We believe embedding private market assets in a target date solution should be an option – one that satisfies our clients’ changing needs as we evolve our business and offerings in service of them.
Key points
01.
Private assets could mean about 15% more money in 401(k)s
By thoughtfully integrating private assets into target date solutions, participants could see about a 15% boost in their 401(k) savings over 40 years.1
02.
Defined benefit plans have invested in privates for years
Broadening access to private assets isn’t new — pensions have long held them as a core part of their portfolios, helping them outperform 401(k)s.2 We believe defined contribution plans deserve the same opportunity.
03.
Embedding purpose-built exposures in target date strategies
We estimate adding a strategic allocation of private assets could increase returns by an incremental 50 basis points each year.
The stakes are high
Roughly 85 million Americans rely on defined contribution (DC) plans like 401(k)s to save for retirement. For many, it’s their first—and only—experience with investing. The stakes are high to help participants retire on their own terms.
As more private sector employers have shifted from defined benefit (DB) pension plans to DC plans, saving for retirement has become the individual’s responsibility — but without access to the same investment opportunities available to institutional investors.
The good news? The retirement industry and its allies are responding: The Secure 2.0 Act bolstered automatic enrollments in DC plans and expanded emergency-savings programs, while employers now have options to access a wide range of guaranteed income solutions.
DC plans have come a long way, but one powerful lever remains out of reach for most savers: private assets. DB plans have long used private assets—allocating about 16% on average3—which helps them typically outperform 401(k)s by roughly 50bps a year.4As access grows for U.S. wealth investors and retirement plans outside of the U.S., we believe it’s time DC participants get the same opportunity.
More than thirty years ago, we transformed retirement by pioneering the target date fund. Today, we see opportunity to help millions of Americans improve their retirement outcomes by offering access to private assets in DC plans.
We regularly engage with and learn from our clients to understand their changing needs – and we evolve our business and offerings in service of them. Helping people achieve better retirement outcomes is our core business: more than half the money we manage is retirement money.
About 15% more money in 401(k)s
Private assets have seen strong growth in recent years - and BlackRock estimates that private market opportunities can grow by more than two-thirds by 2029, reaching $23 trillion.5
We anticipate private assets will continue to outperform public assets over the coming decade, and our research suggests that including them within a target date solution can offer a host of benefits for retirement savers: better risk-adjusted returns, diversification, stable cash flows and inflation protection.
Leveraging BlackRock Investment Institute’s capital market assumptions and Preqin data, we estimate that adding private equity and credit to DC plans through a target date solution could boost annual returns by about 50 basis points. Over 40 years, that modest lift compounds into about a 15% increase in 401(k) savings.6
A purpose-built solution
So what do we propose? We envision a retirement plan option that thoughtfully integrates private assets into target date strategies – the most common default option in DC plans – through purpose-built exposures.
This does not mean simply ‘bolting-on’ an existing stand-alone private asset fund to a portfolio of public securities. Rather, we’d consider the benefits and risks of private assets at every stage of the investor lifecycle, as well as the ways in which private assets interact with public ones. Our approach to this choice would make small but growing allocations to private assets when investors are younger and then decreasing them as they near retirement.
Addressing DC plan fiduciaries top concerns
Private assets have long been regarded as the ‘black box’ of investing—less liquid, harder to see into and often more expensive to access. But as they step into the spotlight of mainstream portfolios, we’re innovating to crack that box open—bringing greater transparency, smarter pricing and broader access than ever before.
While we see a significant opportunity to create better retirement outcomes for millions, we also recognize that the plan must operate in accordance with legal and regulatory requirements and act in the best interest of plan participants. As such, we recognize there are questions around adding private assets to DC plans, including liquidity, fees and transparency, and are focused on ensuring processes meet the high standards under applicable legal requirements. There are many practical considerations to resolve and the fiduciary responsibility is significant.
With product design that keeps DC-friendly characteristics top of mind (competitive fees, transparency), along with more education, our proposal seeks to minimize private asset-related concerns that may arise with this kind of choice:
- Fees: A solution that maintains competitive, transparent pricing will require allocating to private assets in a way that enables fee simplicity and avoids further fees (including for distribution) by sourcing investments from our own extensive private assets platform.
- Cash drag: A solution that helps address concerns about cash drag in private asset solutions by sourcing liquidity from the broader target date strategy and a daily liquid, uncorrelated alpha stream—reducing the need for large cash buffers and helping preserve return potential.
- Liquidity: A solution that will mitigate the impact of liquidity-driven shocks, giving us full control of the fund’s architecture, cash flow and allocation management.
Answering the call for access
We believe demand for the option to include private assets in retirement portfolios will only continue to grow.. In a recent survey of DC plan advisors, 21% said they plan to add private market investments to the plans they manage. And when asked how they’d like to deliver those investments, target date strategies came out as the top.7
‘Choice’ is a critical word here. We see the choice to include private assets in retirement plans as an important part of our broader efforts to bring the full power of capital markets to all investors.
Want to see how it all comes together?
Dive deeper into how we’re approaching integrating private assets into a target date solution’s glidepath—and how we’re addressing the questions retirement plan professionals care about most.
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