Do private assets belong in 401(k) plans?

The investment case for private assets in DC plans hinges on choosing high-performing managers—specifically those in the top third of the performance spectrum, committing to long holding periods, and accepting the risk of underperformance over time.

“Private asset returns exhibit wide dispersion, making manager selection critical,” Greig said. She added that private equity funds, for example, show a much wider performance spread than public index and active funds (26 percentage points versus 7 percentage points), highlighting the importance of identifying skilled managers.¹

Vanguard research shows that hypothetical portfolios incorporating private assets (using a 10%–20% allocation split between private equity and private debt) within target-date funds (TDFs), assuming top-tier managers, could improve retirement wealth by 7%–22% and retirement income by 5%–15% (after fees) over 40 years. Given that the typical U.S. worker faces a projected 13% shortfall in retirement income relative to spending needs, this potential increase in wealth could play a meaningful role in closing the gap for many savers. For example, a worker earning $52,000 annually might gain an additional $108,000 to $325,000 in retirement wealth, or $500 to $1,500 more per month in retirement income.²

Greig noted that private assets, such as private equity, private credit, private infrastructure, real estate, and venture capital, have grown substantially over the past two decades, with private equity alone rising from 1% to 8% of global equity. “This expansion underscores the increasing relevance of private markets and, under the right conditions, can offer broader diversification opportunities within retirement portfolios,” Greig said.

Access to private assets has traditionally been limited to institutional or wealthy investors due to their complexity, illiquidity, and long investment horizons. But Greig points out that new fund structures with improved liquidity and transparency, such as interval and tender offer funds, are emerging, increasing the possibility for DC plan participants to access them.

While private assets may offer compelling investment benefits, plan sponsors face critical challenges in offering them within DC plans, starting with significantly higher fees. Private asset fees typically range from 1.5% to 5%, compared to 0.06% to 0.60% for typical TDFs.³ As fiduciaries, plan sponsors must be able to identify and access high-quality managers at reasonable costs and demonstrate that the benefits outweigh the costs and risks.

“Manager due diligence for private assets is more complex and resource-intensive than for public assets, and top managers may have limited capacity or charge higher fees,” Greig said. “Clear communication of risks, fees, and investment merits to participants is essential to mitigate litigation risks.”

Employers must also assess whether private asset investing is appropriate for their plan population. This kind of investing requires patience because of its relative illiquidity and potential for extended periods of underperformance. The median TDF holding period across plans is about four years, with only one-third of plans having median holding periods exceeding five years.⁴ Worker turnover often shortens holding periods, because participants tend to cash out or roll over assets when changing jobs.

“Plans with longer holding periods may be a better fit for private assets,” Greig said. “Plan design can encourage longer holding periods by enrolling workers in the plans immediately upon hire and allowing them to remain invested in the plan even as they switch jobs or retire. Making plans more of a destination for all of a worker’s retirement assets could help participants realize the benefits of private assets.”

Greig added that plan sponsors have two primary pathways to introduce private assets into DC plans: either within default TDFs or as standalone investment options. Including these assets in default TDFs can ensure broad participation (about 59% of participants hold TDFs), professional risk management, and liquidity pooling, thereby mitigating liquidity risks.⁵ Standalone options or managed accounts require active participant choice, leading to lower adoption rates—just 7% for managed accounts—and greater liquidity risk because participants must manage their own allocations.⁶

Expanding access to private assets in DC plans offers the potential to enhance retirement outcomes, particularly for participants with long investment horizons and sponsors capable of identifying top-tier managers at reasonable fees. But private assets also come with higher costs, greater return dispersion, and liquidity constraints.

“Not all plan populations are a good fit for private asset integration, particularly those with shorter holding periods, lower incomes, or high turnover participants,” Greig added. “As regulatory standards evolve, clear and actionable guidance will be essential to help plan sponsors navigate the complexities of integrating private assets in DC plans.”