Criticisms around risky exposures, illiquidity, litigation threats, and unsuitability are substantially off the mark, report says.
A new joint study from Cerulli Associates and the Defined Contribution Alternatives Association is challenging long-held assumptions about the role of private-market investments in 401(k) plans, as industry participants seek to broaden the investment universe for American retirement savers.
The report, “Unlocking the Potential of Private Investments in Defined Contribution Plans,” highlights the sheer scale of the 401(k) market, which accounts for the majority of the $13.6 trillion in defined contribution assets as of 2024.
That figure is projected to grow to $18.1 trillion by 2029, with corporate 401(k) plans alone expected to reach $13.9 trillion. Nearly two-thirds of 401(k) contributions currently flow into target-date funds, which are set to hold $6.5 trillion by 2030 – almost half of all 401(k) assets.
Despite this growth, Cerulli’s joint research with DCALTA notes that private-market allocations remain rare in 401(k) plans, even as institutional investors and high-net-worth individuals have long benefited from exposure to private equity, credit, real estate, and infrastructure.
Pushing back on misconceptions
The Cerulli/DCALTA study identifies four persistent myths that have contributed to the slow adoption of private markets in 401(k) plans, and provides data-driven rebuttals for each:
Myth 1: Participants will invest directly in private markets via the plan menu
The study clarifies that private-market exposure in 401(k) plans would only be available through professionally managed investment options – primarily target-date funds and managed accounts – not as standalone menu choices. This approach ensures that allocations are handled by experienced managers, who can tailor exposures based on participant age, risk tolerance, and other factors.
Myth 2: Private markets are too illiquid for 401(k) investors.
While private assets are less liquid than public stocks and bonds, the report notes that most 401(k) participants would retain daily access to their retirement assets. Liquidity is maintained at the product level, with private-market holdings representing only a small portion of diversified target-date funds or managed accounts. Many managers are designing products that blend private and public assets, allowing for participant withdrawals without disrupting the underlying private-market allocations.
Myth 3: Including private markets increases litigation risk for plan sponsors.
According to the study, the risk of ERISA litigation is mitigated when plan sponsors follow prudent processes and provide proper oversight. The report points to recent regulatory developments and legal precedents that support the inclusion of private-market strategies, provided fiduciaries adhere to established standards for investment selection and monitoring. Over time, successful implementation may even reduce litigation risk by aligning 401(k) offerings with best practices observed in defined benefit plans and institutional portfolios.
Myth 4: Private-market assets cannot be valued daily, making them unsuitable for 401(k) plans.
The research finds that daily valuation is feasible, thanks to advances in estimation processes and the use of third-party valuation agents. Private assets would make up a limited share of participant portfolios, minimizing the impact of any valuation lag. The industry has developed operational frameworks that allow for daily net asset value reporting, ensuring that participants can track their investments alongside traditional holdings.
Don’t fixate on fees
The study also addresses concerns about fees, noting that while private-market strategies can be more expensive to implement, their inclusion is expected to be limited and carefully managed within collective investment trusts – structures that already account for 38% of 401(k) assets as of 2023.
Plan sponsors are increasingly weighing costs against the potential for improved diversification and risk-adjusted returns, rather than focusing solely on the lowest possible expense ratios.
“[DC plan] sponsors recognize that the focus must extend beyond fees to the outcomes offered by the solutions – an approach that many research participants emphasize is in line with ERISA guidance,” the Cerulli report said.