Defined contribution (DC) plans have increasingly transferred investment and longevity risks from employers to individual retirement savers. As policymakers and plan providers explore expanded access to private markets, fiduciaries are tasked with evaluating whether these assets can enhance retirement outcomes without imposing costs and risks that participants may not fully comprehend.
A study titled “Private Markets in Retirement Plans: Returns, Risks, and the Importance of Plan Design” investigates the potential impact of five private market asset classes—private equity, private debt, infrastructure, real estate, and venture capital—on end accumulations through target-date funds (TDFs). The analysis contrasts a baseline TDF, which primarily invests in public equities and bonds, with those incorporating private market allocations throughout the accumulation phase.
The findings reveal how various private assets influence average end accumulation values and the associated volatility. The study also examines both downside and upside results and assesses risk-adjusted performance. Additionally, it evaluates whether integrating growth-oriented assets with defensive private investments alters the risk-return dynamic.
A key takeaway from this analysis is that access to private markets cannot be viewed as an isolated investment choice. Successful outcomes hinge on multiple factors, including the role of each asset class, the size of the allocation, the structure of the glide path, the duration of the accumulation period, regular contributions, fees, liquidity, valuation, and governance.
Why this story matters:
- Expanding access to private markets could influence retirement savings outcomes for individuals.
Key takeaway:
- The effectiveness of private market investments depends on a range of structural and strategic factors.
Opposing viewpoint:
- Critics argue that introducing private assets may complicate investment decisions and expose participants to unfamiliar risks.
