Private Markets in DC: What’s Public Policy Got to Do With It?
The topic of the inclusion of private markets exposures in a diversified defined contribution plan has gained momentum. In this article, we discuss the opportunities for public policy to support plan sponsors in expanding access to this asset class for their employees.
In the past two decades, private markets have transformed significantly. Private equity alone has grown from 3% of the total equity market to over 10%.1 Looked at another way, 87% of US companies with over $100 million in revenue are now privately held.2 Private credit has followed suit, now representing nearly 7% of US debt outstanding and more than 20% of total credit markets.3 These shifts have fundamentally reshaped the investment landscape.
Yet Defined Contribution (DC) plans have generally not included private markets exposures. While US public Defined Benefit plans, on average, allocate about 25% to alternative assets, US DC plans allocate less than 2%.4 Even within the massive target date fund (TDF) market, we estimate only $115 billion5 is currently invested in TDFs that include private equity or private real estate.
The reasons for the differences in approach between defined benefit and DC plans likely include lack of available products designed for the DC plan market as well as concerns about litigation risk for DC plan sponsors.
Today, as private markets make up a rapidly increasing percentage of overall markets, we believe there is an opportunity for defined contribution plans to tap into this growing asset class. Bridging this gap isn’t just about product innovation – public policy can also play a role to provide guidance to plan sponsor when considering inclusion of this asset class in a DC plan.
Public Policy and Inclusion of Private Markets in DC Plans
As plan sponsors consider further enhancements to their DC plan offerings to include private markets exposure, they should assess opportunities and challenges in public policy.
It is permissible for DC plan fiduciaries to consider including private market exposure in their plans today; however, plan sponsors may be wary of the potential regulatory and litigation risks that accompany the inclusion of private markets exposures in a DC plan offering. Public policy is one tool that can be leveraged to provide additional guidance and protections if a DC plan sponsor decides to include such investments.
On the legislative front, Senator Tommy Tuberville (R-AL), introduced the Financial Freedom Act (S. 1222) on April 1, 2025.6 A companion bill (H.R. 2544) was introduced in the U.S. House of Representatives by Representative Byron Donalds (R-FL).7
The proposed measure would explicitly amend Section 404(a) of ERISA to state that DC plan fiduciaries would not be required to select, or be prohibited from selecting, “any particular type of investment alternative” as long as participants are able to choose (or not choose) the investment from a broad range of alternatives.
Although this legislation does not directly address the inclusion of private market exposures in a DC plan, its broad mandate may provide additional comfort that such investments are permissible.
From a regulatory perspective, the DOL addressed the inclusion of private equity in target date funds in Information Letters in 2020 (the first Trump Administration) and 2021 (the Biden Administration). In the 2020 Information Letter, the DOL provided guidance regarding how private equity investments could be included within a broader fund available to participants.8
“In conclusion, a plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter. There may be many reasons why a fiduciary may properly select an asset allocation fund with a private equity component as a designated investment alternative for a participant directed individual account plan. Private equity investments, however, present additional considerations to participant-directed individual account plans that are different than those involved in defined benefit plans. In making such a selection for an individual account plan, the fiduciary must engage in an objective, thorough, and analytical process that compares the asset allocation fund with appropriate alternative funds that do not include a private equity component, anticipated opportunities for investment diversification and enhanced investment returns, as well as the complexities associated with the private equity component.”
Despite the measured approach to inclusion of private equity in a DC plan contained in the 2020 Information Letter, in 2021, the DOL issued a statement in follow-up to the 2020 Information Letter.9 The statement did not revoke the 2020 Information Letter, but it added several cautionary notes related to a plan sponsor’s consideration of whether to include private markets assets in a DC plan – the DOL described the 2021 statement as a “supplement” to “ensure that plan fiduciaries do not expose plan participants and beneficiaries to unwarranted risks by misreading the letter as saying that private equity —as a component of a designated investment alternative—is generally appropriate for a typical 401(k) plan.”9
To clarify the DOL’s position on private markets in a DC Plan, the DOL could solidify its position as between the 2020 Information Letter and the 2021 supplemental statement. The DOL could provide further guidance to plan sponsors by issuing a Field Assistance Bulletin or Interpretive Bulletin that would make clear that the inclusion of private market exposures (or any exposures) in a diversified fund is appropriate so long as a prudent process is undertaken.
In addition to ERISA legislative action and DOL regulatory and sub-regulatory relief, coordination between the DOL and the Securities and Exchange Commission (SEC) will be critical to address the full spectrum of concerns plan sponsors may have with respect to the inclusion of private markets exposures in a DC plan.
The Litigation Challenge
We believe issuing sub-regulatory relief that provides plan sponsors with actionable guidance on fulfilling their fiduciary obligations when considering options for inclusion in their plans is a critical step in protecting plan fiduciaries.
Another potential solution would be legislation amending the ERISA pleading standards to require more specific pleadings. In addition, other potential avenues for ERISA litigation reform include:
- Limits on plaintiffs’ lawyers’ fees in ERISA litigation. Plaintiffs’ lawyers’ fees could be subject to caps, reducing the currently uncapped incentive to file lawsuits not based on specific claims.10
- Requiring an unsuccessful plaintiff to bear a successful defendant’s costs of litigation. Legislation requiring a losing party to pay the other party’s litigation costs could further disincentivize unsubstantiated claims.11
Conclusion
As plan sponsors continue to consider the inclusion of private markets exposures in their DC plans, policymakers can issue guidance that provides greater certainty regarding fiduciary considerations. Doing so while legislative and regulatory proposals work their way through the process may benefit plan sponsors that are early adopters of private markets.