Private Markets

Private Equity in Defined Contribution Plans and Collective Investment Trusts

Private investments have the potential to play an important role in retirement plans. Our experts discuss new guidance from the U.S. Department of Labor.

December 2020

The alternative investment industry has long been recognized as a growing opportunity for retirees to access an asset class that offers strong returns and diversification.

But for plan sponsors seeking to bring the best of their defined benefit (DB) portfolio to their defined contribution (DC) plans, they often lacked sufficient guidance to include private equity (PE) investments.

Met with wide approval, in June 2020, the Department of Labor (DoL) released a framework to include PE investments as part of a multi-asset class vehicle with a sufficient pool of assets to diversify participants’ exposure. In their guidance, the DoL stated that overall asset allocation to PE investments should not exceed 15 percent of a funds’ assets, with the remainder invested in publicly traded securities or other liquid investments with readily ascertainable market values.1

Is the Guidance Good, Bad or a Mixed Bag?

In 2019, the estimated market size for 401(k) and individual plans was around US$9 trillion.2 According to Willis Towers Watson, this represents half of all retirement assets globally – a sizeable opportunity for plan sponsors.

For retirees, allowing DC plans to incorporate private investments would offer access to a new asset class. Over the last 20 years, the number of listed companies on US stock exchanges has declined by half, limiting asset diversification as well access to private companies, especially start-ups, that reach billion-dollar valuations without going public.


In addition, growth in DC plan assets has been lagging DB plans by 0.6 percent to 1.4 percent per year. Market experts believe this is primarily due to contrasting allocations to alternatives – an average of two percent for DC versus 17 percent for DB.3

Eugene Scalia, DoL Secretary, said that the information letter will, “help Americans saving for retirement gain access to alternative investments that often provide strong returns.”

However, investors and industry experts alike raise valid concerns about fees and fund returns. PE fund managers collect a two percent fee and additional 20 percent profits for investments. In comparison, managements fees for funds ruling 401(k) menus are often less than 0.5 percent. This means that PE funds must consistently generate above average returns to ensure investors remain profitable post fees. With the average gross return of the S&P 500 index at 12 percent a year, a private equity fund would have to notch gross returns of 17 percent a year just to match the S&P 500.4

Strategies for Including PE in DC plans

As per the June guidance, PE funds would be included as part of a broader, diversified fund. A popular and default option for most investors is to invest in collective investment trusts (CIT) target-date funds (TDFs) that are a combination of stocks and bonds. These funds reduce exposure to risky assets as investors near their retirement age, moving from a growth-oriented to an income-oriented portfolio. Investors and managers may also want to explore asset classes with a greater liquidity profile, such as private debt, listed PE and infrastructure, alongside traditional illiquid private market investments. In addition to diversification benefits, research finds that including private equity in a portfolio improves performance and reduces downside risk.5

The DoL information letter has been widely appreciated by the industry and is expected to open an array of opportunities to include PE strategies in retirement plans. That said, investor protection remains a central concern considering the risks and non-transparent nature of PE funds. Savers must read the fine-print to understand if and how much of their money is invested in PE funds. Subsequently, they must recognize that it may be hard to evaluate if such an investment is worthwhile given the lack of publicly available information on private companies.  

Our alternatives investment servicing team is ready to help you understand more about the guidance from the DoL and explore the benefits and potential challenges of incorporating a PE strategy into your CITs. To learn more, please contact Cesar Estrada, PE Product Management, and Rekha Vatsa, CIT Product Management.


1 U.S. Department of Labor Issues Information Letter on Private Equity Investments, June 3, 2020
2 DowJones, June 2020
3Adding private markets to DC pension plan portfolios”; The Partners Group, January 23, 2017
4 MarketWatch, June 2020
5 Plansponsor, “Private Equity Could Boost DC Plan Participant Returns”; November 21, 2019