Private assets in defined contribution plans could top $1T by 2030

Private investments could account for roughly 6% of defined contribution plan assets — or about $1.1 trillion — by 2030, according to a Deloitte analysis. A more conservative scenario, the firm projected, would result in allocations of roughly $200 billion.

If private investments such as private equity, private credit and other alternatives do become more widely available in retirement plans, advisors will increasingly have to weigh potential diversification benefits against concerns over illiquidity, higher fees and risk. 

The U.S. Department of Labor has proposed a rule that would provide a safe harbor to fiduciaries to include alternative investments in 401(k) plans. The public comment period for the proposed rule has ended, but finalization of the rule is still pending.

In its analysis, Deloitte recommended that investment managers prioritize integrating private credit in target date funds (TDFs) and grow existing offerings in defined contribution plans.

"Beyond TDF integration, private capital can be incorporated into new or enhanced product structures, such as multiasset, income-oriented, or capital preservation strategies, to introduce incremental yield or diversification while managing liquidity constraints," the Deloitte Center for Financial Services wrote.

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Supporters argue the trade-off could improve retirement outcomes. Target date funds with 20% private market asset allocations performed better than public-only options in 94% of 100,000 simulations, found a study by the Investment Company Institute, a trade group representing asset managers and their individual investor customers.

Gabbi Cerezo, a Los Angeles-based CFP with Sustain Financial, said in an interview that allowing individual investors to invest in private capital would be risky because they don't have the resources that institutions have to evaluate these assets. Many of her clients are teachers. Cerezo noted that teachers often have pension funds that hold private capital allocations, but unlike individual accounts, large institutional teams run pension funds and can professionally evaluate trade-offs.

Indeed, opinions differ on whether private assets belong in 401(k)s or target date funds, with critics pointing to liquidity and other constraints.

The Deloitte analysis said firms considering private assets need thorough documentation  covering "clear governance checkpoints, fees, liquidity limits, valuation cadence, and conflicts," and that should be "consistent with heightened disclosure expectations for semi-liquid and private-fund packaging."

READ MORE: CFPs, asset managers spar over DOL's 401(k) rule

Due diligence can't be an 'afterthought'

The Deloitte report also encouraged investment managers to pay attention to data transparency, risk aggregation and changing regulatory expectations — not letting them be "afterthoughts."

"Operational fragility or compliance gaps can quickly translate into fiduciary risk," according to the report.

Building wrapper strategies that align with the liquidity profile of underlying investments is also important, the Deloitte authors said, noting that private credit tends to be less liquid than traditional asset classes. Firms that are able to invest in technology for liquidity modeling, risk aggregation and valuation oversight could help make private asset integration more transparent and resilient.

"Plan participants stand to emerge as the ultimate beneficiaries, gaining exposure to asset classes historically reserved for institutional investors," Deloitte wrote. "However, investment firms that underestimate the operational, regulatory, and governance complexity risk reputational and fiduciary challenges that may limit adoption."