Is Private Equity Coming to Your 401(k)?

Some asset managers—BlackRock among them—are eager to add private-market investments to retirement plan products, such as target-date funds. Morningstar’s senior principal for multi-asset strategy ratings Jason Kephart discusses the portfolio benefits that private assets can provide, the hurdles asset managers will face to see adoption, and whether the private-asset push into 401(k) plans is really in the best interests of investors saving for retirement.

Susan Dziubinski: What are private markets, and why are asset managers and others in the financial-services industry talking about the “convergence” of private and public markets?

Jason Kephart: Private markets are asset classes like private equity and private credit, which are well-known, but most people haven’t had access to them. The convergence of public and private markets reflects efforts by asset managers to broaden access, blending private assets with public ones in vehicles like interval funds or multi-asset strategies like target-date funds.

Dziubinski: The talk about private-market investments in defined-contribution retirement plans, such as 401(k)s, seems to be focused on private equity, not private credit. Why?

Kephart: Private equity grabs the headlines thanks to its historically strong returns compared with public markets like the S&P 500—that’s an easy story to sell. But it comes with more operational hurdles than private credit. Returns take time to materialize, since there’s no liquid market for those holdings. Private credit, on the other hand, generates steady cash flows and has shorter loan durations. That’s why we expect to see more private credit than private equity in target-date funds over the next few years.

Dziubinski: Why is the talk about private equity in target dates intensifying now, specifically?

Kephart: In 2020, the Department of Labor updated its guidance to 401(k) plan sponsors to allow private investments in a multi-asset fund, like a target-date or balanced fund. In the past five years, none of the biggest target-date providers have made any moves to offer it. Lately, we’re seeing more talk about it from asset managers as there seems to be an expectation of less regulatory scrutiny from the SEC going forward, but it’s not clear there’s the same level of interest from plan sponsors.

Dziubinski: BlackRock is just one asset manager that has talked about bringing private equity into its retirement plan options. What other well-known asset managers have expressed an interest?

Kephart: All of the best-known target-date managers are looking into it, even Vanguard. But aside from talk, the only well-known firm we’ve seen launch something so far is State Street, which announced a target-date series that uses a multi-asset private fund from Apollo.

Dziubinski: Theoretically, what are some of the benefits that private equity can offer a diversified portfolio?

Kephart: Private equity can offer higher returns than public markets and gives investors access to companies that aren’t publicly traded. Our colleague Amy Arnott recently wrote about private equity’s role in a portfolio and pointed out that when you add up the public and private equity markets, private equity makes up nearly 10% of the total. So, for investors who want broad market exposure, owning some private equity helps fill that gap.

Dziubinski: How large of a position in private equity would you expect these target-date-type investments to have?

Kephart: Target-date funds, whether structured as mutual funds or collective investment trusts, still face limits on how much they can hold in illiquid assets. The cap is 15%, but most managers don’t want to get too close to that. We expect private-asset exposure to land somewhere between 5% and 10%. State Street is on the high end of that range, with a 10% allocation to private assets across its glide path.

Dziubinski: Would these target-date products directly invest in individual private companies or instead invest in a fund or pool that invests in private companies?

Kephart: Almost all target dates are structured as funds of funds, so it would most likely be through an underlying fund instead of direct investment.

Dziubinski: It seems like retirement savers in accumulation mode are good candidates for private equity investments, since there are liquidity limitations with private equity, but accumulators have long time horizons. But what about those savers who are approaching drawdown mode? Would private equity be an ill fit for these investors?

Kephart: That’s where target-date managers will face questions around liquidity, especially about what prices they can get when investors start pulling money out. No one needs their whole portfolio to be liquid all the time, but during decumulation, you don’t want the illiquid portion to keep growing.

Dziubinski: What might the added costs to the investor or plan sponsor be for adding private equity to these accounts?

Kephart: We don’t know yet. Private assets aren’t cheap, especially compared with the low costs that target-date investors are used to. At the end of 2024, the asset-weighted fee for target-date mutual funds was just 0.29%, not even counting the cheaper CIT versions. Most private funds charge more than 1.00% in management fees plus incentive fees as high as 20%. So, the big question is: How much of those fees are private managers willing to give up to break into the retirement market? Plan sponsors are famously fee-sensitive, especially with the ongoing risk of lawsuits over expenses. High costs could easily be a nonstarter.

Dziubinski: What are some of the hurdles—regulatory or otherwise—facing asset managers that want to add private equity to retirement plan offerings like target-date funds?

Kephart: The biggest hurdles are going to be fees, liquidity, and transparency. A high-fee, illiquid black box isn’t going to make its way past the fiduciary standards that plan sponsors are held to.

Dziubinski: We already have some target-date funds that invest in the private markets: Fidelity, Nuveen, and J.P. Morgan have target-date series with allocations to direct real estate, for instance. Are there any lessons from that experiment that can be applied to private equity?

Kephart: We’ve learned that private assets aren’t a magic bullet for better performance or investor outcomes. When we compare the performance of the Nuveen and J.P. Morgan target-date funds with direct real estate to those firms’ target dates without direct real estate, performance is mixed depending on the period. To be fair, these funds have only used direct real estate for a short period of time relative to the long time horizons target dates are designed for, so we may see more separation over 20 or 30 years.

Dziubinski: What do you think the timeline is, Jason? When will we begin to see asset managers adding private equity to their target dates?

Kephart: Retirement plan sponsors don’t move fast. Last year, there was a lot of buzz around target dates with guaranteed income, but we’re only now starting to see real assets flow in. Since most major asset managers haven’t rolled out clear plans for adding private investments to the glide path, it’ll be a while before we know whether plan sponsor demand is as strong as managers hope.

Dziubinski: Do you think the potential benefits of including private equity in a retirement plan will outweigh the costs and complexity? Put another way, do you expect that having some allocation to private equity will improve outcomes for investors saving for retirement?

Kephart: Private equity does have the potential to boost returns, if—and it’s a big if—asset managers can solve the hurdles around fees, liquidity, and transparency. But the most important factors that drive investors’ outcomes are how early they start saving, how much they save, and sticking with their target-date strategy over the long term, not whether or not they have private-market exposure.