Capital Ideas^™ 
Investment insights from Capital Group

Why are private markets so rare in DC plans?

Private market investments have long been used in DB plans as a potential source of diversification and compelling returns, yet adoption in DC plans has remained limited for several reasons.

Whereas pension plans are professionally managed and have predictable cash needs, DC plans are participant-directed and typically require daily liquidity. Unlike in DB plans, DC plan participants bear the brunt of investment risk for private markets investments. Combined with the generally higher fees associated with private asset strategies, this can expose DC plan sponsors to greater litigation risk. Private market investments may also require extensive participant and plan sponsor education, adding another layer of complexity to adoption.

What's changing?

The barriers that once kept private markets largely out of DC plans are beginning to ease.

Start with regulation; in August 2025, President Trump signed an executive order directing the Department of Labor (DOL) and the U.S. Securities and Exchange Commission (SEC) to facilitate access to alternative assets in retirement plans. More recently, the DOL issued a proposed regulation confirming that there is no per se prohibition on including alternative investments in defined contribution (DC) plans, and that this holds true even when those assets sit inside a Qualified Default Investment Alternative (QDIA) such as a target date fund. The proposal adopts a principles-based, asset-neutral Framework. It neither favors nor disfavors any particular asset class or investment strategy. Instead, it identifies six factors fiduciaries should consider when selecting any investment option — expected risk-adjusted performance, fees, liquidity, valuation, benchmarking and complexity — reinforcing ERISA’s longstanding emphasis on process rather than outcomes. We expect the Department to release its final rule later this year or early 2027.

Two other longstanding challenges are also becoming easier to address: how private market exposure is delivered to participants and how liquidity is maintained within the portfolio.

Offering standalone private markets options on a DC menu would be problematic given their complexity and liquidity limitations. Private markets exposure, therefore, would make more sense in a professionally managed, diversified portfolio like target date funds, which can also serve as a plan's qualified default investment alternative (QDIA). 

Moreover, product innovation is helping to bridge the gap between the liquidity needs of DC plans and the traditionally illiquid nature of private market investments. Many DB plan sponsors are familiar with drawdown funds, where liquidity can be locked up for several years. These funds require a commitment of capital deployed over a multi-year period with distributions occurring late in the fund’s life, likely preventing them from being well suited for target date portfolios. But newer evergreen and interval fund structures offer varying degrees of periodic liquidity, potentially making private market exposure more practical within a target date portfolio. Interval funds with predictable liquidity can also be useful in parts of the glide path where liquidity needs are higher.

Private markets are expanding and maturing 

Private market assets continue to grow, totaling $16.1 trillion in 2024^† and spanning different asset classes and structures. 
 

• Private equity: Involves investing directly in private companies or taking public companies private 
  
  
• Real assets: Ranges from infrastructure (essential physical systems like transportation, energy, utilities and data centers) to real estate (direct ownership or development of property, and loans backed by property) 
  
  
• Private debt: Investors make loans outside of traditional banking channels, either directly to companies or via asset-backed structures

Private markets are an expanding opportunity set

Growth in private markets has been driven by a variety of trends. Many companies are staying private longer and going public later in their life cycle — if ever. In part, this is because they can often meet their capital needs in private markets and may prefer the flexibility of avoiding short-term scrutiny from quarterly earnings reporting. The global energy transition and rising adoption of artificial intelligence are fueling demand for infrastructure investment, particularly in areas such as data centers and electric grid power generation. Private credit has also grown due to factors such as tighter bank regulation in traditional financing channels and increased flexibility in the terms and structure of private debt.

How might target date series with private markets benefit participants?

While standalone private market options could create complexity for participants and plan sponsors, target date funds may provide a more practical framework.

Diversification: 

In general, private markets can offer diversification from public markets and potentially higher long-term returns. The correlation between private market assets and their public counterparts has historically been well below 1 for key indices. While less-liquid asset classes sometimes have lagging price impacts that can contribute to lower correlations, there are also organic drivers of diversification that can benefit a portfolio. By nature, private companies tend to differ from public ones in ways that can enhance portfolio diversification: for example, private companies tend to be smaller and can benefit from operational improvements made by private equity managers.

Excess return potential: 

Returns for private investments have tended to outpace public markets over longer time frames. As the following chart helps illustrate, on a rolling basis over the last two decades, private equity has had a higher range of returns with a comparable average to the broader U.S. equity market. Meanwhile, average returns for private credit and global infrastructure markets have topped those of public fixed income and non-U.S. equity.

We believe private market investments are likely to continue adding value versus their public counterparts, even if the pace of return slows from previous decades.

Why target date funds may be a natural vehicle

As professionally managed portfolios, target date funds are designed to adjust their asset allocation over time to match the evolving needs of participants from accumulation to distribution, a time when participants may draw money for their retirement income needs.

Importantly, younger participants typically have long investment horizons and relatively limited liquidity needs. They also typically face penalties for early withdrawals. A well-managed target date series can include private market assets where they can add the most value to the glide path, while sizing semi-liquid allocations to provide necessary liquidity, even in stressed markets. As always, a plan sponsor must conduct thorough due diligence and choose a professionally managed solution appropriate for their participant base.

What are the different roles of private assets in a portfolio

Private markets are often discussed as a single category, but different asset classes can serve different portfolio objectives. It is important to consider the role of specific private market investments in a portfolio as well as their individual benefits and risks relative to participant goals. For example, just as equities are used differently than bonds in a glide path, the role of private equity differs from private credit.
 

• Private equity may help support long-term growth through investments in private companies typically held for several years. The value creation opportunity lies in strategic and operational improvements made alongside active management, which can offer strong returns. 
  
  
• Infrastructure and other real assets, which tend to have more regulated or contracted revenue models, can offer more diversification, long-term income and downside resilience than private equity.
  
  
• Through direct lending and asset-backed finance, private credit can provide steady income, diversification and a buffer from interest rate risk via floating-rate structures. A senior position in the capital stack can also help reduce risk.

Managing liquidity

Target date solutions can seek to balance the diversification and return potential of private markets with participants' liquidity needs. While most participants hold target date funds for long periods of time, they still expect the ability to redeem or reallocate assets when needed. Plan sponsors likewise expect flexibility, including the ability to make changes to a plan's investment lineup over time. As a result, any private market allocation must be balanced with sufficient liquid assets to meet potential redemption needs while maintaining the portfolio's overall structure.

Liquidity needs also vary along the glide path. In vintages furthest from retirement, redemptions tend to be limited and are often driven by events such as job changes rather than retirement spending. This can create greater flexibility to incorporate modest allocations to less-liquid investments. At the same time, managers must ensure that adjustments along the glide path do not create liquidity challenges for semi-liquid exposures.

Near and during retirement, however, liquidity needs grow as withdrawals become more common. For that reason, private market exposure may need to evolve alongside participant needs, with less-liquid investments potentially playing a smaller role later in retirement. Plan sponsors also want the ability to change target date providers within a reasonable time frame, making prudent sizing and ongoing liquidity management essential. 

Evaluating fees

Fees are another important consideration. Because of their higher fees, a target date solution with private allocations may carry modestly higher fees than its fully public-market counterparts.

When evaluating these strategies, focusing on potential or historical net-of-fee outcomes can provide a more meaningful comparison. Sponsors should also understand the underlying structure of private market vehicles, including provisions such as carried interest (which behaves like a performance fee) or added fees for early withdrawals, and how those costs may affect participant outcomes over time.  

The bottom line

Private markets have long been used by institutional investors seeking diversification and return opportunities. Today, evolving regulations and product innovation are making these investments more accessible than ever before, including for DC plans. While implementation requires careful consideration of liquidity, fees and fiduciary responsibilities, target date funds may offer a practical framework for bringing private market exposure to DC participants. As the landscape continues to evolve, private markets could become a larger component of retirement plan investing in the years ahead.