Addressing questions about Private Markets in Defined Contribution plans

While the investment case for inclusion of private markets exposures in a diversified defined contribution (DC) plan is rarely the sticking point with plan sponsors, we believe the nuances of the asset allocation and implementation decisions matter. To evolve from interest to meaningful adoption within DC plans, we believe asset managers need to address plan sponsor and advisor questions around suitability, implementation, and education. Beginning in 2024 and accelerating throughout 2025, we have had the privilege of participating in hundreds of conversations with investment decision makers on the topic of incorporating a modest allocation to private markets within the DC plan default—Here are the most common concerns expressed during these conversations and how we’ve sought to address them.

Concern: This is new!

While the issuance of an Executive Order on August 7, 2025 aiming to expand access to alternative assets in defined contribution plan investments has increased the interest and questions around the topic, incorporating private markets in target date funds is hardly a new concept. Direct real estate has been used in TDFs for nearly 20 years.¹ Diversifying this private market exposure by expanding into private equity and credit builds on this foundation while potentially improving liquidity and portfolio risk within the TDF compared to private market approaches with more less expansive mandates.  

State Street Investment Management’s focus on incorporating private markets began years ago as private markets continued to grow as a percentage of the global market portfolio and product structures evolved. Our view on glidepath design is informed by a multi-year due diligence process where we evaluated a broad range of private market approaches—single sleeve versus multi-asset, open-architecture versus partnership—and ultimately selected the private market vehicle that we believe is best positioned to improve long-term outcomes while managing the unique liquidity needs of DC investors. In this context, being early proponents of such a solution is an advantage that reflects strategic foresight, not immaturity, in our view.

Concern: Private markets are risky

Private markets span a spectrum of higher risk to lower risk. In our view, there is also considerable risk in public markets today, with markets at all-time highs, increasingly concentrated, and an unclear outlook for fixed income's role as a diversifier. Where private markets differ is a clear distinction between managers and approaches within each asset class (running a company is very different from buying a stock), and we believe an area of opportunity where manager selection can meaningfully influence outcomes. Allowing private market managers to operate across asset classes to strategically reallocate based on market environments is a prudent risk management tool in our view, and may deliver better outcomes compared to naively evolving the allocation to each asset class as the glidepath de-risks.

For example, while we believe private equity is a crucial aspect of any private growth portfolio, in a period marked by stretched valuations and higher interest rates, it may not make sense to put the next dollar to work in buyout strategies, regardless of where a participant sits in their savings journey. In more favorable environments, it may. We believe that relying on a private markets firm with strong origination capabilities across its platform to make those relative-value decisions may drive durable alpha.

Given the fiduciary responsibilities involved, plan sponsors are understandably cautious and demand transparency into this process—a viewpoint we have shared. In selecting and sizing the appropriate private market exposure in the glidepath, State Street Investment Management undertook a robust and transparent investment and operational due diligence process, including rigorous stress testing that we are happy to share. 

Concern: Liquidity and implementation (especially near retirement)

While crucial areas to evaluate, thoughtful manager selection and implementation may improve the liquidity experience.

In designing our private markets glidepath, we modeled a number of different investment approaches including single-sleeve allocations to private equity, credit and real assets. Each asset class offers unique potential benefits, but comes with potential cyclicality and idiosyncratic liquidity risks. For example, interest rate and valuation headwinds have recently led to a challenging liquidity environment for commercial real estate. Similar cyclicality is reasonable to
expect in private equity, as periods of lower exit activity have the potential to impact returns and liquidity as PE vintages extend beyond their expected holding period.   

A consistent allocation to a diversified private market portfolio – e.g. private equity, credit and real assets – helps directly address these liquidity risks. In our due diligence, the scale, multi-asset exposure, and cash flow generation of the portfolio were key factors in evaluating liquidity. In other words, being an early investor in a portfolio lacking sufficient scale or diversification can expose investors to concentration risk, and also pose liquidity challenges in periods of stress.  While a more scaled portfolio cannot entirely remove this risk, it does seek to create a much larger pool of liquidity to work with. 

Concern: The need for education

Plan sponsors and retirement advisors all enter this conversation at very different levels of private markets knowledge. Plans with defined benefit (DB) exposure, for example, may be quite familiar with private markets, while plans with smaller investment staff and no DB plans may not. Similarly, advisors who have spent time in the wealth management channel are likely quite familiar with private markets, while dedicated retirement advisors have less historical experience. We believe it is critical for asset managers to deliver transparency in process, fee structure, and reporting in order to provide these investment decision makers with the necessary tools to evaluate these structures.

The necessary level of participant education, however, is an area that we believe has been slightly misrepresented. In a recent survey conducted by State Street Investment Management,² plan sponsor respondents cited “participant’s understanding of private markets” as one of their top concerns. Folding a private markets allocation into a professionally managed solution like a target date fund largely reduces the need for deep education in our view; participants aren’t making any choices around the investments under the hood. What could be worthwhile, however, is to convey the potential benefits (alongside any potential risks) of a private markets allocation – especially if it’s new to the target date fund offering. According to GR3, our 2025 Global Retirement Reality Report, maximizing returns is participants’ top priority. Positioning the potential benefits in line with participants’ priorities, while also addressing potential risk, can help foster interest and/or build trust.

The diversification imperative

Recent research by Cerulli estimates that 20% of defined contribution plans will include private markets on their investment menu, in some capacity, over the next decade.³ Our survey also revealed that 48% of DC plan sponsor respondents consider multi-asset private market strategies to be the approach most likely to enhance participant outcomes. The demand from participants for solutions that position them for better retirements is clear: according to our survey, a top motivator cited by participants and plan sponsors is the desire for higher returns, while 72% of surveyed participants valued education on the role that private markets can play in this pursuit. While private assets may not be suitable for every TDF, offering this option can help empower plan sponsors to tailor solutions that align with participant needs and desired long-term outcomes.

We believe an open architecture approach that provides thoughtful and risk-aware exposure across the full spectrum of private markets truly captures the best ideas available in the market. Our approach is built on a robust governance framework with transparency into State Street Investment Management’s due diligence, ongoing monitoring and liquidity management process.

As access to private markets expands globally, US DC participants deserve the same opportunities long afforded to institutional investors – potential for improved outcomes through a risk-aware exposure to private market assets. With thoughtful design, operational rigor, and a commitment to fiduciary excellence, we can help unlock potentially better outcomes for millions of Americans.