds if their 401(k) plan's sponsor and administrator agree that adding this option is in employees' best interest.

It shouldn't be terribly difficult to sell this idea to sponsors and administrators, however. BlackRock (which manages the iShares family of exchange-traded funds) notes that, on average, privately owned ventures return about 50 more basis points annually than stocks. Over the course of 40 years, that would make 401(k) account balances about 15% bigger than they'd otherwise be using nothing but conventional stock-based funds.

Demand is growing

Although this launch will be one of the first of its kind for 401(k) plans, access to private enterprises through publicly traded instruments is not unheard of. Business development companies like Main Street Capital (NYSE: MAIN) are a form of private equity and private credit, while Brookfield Asset Management's (NYSE: BAM) Brookfield Renewable Partners (NYSE: BEP) (NYSE: BEPC) offers its shareholders exposure to a basket of energy-related ventures that aren't accessible any other way. Hedge fund manager Bill Ackman is also planning a new venture fund that will offer ordinary, non-institutional investors access to companies that have not yet gone public, but eventually will.

Still, these options remain relatively rare.

That's clearly changing, though. Perhaps finally prompted by the recent initial public offering of Space Exploration Technologies -- you know it better as SpaceX -- which has made its earliest insiders considerably wealthier than its post-IPO investors, more people are clamoring for alternatives capable of delivering better returns. BlackRock's and Great Gray's offering will certainly bring that prospect to the table.

That said, it would also be naïve to ignore the fact that the stock market as a whole has become uncomfortably unbalanced. The S&P 500's 10 biggest companies collectively account for nearly 40% of its value, while nearly as much of the index's value is held by technology stocks. If only for the sake of better diversification, access to alternative investments (private or otherwise) have their obvious appeal.

Look for more of the same

Only time will tell how quickly BlackRock's concept becomes a common option for 401(k) plans. Don't be surprised to see measurable interest, though. In this same vein, don't be surprised to see other outfits introduce similar private investment offerings now that BlackRock is pushing the boundaries of the premise.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BlackRock and Brookfield Asset Management. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.