Private markets in retirement plans: Unlocking opportunities

The proposed rule is based on the duty of prudence that the Employee Retirement Income Security Act of 1974 (ERISA) imposes on plan fiduciaries when selecting designated investment alternatives (DIAs) for a participant-directed individual account plan (Plan). The proposed rule does not specify which investments are or are not appropriate for fiduciaries to consider but instead outlines the process to be used in selecting investment options. The rule also includes a process-based safe harbor that identifies a non-exhaustive list of six factors to be used in evaluating investments by fiduciaries: performance, fees, liquidity, valuation, benchmarks and complexity.  

Why does this matter?

Institutions and family offices have long recognized the value of including private markets for decades. Private markets have historically provided an illiquidity premium relative to their public-markets equivalents,² attractive risk-adjusted returns, and diversification benefits.

Private credit has historically provided higher income than most fixed income options, and real estate and infrastructure have historically exhibited low-to-negative correlation to traditional investments. Private markets are versatile tools that can provide increased growth and income, diversification benefits and can help in hedging the impact of inflation.

Based on research conducted by DCALTA,³ defined benefit plans (DB plans) have significant allocations to alternatives broadly, with roughly 30% to private markets. Of course, DB plans have had access to these investments for decades and often have sophisticated investment committees and/or consultants to conduct due diligence, develop strategic asset allocations, and monitor the results over time. 

DB plans and other institutions have long recognized the growing opportunity set in the private markets and the narrower set of options in the public markets. In addition to the attractive risk-adjusted returns above, the size of the US public market is roughly half its count from two decades ago (down from about 8,000 companies in 1996 to about 4,000 companies in 2025),⁴ while the number of US private companies has been on the rise. According to a Hamilton Lane report, of all US companies with at least US$100 million in revenue, 87% are private,⁵ representing approximately 20,000 companies.

Similarly, while some investors may feel like they have adequate exposure to real estate via publicly traded real estate investment trusts (REITs), the lion’s share of the assets are in private real estate (more than 90%). Also, it is worth noting that publicly traded REITs are more highly correlated to equities than private real estate equity.⁶   

The DCALTA report notes that DC plans have less than a 1% allocation to private markets. This is due to a number of factors including lack of access, lack of experience with private markets, product structure, liquidity, and fiduciary concerns and litigation risks, among others. Note, although evergreen funds offer daily valuations, the underlying investments are illiquid and should be viewed as long-term investments.  

According to a Franklin Templeton, Harris Poll survey, there is growing demand from sponsors to include private markets in DC plans.⁷

What are the challenges?

While DB plans have allocated significant capital for decades, these investments have not been broadly available in DC plans. According to research by Cerulli Associates, and the Defined Contribution Alternatives Association (DCALTA), “Unlocking the Potential of Private Investments in Defined Contribution Plans”, there are a number of challenges to incorporating private markets in DC plans.⁸ Similar to the proposed rule, the report notes challenges including liquidity, valuations, benchmarking, and performance.

The fees for private market funds are typically higher than those of traditional mutual funds, and may include multiple layers (i.e., management and performance fees). Proposed US Department of Labor (DOL) guidelines do not stipulate that a plan fiduciary select the lowest-cost investment option. Instead, the proposed guidelines focus on whether fees are appropriate, considering risk-adjusted return and any other value the investment would provide. In other words, the DOL recognizes that a plan fiduciary isn’t obligated to select the lowest fee and expense option; this is important for private markets, where the lowest-cost option may not be the best one.

As an industry, we will need to educate all stakeholders about the merits of private markets, their illiquid nature, and their long-term value in DC plans. Each fund will need to be transparent about their costs, valuation methodology, historical performance, benchmarking and underlying holdings.  

We believe the broader ecosystem of plan sponsors, asset managers, recordkeepers and third-party providers can address these challenges. The Cerulli/DCALTA report notes that target-date-funds (TDFs) are the preferred vehicle for DC plans.⁹ Within TDFs, there is a growing acceptance that collective investment trusts (CITs) are effective structures in managing liquidity and rebalancing.

TDFs offer broad diversification, professional management and liquidity management. One of the biggest challenges with incorporating private markets in DC plans is dealing with liquidity management and the reallocation of capital. The CIT structure allows for more effective liquidity management. CITs can maintain a liquidity sleeve to help solve the challenges and move capital more efficiently.

As we consider the broader adoption of private markets in DC plans, we can leverage the experience of DB plans in allocating capital to private markets. This will likely be a gradual process as key stakeholders get comfortable with the investment merits, operational nuances, and the most appropriate investment options. Larger plans will likely take the lead in adopting these versatile investments, with meaningful adoption accelerating over the next decade.

Why now?

We believe that there has been a confluence of events over the last several years that will fuel the growth and adoption of private markets in DC plans. As we were reminded in 2022,¹⁰ the markets have become much more interconnected over the last couple of decades, and investors need better tools for diversification. In fact, correlations across traditional investments have risen over the past couple of decades.

Fortunately, we have seen product evolution that has helped provide access to a broader group of investors, while offering more flexible features. Evergreen funds are now generally available to investors at lower minimums, and with more flexible liquidity provisions. Note, the underlying investments are illiquid, but there are liquidity provisions for unforeseen changes in client circumstances.

Lastly, we now have access to institutional-quality managers. Many of these managers were initially reticent to offer funds in the wealth and retirement channels due to concerns about investors’ ability to stay patient during periods of volatility. However, these new hybrid structures (evergreen funds) allow the managers to invest capital for the long run, while maintaining a small liquidity sleeve to meet redemption requests.    

The timing of the proposed DOL guidance for DC plan investments aligns with the evolution of private markets, which became much more accessible in the wealth channel and saw an acceleration in advisor adoption. Trusted advisors can help educate investors about the merits of these valuable tools, their unique nuances and the role they can play in client portfolios. Advisors can help investors with both their personal and retirement portfolios as we as an industry rethink retirement to better serve individual investors.