For decades, conventional wisdom has held that private markets are too illiquid, risky, and inflexible for defined contribution (DC) retirement plans. But many of these objections no longer hold water—especially those focused on liquidity.
Thanks to recent innovations in structure, strategy and oversight, the tools to manage liquidity within DC plans have evolved dramatically. We believe the path is now open for fiduciaries to incorporate private markets without sacrificing accessibility or operational flexibility.
The Problem: Misperceptions About Illiquidity
Historically, many plan sponsors have avoided private market investments due to fears that they would restrict participant access to funds, particularly in daily-valued DC environments.
However, this runs counter to how DC plans operate in practice. Daily participant liquidity does not require every underlying asset to be liquid. Rather, it requires effective liquidity management at the portfolio level—a task that modern investment vehicles are now well equipped to handle.
Three Realities That Debunk the Myth
Plan features and evolving investment options also address liquidity challenges head-on.
1. Semi-liquid alternatives are now commonplace
New structures have emerged that enable quarterly redemptions and eliminate the J-curve by keeping portfolios fully invested from inception. These semi-liquid strategies can offer:
- Regular access to capital through structured liquidity windows
- Smoother return profiles
- Elimination of vintage risk and capital call complexity
2. Collective investment trusts (CITs) can provide flexibility
Semi-liquid alternative strategies can be deployed in a familiar vehicle for the industry, the collective investment trust (CIT). When used as a wrapper, a CIT can improve the liquidity of alternative portfolios when they’re tailored to include a “liquidity sleeve,” typically invested in highly liquid assets like Treasuries or investment-grade bonds. This design can enable:
- Daily NAV calculation for plan transactions
- On-demand liquidity for participant redemptions
- A familiar regulatory and operational framework for plan sponsors
3. Holistic Liquidity Management at the Plan Level
DC plans inherently benefit from continuous participant contributions, which act as a natural liquidity source. When combined with diversified portfolio structures and cash flow modeling, fiduciaries can meet liquidity needs.
In our view, perceived illiquidity of a DC plan including alternative assets is just that—perceived.
The Takeaway: It's Time to Move Forward
With these innovations in place, the barriers to including private markets in DC plans are largely behind us. The fiduciary tools exist. The operational pathways are clear. And the potential benefits—enhanced returns, reduced volatility, and greater diversification—are too important to ignore.
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