The inclusion of alternative assets in retirement plans opens access to a massive market.
Key takeaways
Asset managers face hurdles in adapting products for the defined contribution space.
Liquidity, valuations and regulatory compliance are all key considerations.
The president’s August Executive Order 14330, "Democratizing Access to Alternative Assets for 401(k) Investors," marked a significant policy shift that could reshape the retirement landscape for millions of Americans participating in employer-sponsored defined contribution plans.
The order directs federal regulators to reduce the hurdles that have historically prevented alternative investments—including private equity, private credit, real estate, digital assets, commodities, infrastructure and lifetime income strategies—from being included in defined contribution plans. Total retirement assets in the U.S. are significant; employer-based defined contribution plans in the United States totaled $13 trillion as of the end of June, according to the Investment Company Institute, with $9.3 trillion of that held in 401(k) plans among 70 million active participants.
Just five days after the order was issued, the U.S. Department of Labor (DOL) rescinded a 2021 supplemental statement that cautioned plan fiduciaries against including private equity in retirement plans, signaling the administration's commitment to swift implementation. The executive order establishes a 180-day timeline for the DOL to issue new guidance clarifying fiduciary responsibilities and potentially creating safe harbor provisions, with action expected by February 2026.
For asset managers, the inclusion of alternative assets in retirement plans opens access to a massive market that has been largely off-limits, creating opportunities for product innovation and revenue growth. But for asset managers and individual savers alike, this policy shift brings challenges alongside the opportunities.
Access and diversification for all
The democratization of alternative assets extends investment opportunities historically reserved for institutional investors and high net worth individuals to the average 401(k) participant. Proponents argue that this access can improve retirement outcomes through enhanced diversification and superior long-term returns. Alternative investments exhibit low correlation with traditional stocks and bonds, potentially reducing overall volatility and improving risk-adjusted returns. By gaining exposure to private markets, participants can access high-growth, private companies, potentially capturing value creation that otherwise would never have reached the public market.
Asset managers are pursuing multiple pathways to access the retirement market, with collective investment trusts (CITs) and interval funds emerging as preferred vehicles. CITs have become particularly attractive, as they generally operate with lower administrative costs compared to mutual funds. CITs also are not subject to the same registration requirements from the U.S. Securities and Exchange Commission, allowing for greater flexibility in holding illiquid assets. Interval funds—which offer periodic liquidity windows and typically quarterly redemptions rather than daily—provide another viable structure for packaging alternative strategies within retirement plans.
The most common implementation pathway involves embedding alternative exposures within target date funds rather than offering them as stand-alone investment options. One megafund has already announced plans to launch a target date strategy fund in 2026, featuring a 5% to 20% allocation to private market assets, based on investor age. Other megafunds are exploring methodologies that pair index-based public market investing with diversified private market exposures across the target date fund spectrum.
An Investment Company Institute study from 2023 points to some important data related to the rise of target date funds between 2006 and 2020:
- During this time frame, large 401(k) plans added an average of six investment options to their plan lineups, going from an average of 22 investment options to 28. Target date funds accounted for much of the net increase in investment options offered.
- In 2006, 32% of large 401(k) plans offered target date funds; this rose to 87% of plans in 2020.
- The percentage of participants who were offered target date funds increased from 42% to 84%.
- The percentage of assets invested in target date funds increased from 3% to 28%.
Given the executive order, we anticipate the above numbers to grow.
Headwinds
Asset managers face significant hurdles in adapting their products for the defined contribution space. The order does not help address some of the greater challenges alternative asset managers, specifically the private equity sector, have faced over the past couple of years. While exit values have rebounded, the number of exits remains below historic norms. Private equity fundraising has slowed over the past two years amid sustained weak exit activity and low distributions back to limited partners. Per PitchBook data, fundraising peaked in 2023 at $417.1 billion, dropping to $360.7 billion in 2024. Year to date through September 2025, this number was $214.4 billion. Access to 401(k) plans could help drive additional inflows.
Other structural hurdles include:
- Liquidity: The reduced liquidity inherent in alternative investments poses practical challenges for participants who may need to access their retirement savings earlier than planned. While traditional 401(k) investments, such as public equities, can be sold instantly to fund loans, hardship withdrawals, or distributions upon retirement, alternatives may be locked up for long periods of time. Even when alternatives are embedded within asset allocation funds that maintain liquid portfolios, participants may still face obstacles in getting their cash.
- Valuations: Alternative assets lack the real-time pricing transparency that plan participants expect. While stocks and bonds are valued in real time during trading hours, private investments are typically valued quarterly or annually, using complex methodologies. This makes it difficult for participants to monitor their account balances accurately and creates challenges for plan recordkeepers, who must strike daily net asset values for participant accounts. There can also be significant valuation swings after executing secondary transactions.
SEC Chair Paul Atkins has acknowledged valuation issues as a key concern that asset managers must address through appropriate guardrails. Asset managers developing products for the defined contribution retirement market are establishing more frequent and transparent valuation procedures, including independent third-party valuations and enhanced disclosure of valuation methodologies. Nonetheless, these solutions add operational costs and complexity, which ultimately result in higher fees for participants.
- Regulatory compliance: The executive order directs the DOL, SEC and U.S. Treasury Department to coordinate regulatory actions that will facilitate access to the private markets. The SEC has been specifically tasked with considering revisions to "accredited investor" and "qualified purchaser" definitions, which currently restrict access to private investments. Asset managers must navigate this evolving regulatory landscape while developing products that remain compliant under multiple scenarios. Coordinated DOL and SEC guidance will be critical in determining whether direct participant access becomes feasible beyond the current asset allocation fund approach.
- Fee structures: Alternative investments typically carry management fees of 2% or higher, substantially exceeding the low-cost index funds that have become standard in 401(k) plans. Traditional employer-funded retirement plans can pay fees well under 1%. This fee differential exposes asset managers and plan sponsors to heightened litigation risk, as participants may contend that fiduciaries imprudently selected high-fee options. Employer-funded plans that invested in private equity in the past have faced lawsuits due to higher fees. This highlights the importance of the DOL’s directive “to identify the criteria that fiduciaries should use to prudently balance potentially higher expenses against the objectives of seeking greater long-term net returns and broader diversification of investments.”
A nascent space
Many questions and few definitive solutions arise around expanding access to private markets. Stakeholders must proceed cautiously and keep in mind these considerations:
- Variable returns among alternative asset managers: The dispersion of returns across alternative investment managers adds another dimension of complexity to allowing private assets in 401(k)s. Vanguard research shows that private equity funds exhibit a much wider performance spread than public active funds—26 percentage points versus 7 percentage points—making manager selection critically important.
- Plan participant education: Participants need to understand the basic characteristics of different alternative asset classes, how these investments fit within diversified portfolios, how their risks differ from traditional investments, and what the liquidity restrictions mean for their ability to access funds.
- Tech stack upgrades for regulatory compliance: Stakeholders should automate data gathering and reporting, integrate private market platforms, and enhance compliance automation to centralize processes for scale. Improving governance tools and preparing agile, flexible processes can help managers navigate transitory periods with fewer headaches.
- Potential legal challenges: Litigation targeting 401(k) plans has increased substantially in recent years, with plaintiffs alleging fiduciary defects in investment menu design and service provider oversight. Rigorous due diligence, regular review and monitoring, partnering with experts, and strengthening fiduciary liability insurance can help managers navigate these issues.
A paradox for middle market asset managers
The executive order presents a paradox for middle market asset managers. While the democratization of alternatives creates potential access to hundreds of billions in 401(k) capital, the practical mechanics of bringing products to market favor significantly larger asset management firms with the scale, technology infrastructure and brand recognition required to develop and distribute these products.
Most product development and partnership announcements so far have been concentrated among megacap alternative managers and established institutional asset managers that already maintain relationships with target date fund providers. Technology and fintech platforms may ultimately prove critical enablers for middle market manager participation.
The bright spot is that if the 401(k) channel generates the billions in annual inflows to private assets that the industry is projecting, even a modest allocation to middle market strategies could represent meaningful new capital sources—particularly for managers able to demonstrate differentiated expertise, strong track records and technology-enabled operational infrastructure.
RSM contributors
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