New research from the CFA Institute Research and Policy Center finds that modest private market allocations can improve risk-adjusted performance in a modeled defined contribution (DC) plan, although the source of the improvement differs by private market asset class and the fund’s overall design.
The research, Private Markets in Retirement Plans: Returns, Risks, and the Importance of Plan Design, models regular contributions to a DC retirement portfolio comprising public equities, fixed income, and private markets. The analysis compares allocations to private equity, private debt, infrastructure, real estate, and venture capital alongside public equity and fixed income in a stylized target date fund to examine how each could affect long-term retirement outcomes. The results illustrate that some private assets increased growth potential, while others reduced the volatility of end accumulation values under different private market allocations.
Olivier Fines, CFA, Head of Advocacy and Policy Research at CFA Institute, comments:
“Across several major markets, policymakers are creating avenues for retirement savers to gain exposure to private assets. But opening access is not the same as improving retirement outcomes. In the United States, the key question is whether 401(k) plan fiduciaries can prudently determine that private investments improve outcomes net of fees while maintaining adequate liquidity, reliable valuation practices, and clear participant understanding. Our analysis shows that the answer depends on the asset class and the design of the plan.”
Key findings:
- The impact of private market allocations on retirement outcomes varies by asset class. A modest allocation to each of the five private market asset classes across the accumulation period analyzed in the research achieved higher risk-adjusted performance than the comparable portfolio comprising only public equities and bonds. Private equity and venture capital allocations increased average end accumulation values, with private equity producing the highest end value. Private debt, infrastructure, and real estate produced lower average end accumulation values than the baseline public equity and bond portfolio, but the volatility of end accumulation values was also reduced, improving risk-adjusted performance.
- Combining private assets altered the balance between growth and risk. Pairing venture capital with defensive private market assets such as private debt, infrastructure, or real estate reduced volatility and modestly improved risk-adjusted performance compared with including only venture capital in the private market allocation, alongside the allocations to public equities and bonds. Adding the same defensive assets to private equity in the private market allocation of the stylized default fund also reduced volatility but lowered average end accumulation outcomes and risk-adjusted performance compared with allocating only to private equity alongside public equities and bonds.
- Plan design matters. Changes to the target-date fund’s asset allocation over the course of the plan, in particular the glide path from equities to bonds over the final 10 years, affected the modeled outcome. Plan design, including asset allocation and accumulation time horizons, affected outcomes as much as or more than, the private market allocation. Ultimately, contribution levels and the time horizon over which cash flows are compounded are the most important aspects of securing adequate retirement income.
Raymond Pang, PhD, Senior Researcher at CFA Institute, and co-author of the research, adds:
“Private market access is not, by itself, a retirement strategy. The relevant question is what problem an allocation is intended to solve and whether it improves outcomes for participants after fees. Our modeling found no single formula: results changed with the asset class, its interaction with public assets, and the fund’s glide path, while the accumulation period could have a larger effect than the private market allocation itself. This is fundamentally a portfolio-construction question, not simply an access question. Regular contributions and time in the investment plan remain key drivers for retirement fund outcomes.”
Private Markets in Retirement Plans: Returns, Risks, and the Importance of Plan Design is authored by Raymond Pang, PhD, and Fan Yang. To download the report, visit https://bit.ly/3TdldLr.
To speak with the report’s authors, contact PR@cfainstitute.org.
Notes to Editors
- The analysis within Private Markets in Retirement Plans: Returns, Risks, and the Importance of Plan Design modeled 10,000 accumulation paths for a stylized target-date fund using U.S.-dollar return data from January 2010 through to December 2024.
- Public-market exposure was represented by the Vanguard Total World Stock ETF that tracks the FTSE All-World Index and the iShares Global Government Bond ETF that tracks the FTSE Group-of-Seven (G7) Index. Private market exposure was represented by PitchBook global indexes for private equity, private debt, infrastructure, real estate, and venture capital.
- The study is based on a modeled saver that begins contributing at age 25 with a $25,000 salary, annual salary growth of 2.5%, and a total employee-and-employer contribution equal to 10% of salary over 40 years.
- Ending values are nominal, scenario-based estimates only.
About the CFA Institute Research and Policy Center
The CFA Institute Research and Policy Center brings together CFA Institute expertise along with a diverse, cross-disciplinary community of experts working collaboratively to address complex problems. Firmly anchored to the CFA Institute tenets of intellectual independence, impartiality, and technical rigor, its research, advocacy, and standards work seeks to transform research insights into actions that strengthen markets, advance ethics, and improve investor outcomes for the ultimate benefit of society. It is organized around four themes: capital markets, technology, the future of the investment industry, and sustainability.
About CFA Institute
As the global association of investment professionals, CFA Institute sets the standard for professional excellence and credentials. We champion ethical behavior in investment markets and serve as the leading source of learning and research for the investment industry. We believe in fostering an environment where investors’ interests come first, markets function at their best, and economies grow. With more than 200,000 charterholders worldwide across 160 markets, CFA Institute has 8 offices and 157 local societies. Find us at www.cfainstitute.org or follow us on LinkedIn and subscribe on YouTube.
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