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Allowing target-date funds to allocate to private equity may deliver better outcomes for plan participants.

The shift from defined benefit to defined contribution plans in the United States has contributed to a significant and growing retirement savings gap – the difference between the savings workers will require to support their living expenses in retirement and what they are on track to save. In 2017, the World Economic Forum estimated the U.S. retirement savings gap at $28 trillion, representing a 40% share of the global total.1
There are myriad, complex factors underlying this retirement savings shortfall. One factor in favor of pensions over DC plans is a more complete and comprehensive investment menu, particularly their access to the private markets. Fortunately, private market strategies like private equity and private credit may soon become integrated into DC plan investments. In June, the Department of Labor issued an information letter giving the green light to DC plans’ use of private equity within asset allocation funds such as a target date funds. The letter opens the door for plan sponsors seeking to offer more pension-like investment options to plan participants, who have largely been limited to funds that invest in publicly listed stocks and bonds.
Pensions and other institutional investors have traditionally held meaningful allocations to private market strategies. In 2018, state and local pensions allocated an average of 12.5% to alternative investments, including private equity.2 A 2019 survey of global pensions by BlackRock found that more than half planned to increase private equity allocations in 2020.3 Other institutional investors also hold substantial private equity allocations. Cambridge Associates found that the top-performing foundations and endowments allocate more than 40% to private markets (including private equity and venture capital).4
Private equity’s attractiveness is in its long-term performance versus public equities. Over a 15-year period, the Cambridge U.S. Private Equity Index outperformed the S&P 500 Index after fees by more than 400 basis points a year on average, with less volatility. A study by research firm Cliffwater also found that private equity delivered state pensions their strongest asset class returns – 10.05% and 9.31%, respectively, over the study’s 10- and 18-year periods.5 As such, a private equity allocation offers the potential to both enhance portfolio performance while lowering risk.
There are very good reasons access to private equity funds has historically been restricted to large, sophisticated investors, such as pensions, foundations, endowments, and family offices. The funds are illiquid, the investment minimums are high, and the strategies, fee structures, and administrative requirements can be complex.
Including private equity as a component of a target date fund held within a DC plan, however, may provide retail investors with a safe, responsible way to access the benefits of the asset class. Because they are managed by experienced investment professionals at larger firms, target date funds should have the ability to source and conduct due diligence on private equity funds and determine an appropriate allocation that will balance return and risk goals alongside illiquidity and fee considerations.
To be clear, adding private market exposure to DC plans will pose challenges. DC plan fund flows are less predictable than they are in pensions and participants can freely switch between funds. As a result, target date fund managers must find ways to balance liquidity with the performance enhancement potential of private markets. Even more important, however, will be educating plan sponsors about the important characteristics, benefits, and considerations of investing in private markets and the importance of performing due diligence on any fund making a foray into private markets.
The move to defined contribution from defined benefit plans shifted the burden of saving and investing from employers to employees without giving workers the robust tools needed to assume that important responsibility. Given that the objective of target date funds is to help provide investors with adequate retirement savings, any appropriate investments that can help achieve this goal should be accessible to them. Enabling target date and other diversified asset allocation fund managers to access the same investments that have long been available to pensions could help these managers deliver returns for participants that are stronger and steadier than those that can be achieved in the public markets alone. Over time, this move may help workers close the retirement savings gap and mitigate the risk of outliving their savings.

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(1) World Economic Forum, We’ll Live to 100. How Can We Afford It?,  May 2017.
(2) NCPRS, 2018 NCPERS Public Retirement Systems Study, January 2019.
(3) BlackRock, 2020 Institutional Rebalancing Survey, January 2020.
(4) Cambridge Associates, Private Investing for Private Investors: Life Can Be Better After 40(%), February 2019.
(5) Cliffwater, An Examination of State Pension Performance, 2000 to 2018, March 2019.


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Lawrence Calcano

Lawrence Calcano

Lawrence is Chairman & CEO of iCapital. He began advising and working with iCapital shortly after its 2013 founding to lead key strategic and business development initiatives. Lawrence was a partner at Goldman, Sachs & Co., where he spent 17 years, most recently serving as the co-head of the Global Technology Banking Group of the Investment Banking Division. He received a BA from the College of the Holy Cross and graduated from the Amos Tuck School of Business at Dartmouth College as a Tuck Scholar. See Full Bio.