Why 401(k) Sponsors Should Evaluate Private Markets the Same Way They Assess PBMs

Article Key Takeaways

• 401(k) plans may be repeating governance mistakes already seen with pharmacy benefit managers (PBMs).

• As private equity and private credit enter defined contribution plans through collective investment trusts (CITs), sponsors should examine ownership structures, incentives, and potential conflicts of interest.

• Vertical integration in retirement plan ecosystems can create the same fiduciary and transparency concerns that employers have spent years addressing in healthcare benefits.

• The existence of fiduciary oversight does not eliminate risk if recommendations, manager selection, education, and scoring systems are controlled by affiliated parties.

• Plan sponsors should apply the same due diligence framework used for PBMs: Who pays whom? Who owns whom? Who controls the recommendations?

• Because 401(k) fees and performance directly affect participant balances, conflicts involving private market investment structures may face greater scrutiny than similar PBM arrangements.

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Sponsors have already learned what happens when the gatekeeper is paid by the products it lets through. Private markets in DC plans are rebuilding that structure.

You've seen this movie before

Picture a benefits committee in the middle of its pharmacy benefit manager (PBM) renewal. Five years ago, this was a line item. Today, the committee asks pointed questions.

Who pays the PBM besides us? How much of the manufacturer rebates flow back to the plan? Does the PBM own the specialty pharmacy it steers members toward? Does it sit under the same parent as the insurer?

The committee learned to ask these questions the hard way. The formulary, the list of drugs the plan covers, turned out to be shaped by the companies paying to be on it. The PBM that wrote the prescriptions often owned the pharmacy that filled them. And the whole chain frequently rolled up to one corporate parent.

The litigation followed. Lewandowski v. Johnson & Johnson and Navarro v. Wells Fargo alleged that plan sponsors failed to manage their PBMs prudently. Both were dismissed on standing, but the lesson stuck. Wells Fargo renegotiated its PBM contract after the first suit was filed. And in Stern v. JPMorgan Chase, a prohibited transaction claim tied to hiring the PBM survived a motion to dismiss.

Now the same committee meets private markets

The same committee also oversees the 401(k). This year, its advisor brings a new idea: private equity and private credit, delivered through a collective investment trust (CIT). The pitch is professional management, institutional access, and a trustee who "retains ultimate fiduciary authority."

On September 14, Great Gray Trust Company named iCapital its preferred partner for private markets manager evaluation, due diligence, and portfolio construction. The two firms will build CITs in private equity, private credit, and private real assets. Great Gray serves as trustee. iCapital recommends the underlying managers, the allocation design and the liquidity approach, and provides "education" for advisors and sponsors.

That structure sounds clean until you trace the relationships:

• The recommender is owned in part by the managers it would recommend. iCapital's strategic investors include Blackstone, KKR, Carlyle, and Apollo. Its business model is opening new sources of capital to asset managers. The General Partners are its customers.
• The trustee's parent owns the tool that scores its funds. Great Gray Group owns Retirement Plan Advisory Group (RPAG), a practice-management platform used by retirement plan advisors. Great Gray's own announcement acknowledges that RPAG scores CITs for which Great Gray is trustee.
• The trustee now owns a glidepath manager. Great Gray bought flexPATH's CIT sub-advisory business last November, so the "independent" trustee oversees an affiliate's glidepath.
• One private equity sponsor sits over all of it. Madison Dearborn Partners owns Great Gray and RPAG. Trade press noted at the time that RPAG could help funnel assets to Great Gray's partners.

None of this proves that anyone will act against participants. Great Gray may run a rigorous process, and iCapital may recommend the best managers regardless of who owns its shares. But the structure is familiar. We have seen it before, in the formulary.

That last row is not a stretch. Great Gray's CEO said the firm chose iCapital in part for its promise to educate advisors, who in turn educate sponsors, about the need for private markets in retirement. When the educator profits from the conclusion, the education is marketing.

Final authority is only as good as your inputs

The PBM era taught a simple lesson. Holding the final signature means little if every recommendation reaching you comes from someone paid by the other side.

A committee could "approve" a formulary every year and still overpay. It wasn't negligent. It just never saw an independent view of what the drugs should cost. The authority was real, but the information was captured.

A CIT trustee that "retains ultimate fiduciary authority" faces the same test. If the manager's shortlist comes from a platform owned by the managers, the trustee's approval is only as independent as that shortlist. The same holds when the scoring comes from an affiliate and the glidepath comes from another affiliate.

There is one important difference, and it cuts against sponsors. The PBM cases against J&J and Wells Fargo failed on standing. Courts found participants couldn't trace excess PBM fees to their own premiums, because the employer sets contribution rates. A 401(k) has no such buffer. Every basis point of fees and every dollar of underperformance lands directly in a participant's account. Plaintiffs' lawyers will notice.

Ask the PBM questions

If a private markets CIT lands on your agenda, bring the questions your health plan consultant taught you:

1. Who pays the recommender, and how? Is it a flat fee, a percentage of CIT assets, or any payment from underlying managers or their affiliates?

2. Does the recommender acknowledge ERISA fiduciary status in writing? Or is it only "making recommendations" to someone who is?

3. What is the trustee's override record? How often has it rejected a recommended manager, and why?

4. Which managers own a piece of the platform? What policy governs selecting them?

5. What is the all-in cost? Include management fees, carry, fund-level expenses, and any feeder or platform layer, in dollars per $10,000 invested.

6. Who scored this product for your advisor? Is the scoring tool affiliated with the trustee?

7. How are illiquid holdings valued, and by whom? Who decides when participants can't get out?

These questions don't assume bad faith. They are the same diligence you now apply to your PBM without a second thought.

You already know how to do this

Private markets may earn a place in some DC plans. That is a separate debate. The point here is narrower: the vehicles arriving first are built on the same vertically integrated, conflict-dense architecture that sponsors spent five years untangling in their health plans.

The good news is that you don't need a new playbook. You need the one you already wrote for your PBM. Ask who pays whom, who owns whom, and who wrote the list. Then ask whether anyone at the table works only for your participants.

Multnomah Group is a registered investment adviser registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.