As asset managers, trustees, and recordkeepers seek to incorporate private markets in target-date solutions and managed accounts for use within defined contribution (DC) plans, new research, issued by Cerulli and DCALTA, Unlocking the Potential of Private Investments in Defined Contribution Plans, addresses four key misconceptions about delivering the asset class to the market.

The DC market is tremendous in size. In total, including corporate and nonprofit plans, the market stands at $13.6 trillion and is expected to reach $18.1 trillion by 2029—a 33% increase over the next five years. Most assets are in corporate DC plans, which hold $10.4 trillion in total, a figure Cerulli projects will reach $13.9 trillion by the end of the decade. “The importance of the DC industry to the retirement needs of Americans cannot be overstated,” notes Chris Bailey, director of retirement. To date, private markets strategies have been available to defined benefit plans, endowments and foundations, and, increasingly, retail investors working with financial advisors. Yet they remain out of reach for DC plan participants.

Increasingly, private capital firms seek to expand into this market, making their strategies available to a wider range of 401(k) participants while demonstrating their ability to deliver diversification, downside protection, and enhanced returns at a time when capital markets assumptions suggest lower future returns from public markets. “The efforts of a wide variety of DC industry stakeholders are aimed at offering asset classes and outcomes to retirement plan participants that are important to access but unavailable in public stock and bond markets,” says Daniil Shapiro, director of product development.

Incorporating private market allocations into participant investment options such as target-date products and managed accounts is a relatively new concept for most sponsors, consultants, and advisors. As such, it has raised industry concerns and surfaced several misconceptions. The white paper distills four of the most common:

1. Participants will invest directly in private markets via the plan menu: If included in a plan menu, a participant will only be able to access private markets through a professionally managed participant investment option, notably (1) target-date products or (2) a managed account.
2. Private markets are illiquid, hence participants will not have access to their retirement plan assets when they need them: While some managers plan to maintain quarterly liquidity in their underlying private market strategies, plan participants themselves will likely still have daily liquidity via the other underlying funds.
3. Including private market assets in a plan increases the risk of being sued: An industry expectation exists that with time and successful private market strategy implementation in DC plans, plan sponsors will face reduced litigation risk. A key focus will be ensuring that such strategies are included with proper oversight.
4. Private market assets are not valued on a daily basis, making them unsuitable for DC plans: Private market assets can be valued on a daily basis and will be a limited component of participant investment options that incorporate them, significantly mitigating the risk from individual valuation shifts within a broader portfolio of public and private market assets.

The paper finds that incorporating asset allocations, including private markets, that provide participants with exposure to a broader investment universe with the potential to improve participant outcomes is important to plan fiduciaries. “It is critical for the industry to continue educating stakeholders on the benefits of including an allocation to alternatives in professionally managed solutions which allow participants to access their assets when needed to meet their retirement obligations,” notes Jonathan Epstein, President & Founder of DCALTA.

Looking ahead, as the DC ecosystem continues to grow in importance as a retirement savings vehicle for individuals, proponents seeking to make private markets exposure available must carefully consider how they do so. “We believe that successful adoption within DC plans will come to firms that build products and solutions that can deliver the desired outcomes while best integrating into the existing regulatory and operational frameworks," concludes Bailey.