Private Investments in DC Plans: Dispelling Seven Common Myths

Misconceptions about including private markets in Defined Contribution (DC) plans persist. We help separate myth from fact and explain why we believe the convergence of public and private markets presents compelling opportunities for savers.

Myth 1: Private markets are too risky for 401(k) plan participants

Reality: Both public and private markets offer credit, equity and hybrid investment opportunities that span the risk-return spectrum. When a professional investment manager employs modest allocations to appropriate private investments within a diversified portfolio, it may help reduce volatility and improve overall portfolio outcomes. Pension plans for teachers, firefighters and police officers have invested in private investments for decades.¹

Myth 2: Liquidity constraints make private markets unsuitable

Reality: Despite the long-term nature of their holdings, 401(k) retirement investors are largely invested in daily liquid, public index funds. For most participants, their retirement horizons are measured in decades, not months. We believe investors could be missing opportunities by keeping their long-term investments in daily-liquid funds, while avoiding the less liquid but generally higher yielding/returning investments in private markets. The professional portfolio managers, with their private asset managers, have tools to meet liquidity needs.

Myth 3: Fees are too high for retirement plans

Reality: When looking at net-of-fees performance, private markets have consistently outperformed public markets, increase diversification and are generally additive to retirement outcomes. Furthermore, by blending alpha-generating private market investments with public beta index funds, the incremental cost increase is mild given that the net-of-fees performance is enhanced.2 Additionally, institutional pricing through Collective Investment Trusts (CITs) also helps to reduce costs.³

Myth 4: Private markets are too complex for the average participant

Reality: DC plan participants don’t have access to individual private market investments. Exposure comes via qualified investment professionals with experience in managing diversified funds. They carefully allocate to private investments on behalf of participants. Further, we believe target date funds, advisor-managed account portfolios and multi-asset funds can prudently provide participants with private market exposure in funds designed for simplicity and ease of use.

Myth 5: Performance of private investments is inconsistent

Reality: Private markets have outperformed their public market equivalent, across equity (in 20 of the past 24 years)4 and credit (in 13 of the past 14 years).5 Meanwhile, public markets are increasing concentrated, with only 10 stocks in the S&P 500 driving 50% of market cap growth since 2021.6 That’s the opposite of diversification.

Myth 6: Net-of-fees performance is all that matters

Reality: While net-of-fees performance is a critical factor, experience, scale and investment origination are also extremely important. The experienced private asset managers involved in 401(k) plans today are there because they can manage the operational challenges that others are just starting to consider. Furthermore, large funds backed by leading private asset managers can be better equipped to manage liquidity needs especially in challenging market conditions. Many of today’s private managers of scale have built the infrastructure required to originate high-quality investments.

Myth 7: My fiduciary duties preclude using private investments

Reality: The US Department of Labor has stated that fiduciaries may consider private markets if they apply a prudent, well-documented process—the same standard used for all plan investments. This is critical as the integration of private markets into a DC plan requires a professionally managed account overseen by a fiduciary, in addition to the plan fiduciary.

Conclusion

The public market portfolios powering DC plans are showing signs of strain, especially given heightened market volatility and extreme concentration. We believe these challenges present a prime opportunity for DC portfolios to evolve through the integration of private market investments. When private markets are blended with public market investments in professionally managed retirement portfolios, many available levers can balance short-term liquidity with long-term investment horizons to the potential benefit of investors.

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FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR END INVESTORS OR THE GENERAL PUBLIC.

Represents the views and opinions of Apollo Analysts. Subject to change at any time and without notice.
Source: Prequin, data as of March 2024.
https://www.cerulli.com/resource/custom-research-unlocking-the-potential-of-private-investments-in-defined-contribution-plans
Sources: Preqin, Apollo Chief Economist, data reflects period from December 31, 2000, through September 30, 2024. Private equity asset class defined as: balanced, buyout, co-investment, co-investment multi-manager, direct secondaries, fund of funds, growth, secondaries, turnaround.
Sources: Preqin, Apollo Chief Economist, data reflects period from September 30, 2010, through September 30, 2024. Private Credit asset class defined as direct lending.
https://www.apolloacademy.com/extreme-concentration-in-the-sp-500-3/

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