Private Markets in Retirement Plans Face Long Road

In Brief:

Despite an executive order opening the door for 401(k) plans to adopt alternative investments, the path to meaningful private market allocations in America's $12.5 trillion defined contribution market will take years, not months, to materialize due to structural barriers and complex decision-making processes.

Eric Mogelof, head of Global Client Solutions at KKR, recently appeared on the Capital Allocators podcast with host Ted Seides to explain why the anticipated flood of retirement capital into alternatives represents a gradual evolution rather than an imminent revolution. While Mogelof has no doubt the DC market will see allocations of 10-15% to private markets within a decade, the journey requires overcoming daily pricing requirements, liquidity management challenges, and fundamentally different approval processes across three distinct investment channels.

His analysis cuts through the hype surrounding potential hundreds of billions flowing into alternatives, revealing why the hockey stick growth curve everyone anticipates won't arrive in the next few quarters—though it will eventually come through managed accounts and custom target date funds before reaching the mass market of off-the-shelf products.

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Big Picture Drivers:

• Market structure: The $40+ trillion U.S. retirement market splits into three buckets—defined benefit (35%), defined contribution (30%), and IRAs (35%)—with DC growing fastest and serving over 100 million Americans

• Investment evolution: DC plans have transformed from 25% company stock allocations in the late 1990s to 40% in professionally managed investment solutions today, primarily through target date funds

• Private market presence: While DB plans have allocated north of 30% to alternatives for decades and IRAs now hold 2-5% in private markets, DC plans currently have virtually zero alternative allocations

• Decision-maker differences: Off-the-shelf target date funds are selected by HR/finance staff focused on fees and litigation risk, while custom funds involve professional investors already familiar with private markets

Key Themes:

• Structural transformation over revolution: The shift to alternatives in DC plans represents a gradual evolution constrained by existing infrastructure built for daily-priced liquid assets, not a sudden market upheaval

• Fee sensitivity as barrier: The DC market's historical focus on lowest-cost passive strategies creates inherent resistance to higher-fee alternative investments, particularly for off-the-shelf products

• Multiple adoption pathways: Different segments of the DC market—managed accounts, custom target date funds, and off-the-shelf options—will adopt alternatives at vastly different speeds based on their decision-making structures

• Liquidity innovation requirement: Successfully incorporating private markets demands solving both daily pricing capabilities and liquidity management within target date fund structures designed for immediate redemptions

Key Insights:

• Off-the-shelf adoption requires new products, not retrofits: Asset managers like Vanguard, Fidelity, and BlackRock cannot simply add alternatives to existing low-cost target date funds because plan sponsors selected those specific strategies for their fees and risk exposures—instead, managers must create entirely new fund series and convince sponsors to switch or add them.

• Managed accounts and custom target dates will lead the charge: These segments already show faster adoption because they involve professional investors who understand net-of-fee returns and work with investment consultants, making the next 3-5 years heavily weighted toward these channels rather than mass-market products.

• The cash flow reality dampens growth expectations: While substantial new money flows into DC plans annually, meaningful amounts simultaneously exit through retirements and job changes that trigger rollovers to IRAs, limiting the net new capital available for alternative allocations.

• Daily pricing becomes the critical infrastructure challenge: Even if liquidity can be managed through sleeves within target date funds, the entire 401(k) chassis requires daily NAVs for transactions, necessitating industry-wide progress beyond the current monthly marking of evergreen vehicles.

• Legislation provides permission but not momentum: Executive orders and DOL safe harbor statements remove regulatory barriers, but the real work involves one-by-one engagement with plan sponsors to educate them on the value proposition of incorporating private markets.

• Manager selection matters exponentially more in this channel: The difference between top quartile and fourth quartile private market managers can span thousands of basis points, making due diligence and access to best-in-class managers critical as unsophisticated decision-makers enter the space.

Memorable Quotes:

• "It's not an if, it's really a when. Like there's no doubt in my mind in a decade from now we will see very meaningful allocations within that DC market to private markets. Whether it's 10% 15% it's going to be really really big." - Eric Mogelof, expressing confidence in the long-term trajectory despite near-term obstacles

• "Most people don't understand the decision-making processes around how a target date fund gets on a platform and how the evolution and change would happen. And so most people will say, 'Oh, you know, this is great. All of a sudden, all the target date money is just going to drop an allocation to private markets.' And the reality is there's structural reasons why that just are real barriers that have to be overcome." - Eric Mogelof, identifying the key misconception driving unrealistic expectations

• "It's unlikely that that cable company is going to be able to go to you and say, 'Hey, Ted, I've got great news for you. I'm adding all of these great channels, but I'm going to really increase your fees.' It's probably not going to work, right?" - Eric Mogelof, using an analogy to explain why asset managers cannot unilaterally add alternatives to existing low-cost target date funds

• "It will be a hockey stick, but it's not going to be a hockey stick in the next couple of months or couple of quarters. It really is going to take years for this to play out." - Eric Mogelof, tempering expectations while maintaining conviction in the eventual outcome

• "More and more companies are staying private for longer and as a result, the opportunity set for private markets and private equity is growing substantially." - Eric Mogelof, addressing concerns about competition and return generation as capital flows increase

The Wrap:

The conversation reveals a fundamental disconnect between the excitement surrounding potential capital flows and the operational reality of how alternatives will actually enter 401(k) plans.

While the total addressable market appears massive, the path forward requires simultaneous innovation in pricing infrastructure, education of non-professional decision-makers, creation of new fund products, and gradual acceptance of higher fees in exchange for enhanced returns. The winners in this evolution will likely be those who recognize that managed accounts and custom target date funds represent the near-term opportunity, while off-the-shelf adoption remains a multi-year educational and product development challenge.

For private market managers, this means the anticipated flood of retirement capital will arrive as a steady stream over years rather than a sudden deluge, providing time to prepare capacity and maintain investment discipline rather than facing immediate pressure to deploy unprecedented amounts of capital.