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Alternatives in 401(k)s: Opportunity, Opposition, and the Future of Plan Investments

Author

Alison Salka, Ph.D.
Principal Consultant
LIMRA and LOMA
asalka@limra.com

October 2025

The debate over including alternative investments in defined contribution (DC) pension plans has moved from theory to reality. An executive order signed in August 2025 directed the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) to clarify rules for integrating private equity, private credit, real estate, infrastructure, and even digital assets into 401(k) plans. Industry leaders from BlackRock and Apollo to Empower and Franklin Templeton are already developing “DC-friendly” products to capture potential assets.

For plan sponsors and record keepers, though, the path is far from straightforward. The key questions are not simply whether alternatives should be offered, but how they can be integrated in a way that is prudent, transparent, and operationally feasible.

Washington has signaled an openness to broaden the investment menu for retirement savers, but it has done so somewhat cautiously. The executive order is directional rather than prescriptive, leaving the heavy lifting to regulators. Safe harbors are expected to play an important role, providing a framework for prudently evaluating and monitoring illiquid or higher-cost products.

Some industry associations are helping lay groundwork. The Defined Contribution Alternatives Association (DCALTA) recently issued five guiding principles for fiduciaries considering private market investments: fiduciary process, value for money, asset class distinctions, operations, and participant communications. Their message is that private markets should be evaluated under the same ERISA standards as traditional investments.

Some momentum seems to be building. According to Cerulli Associates, 3.9 percent of DC plans offered alternatives in 2024, up from 2.2 percent the year before. Still, exposure remains limited. Real estate investment trusts (REITs) are the most common option, available in roughly one-fifth of plans and used by a small fraction of participants. True private equity and private credit allocations remain the exception, typically confined to large sponsors with custom target-date funds (TDFs).

Advocates’ View

Advocates argue that the inclusion of alternatives offers diversification and return potential that public equities and bonds cannot fully deliver. Private markets have historically exhibited lower correlations with public markets, creating opportunities to dampen volatility. They also provide access to companies that increasingly remain private for longer, capturing value that public investors never see.

The return argument resonates strongly. Studies suggest that even a half-percentage-point improvement in long-term returns can significantly boost retirement outcomes. Over a 40-year horizon, that increment compounds into a meaningful difference in account balances at retirement.

Proponents also frame this as a question of fairness. Defined benefit plans, endowments, and ultra-high-net-worth investors have long relied on private equity and private credit. Allowing access in 401(k)s, they argue, democratizes opportunity and gives everyday savers the same tools that institutional investors already enjoy. For employers, there is also a competitive angle: sophisticated investment options can serve as a talent differentiator, particularly for younger, higher-income, and financially literate workforces.

Skeptics Reply

Skeptics, however, see risks that may outweigh the rewards. Illiquidity remains a fundamental challenge: private assets are not designed for daily valuation and redemption, yet daily liquidity is a hallmark of 401(k) platforms. Fees are another sticking point. While the average equity mutual fund in a 401(k) charges about 0.26 percent, private equity funds often carry much higher fee structures. Critics argue that, net of fees, private markets may not outperform their public counterparts.

A 2022 study by the Center for Retirement Research (CRR) at Boston College found that, despite public pension plans increasing their allocation to alternatives from 9 percent in 2001 to 34 percent in 2022, long-term returns were not meaningfully improved. Alternatives appeared to reduce short-term volatility, but they may have lowered overall portfolio performance net of fees (CRR, 2022). In addition, there is no benchmark or index like the S&P 500 for private investments. For plan sponsors weighing fiduciary risk, this could be a concern.

Legal liability is another concern. Past litigation, most notably on Intel, demonstrates that fiduciaries face risks when adopting complex or high-fee options. Even with safe harbors, many sponsors will worry about being targeted by plaintiffs’ attorneys if performance disappoints.

Finally, critics question participant knowledge and interest. Many workers lack basic knowledge of investments, much less the ability to evaluate complex asset classes.


Figure 1. LIMRA data about consumers’ knowledge of finances and investments

I am very comfortable about my knowledge of investments


According to the Investment Company Institute, over 90 percent of participants feel their current plan offers a good investment lineup. Political scrutiny adds to the hesitation. Senator Elizabeth Warren and consumer advocacy groups have already raised alarms about systemic risks and potential participant harm.

Potential Scenarios

The most likely scenario is gradual adoption, beginning with the largest and most sophisticated sponsors. Mega plans with more than $5 billion in assets and custom target date funds (TDFs) are best positioned to pilot alternatives. These employers already have governance structures, consultant oversight, and bespoke investment designs that can accommodate complexity. Based on a recent survey of consultants and advisors, it’s unlikely alternatives will be offered as a stand-alone option.

In the near term, adoption will likely be limited to a handful of high-profile sponsors. These pilots will be watched closely by industry peers, consultants, and regulators. If early adopters demonstrate success — delivering diversification and return benefits without undue operational strain or litigation — confidence may grow. Over the next three to five years, larger plans with professional, higher-income workforces could follow, especially those that already offer managed accounts.

Beyond that, adoption may slowly filter down to the mainstream. But this would take time. Even under optimistic scenarios, alternatives are unlikely to account for more than 5 to 10 percent of DC portfolios in the foreseeable future. Midsize and smaller employers, by contrast, are expected to remain on the sidelines until regulators provide clear safe harbors and strong proof of value.

Implications for Record Keepers

For record keepers, alternatives represent both challenge and opportunity. Systems built for daily liquidity and transparent pricing must evolve to accommodate illiquid assets that are valued quarterly or less frequently. Investing in infrastructure to support settlement, participant reporting, and monitoring of funds if they are offered outside of TDFs is necessary.

Transparency will be equally important. Record keepers should design tools that clearly explain complex fee structures and provide sponsors with monitoring frameworks to document prudent processes. Participant education must also be prioritized. Without clear communication, trust could erode quickly.

The most successful record keepers will likely adopt a phased approach — supporting sponsors that want to test alternatives through custom TDFs or managed accounts, while preserving flexibility for broader adoption later. Partnerships with asset managers will be essential to deliver products purpose-built for DC plans: lower-fee, partially liquid, and operationally simple.

The inclusion of alternative investments in 401(k)s is no longer hypothetical. Regulatory signals, industry interest, and product innovation are converging. Advocates see the potential to improve retirement outcomes and democratize access, while skeptics warn of high fees, fiduciary risk, and participant confusion.

The likely path forward is slow and measured: a few large sponsors will test alternatives first, and only after their results prove successful could broader adoption follow. Record keepers must decide their path. Those who invest now in infrastructure, transparency, and sponsor support will enable prudent adoption and potentially win a competitive advantage.

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