Guest Contributors: Lavina Mehta, CFA, RMA VP Institutional Retirement Solutions and Jon Schreiber, CFA Solutions Portfolio Manager, Franklin Templeton Investment Solutions

Background:

Target date funds (TDFs) have become the default investment solution for millions of defined contribution (DC) plan participants. As the role of target date funds has expanded, so too has the evolution of glide path design—prompting consideration of whether traditional public-market-only approaches are sufficient for long-term retirement objectives.

Against this backdrop, private assets have gained increasing attention as a potential complement within a target date framework. When thoughtfully implemented, private assets such as private real estate, private credit and private equity may enhance diversification, improve risk adjusted returns, and contribute durable retirement income without compromising liquidity or fiduciary standards.

This Research Minute outlines the case for incorporating private assets into TDFs, evaluates their impact on portfolio risk and return, examines liquidity considerations under stress scenarios, and highlights the critical importance of manager selection.

Findings:

When evaluating whether an allocation to private assets enhances participant outcomes, the focus should be on how they impact expected return, diversification and retirement income. To assess their true impact, investors should take a critical look at the historical returns delivered by private markets in relation to the level of risk taken to achieve those returns.

One of the unique features of some private assets is that they are reported with appraisal-based valuations and less-frequent price observations than public markets. As a result, the realized return stream can appear artificially smooth. When designing long-term investment strategies, it is critical to adjust the volatility and correlations used in capital market assumptions so that inputs better reflect the underlying economic risk. This prevents an overallocation to private assets due to artificially low volatility estimates.

Bottom Line:

As DC plans continue to evolve, thoughtful fiduciaries are asking how private assets can be implemented responsibly in pursuit of better participant outcomes. Private assets are not a universal solution for all multi-asset portfolios, nor are they appropriate for all investors. However, when thoughtfully integrated into a target date framework, they can enhance diversification, improve risk adjusted return potential, and support retirement income generation—without compromising liquidity or governance.

The path forward is clear: Use desmoothed, economically grounded capital market assumptions; size allocations thoughtfully within the glide path; rigorously stress test liquidity under severe but plausible scenarios; and treat manager selection as an essential function, overseen by an experienced investment team.  A modest allocation to private assets—implemented within a well-designed target-date framework—can potentially improve portfolio efficiency and help retirement savers achieve better outcomes.

Read the full report here.  

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Insights shared by guest contributors are their own and do not represent the views of DCIIA or the RRC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.