Perspectives : Investment | May 07, 2026

Private assets in target-date funds: A balanced assessment

Access to private equity, private credit, private infrastructure, and private real estate assets can potentially improve long-term investment outcomes for participants.

This article outlines a fiduciary evaluation framework for defined contribution (DC) plans and target-date fund (TDF) providers, focusing on six key considerations: performance, fees, liquidity, valuation, meaningful benchmarks, and complexity.¹ Together, these considerations frame the governance and implementation approach needed to assess the appropriate role of private assets in target-date design.

Our research affirms that the investment case is straightforward. Integrating private assets may (1) enhance returns through a liquidity premium, (2) benefit from an active management skill set, and (3) improve diversification through new sources of return. Private markets have also expanded significantly, growing from less than $1 trillion in 2006 to more than $10 trillion today.²Currently, 85% of U.S. companies with more than $100 million in revenue are private.³ We believe this makes private assets a worthwhile opportunity to explore and evaluate.

Implementation, however, is more complex. There is no widely available, low-cost private market index fund. In practice, the active management required for adding private assets can potentially include higher fees, less transparency, and a wider range of outcomes. Currently, very few participants can access private assets through self-directed DC plans, though policymakers and industry stakeholders are exploring ways to extend access to everyday investors. Against this backdrop, investment managers are devoting considerable time and resources to addressing these challenges with the view that, through thoughtful design, prudent oversight, and clear guardrails, private assets can be integrated into TDFs in a way that manages risks responsibly while expanding the opportunity set for retirement savers.

For DC plans, most investment activity is concentrated in qualified default investment alternatives. Over the past decade, the percentage of participant contributions directed into TDFs rose from 46% in 2015 to 64% in 2025.⁴ Incorporating private assets into TDFs—where allocation and oversight are professionally managed—has the potential to expand adoption among DC plan participants. Figure 1 illustrates the growing share of private investments within global equity markets, underscoring the increasing role of private assets in the broader investment landscape.

Figure 1. Growth of private investments over the past 25 years

Source: Vanguard calculations, based on data from Preqin and FactSet.

Note: The sizes of the private asset categories are based on reported year-end unrealized values from funds and co-investments. Fund-of-funds data is excluded to avoid double counting. The size of the public equity market is proxied by the total market capitalization of the MSCI ACWI IMI Index.

Potential benefits of private assets in TDFs and practical considerations

When considering whether to incorporate private assets within TDFs, DC fiduciaries and investment managers should weigh the potential for improved long‑term outcomes against the practical requirements needed to achieve those benefits. The Department of Labor’s (DOL) proposed rule on fiduciary duties in selecting designated investment alternatives introduces a safe harbor for selecting DC plan investment options, including those with exposure to alternatives, while reinforcing ERISA’s process‑based standard. For any TDF investment, committees—in partnership with their consultant if one is aligned—should establish and document an objective and thorough evaluation process to satisfy ERISA’s duty of prudence. While the DOL rule is still only a proposal, the six key factors that fiduciaries are expected to consider when selecting investment options (performance, fees, liquidity, valuation, meaningful benchmarks, and complexity) provide a reasonable framework for analyzing potential plan investment options, as outlined below.

Performance

Assess return potential. Determining an appropriate allocation to private investments within a TDF requires developing an accurate view of risk. Because private asset returns are typically appraisal based and subject to reporting lags, performance can appear smoother and less volatile than that of comparable public market investments. When adjusted using statistical unsmoothing techniques, however, these returns often exhibit higher volatility, providing a more realistic picture of the underlying risk profile.

Our research suggests that incorporating a modest 10%–20% allocation to private assets within a target‑date fund has the potential to meaningfully enhance long‑term retirement outcomes. Over a 40‑year investment horizon, such an allocation could increase cumulative retirement wealth by approximately 7%–22% on a net‑of‑fees basis, reflecting the benefits of an expanded opportunity set, access to less efficient markets, and the potential to earn liquidity and complexity premia.

Select managers carefully. Private assets introduce greater dispersion of outcomes than public markets, making manager selection a critical driver of success within a TDF. As Figure 2 illustrates, this dispersion reflects both differences in manager skill and the operational realities of private investing, including valuation practices, unit pricing, and liquidity management. While these complexities raise the bar for implementation, they also create the potential for meaningful alpha when managed well. Institutions that can leverage scale and resources—by partnering with an experienced external TDF provider with repeatable processes for sourcing, due diligence, capacity access, fee negotiation, and ongoing monitoring—are better positioned to harness these benefits. Although higher fees increase the net‑of‑fee performance hurdle, disciplined access to well‑above‑median managers, supported by rigorous selection, sizing, and ongoing oversight, ultimately determines whether dispersion becomes a headwind or a sustained source of value within a TDF.

Figure 2. Dispersion of private investment alpha across various strategies

Source: Vanguard calculations using MSCI data for private funds and Morningstar data for public funds. Direct alpha for private equity (buyout) funds is computed against the S&P 500 Index; for venture capital funds against the Russell Microcap Index; for private infrastructure against the MSCI World Core Infrastructure Index; for private real estate against the MSCI World Real Estate Investment Trusts (REITs) Index; and for private debt against the MSCI USD High Yield Corporate Bond Index in U.S. dollars across all available vintages. Direct alpha is an annualized measure of excess return that compares the performance of a private investment with the hypothetical return of a public market index, assuming an identical cash-flow pattern. Performance for public infrastructure, global high-yield bonds, global leveraged loans, global real estate, global fixed income, and U.S. equities are computed against the Morningstar U.S. fund categories: infrastructure, high-yield bonds, bank loans, global real estate, global bonds, and global large-stock blend equities, respectively, over the last 10 years ended December 2024.

Improve diversification through broader market exposure. Beyond return potential, private assets can enhance diversification within TDFs by expanding exposure beyond traditional public equity and fixed income markets. Private markets represent a significant and growing share of global economic activity and include companies, assets, and return drivers beyond public markets. When thoughtfully incorporated, private assets can add differentiated sources of return that may respond differently across economic environments, helping to smooth outcomes over long investment horizons. For long-term investors such as TDF participants, this broader opportunity can diversify risk, reduce reliance on public market drivers, and support more resilient portfolios when combined with patient capital and professional management.

Fees

Assess fees relative to total value delivered. Private assets generally have higher stated fees than public market investments, raising the net-of-fee outperformance hurdle. In a TDF structure, however, a fiduciary can negotiate access and implement strategies at scale, which may lead to lower effective fees and institutional pricing. Committees should evaluate whether the structure provides a clear net-of-fee benefit and whether fees are aligned with the expected value delivered.

As shown in Figure 3, these exposures are typically associated with higher fees and a wider dispersion of outcomes, raising the bar for successful implementation and underscoring the importance of careful, well‑informed decision-making.

Figure 3. Typical all-in fee ranges for private assets versus public assets

Source: Vanguard.

Note: Ranges show typical all-in fees (management and performance, where applicable) in basis points (bps). Fees vary by strategy, vehicle, and negotiated terms. The fees for private assets are rounded off to the nearest 50 bps. Ranges for public assets are based on 5th and 95th percentiles of the Morningstar category over the last five years.

Liquidity

Balance liquidity constraints with expected benefits. One benefit of investing in private assets is the potential for outperformance driven by the illiquidity premium of the asset class. While pooling across thousands of participants can reduce day-to-day liquidity pressure, committees should still review how the fund would operate during periods of sustained market stress. This includes evaluating the available liquidity, such as cash buffers, credit lines, rebalancing bands, and any redemption limits. Such liquidity buffers could be held either at the evergreen private vehicle level⁵ or at the TDF level. While maintaining a modest liquidity buffer within an evergreen vehicle may affect overall performance, it can also support more efficient portfolio management by facilitating rebalancing within the allocation to private markets.

Mechanisms such as gating or redemption limits are designed to manage short‑term mismatches between contributions and withdrawals while protecting the interests of long‑term investors. These features are a standard element of private investment structures, not an unexpected restriction. Importantly, during periods of market stress, such mechanisms have at times benefited investors by limiting the ability to redeem at depressed valuations, effectively reducing the risk of selling at inopportune moments and helping preserve long‑term value for remaining participants.

Clear communication helps ensure that both participants and fiduciaries understand that the potential return premium associated with private assets is partly linked to accepting these liquidity management practices. When appropriately designed and governed, gating and liquidity controls can serve not only as a risk‑management tool but also as a behavioral safeguard that supports long‑term investment objectives.

Valuation

Understand pricing limitations and valuation controls. Infrequent pricing can dampen observed volatility, but it introduces stale-price risk and basis risk relative to public benchmarks. Committees should seek to understand whether valuation oversight is in place and whether clear escalation procedures exist.

Meaningful benchmarks

Establish benchmarking expectations for effective oversight. Benchmarking and reporting expectations should be established up front. Committees should agree on an appropriate benchmark for evaluating the TDF, ensuring that it aligns with the fund’s objectives and glide path. At the same time, committees should also understand the private asset benchmark selected by the investment manager and be comfortable with how it is used as a measurement tool for that sleeve, including net-of‑fee performance and cash‑flow‑aware metrics, such as internal rate of return or time‑weighted returns. Because private asset benchmarks and peer comparisons can be difficult to interpret, they should be used to guide oversight rather than as standalone performance hurdles—and always with appropriate context.

Complexity

Mitigate complexity through strong participant education. Fiduciaries should communicate clearly and transparently with participants, ensuring that both the potential benefits and the risks of private assets are well understood. While these investments may enhance long-term outcomes, they can also underperform, carry higher fees, and offer less liquidity, all of which can affect overall TDF performance. Ongoing, straightforward education can help participants set appropriate expectations and better understand how these investments behave across different market environments.

Taken together, these considerations highlight the importance of a thoughtful, well-documented approach to evaluating private assets within TDFs, setting the stage for a clear assessment of their overall role and value.

The bottom line: Advantages of private markets in retirement plans

Overall, the potential benefits of private assets in TDFs make them a worthwhile area for committees to explore and evaluate, particularly as part of the ongoing evolution of target‑date design. When thoughtfully implemented, a private asset sleeve can enhance long‑term participant outcomes, but success depends on more than simple inclusion. It requires a rigorous investment process, strong governance, disciplined implementation, and clear alignment with participant needs and behaviors. For many committees, this means carefully evaluating available solutions, establishing a governance framework that can remain resilient across market environments, and selecting a provider with a well‑established, repeatable, and transparent implementation approach.

Glossary

Evergreen fund: Usually refers to an open‑ended, perpetual investment vehicle with no fixed termination date, designed to continuously raise, deploy, and reinvest capital. Unlike closed‑end private funds, it generally permits periodic subscriptions and redemptions, subject to liquidity constraints. In private assets, evergreen structures enable sustained, multivintage exposure while supporting disciplined cash‑flow and liquidity management.

Private equity (buyout): Typically refers to acquiring controlling stakes in companies and working to improve and grow earnings over several years. In a retirement portfolio, buyout exposure can serve as a long-term growth allocation that may enhance return potential, but it usually requires a long horizon because outcomes can vary and capital may be tied up for extended periods.

Private credit: Generally involves lending to companies outside the public bond market in exchange for contractual interest payments and repayment of principal. Private credit can play an income-oriented role in the portfolio, potentially offering a steadier return stream over equity-like private assets while still carrying meaningful credit risk that tends to emerge during economic downturns.

Private infrastructure: Usually refers to investing in long-lived, essential assets, such as utilities, transportation networks, and communications systems, where revenues are often supported by contracts or regulated pricing. In a retirement portfolio, private infrastructure can offer a long-term inflation hedge and help balance exposure to traditional stocks and bonds.

Private real estate: Typically involves owning or financing properties, with returns driven by rental income and changes in property values over time. Private real estate can provide income and real-asset exposure that may be beneficial in certain inflationary environments, but it is also sensitive to interest rates and local market conditions, underscoring the importance of diversification across property types and regions.

Because the four private asset categories differ in cash-flow patterns, valuation behavior, and liquidity, return expectations are adjusted for reduced flexibility before being incorporated into portfolio design.

Related links

Sources:

¹ Private Assets in Defined Contribution Plans: Benefits, Risks, and Implications. Vanguard, 2025.

² An estimate using MSCI for private equity and total global market capitalization for public equity suggests that private equity accounted for approximately 6% of total global equity as of December 31, 2024.

³ S&P Capital IQ, as of April 2024.

⁴ How America Saves 2025. Vanguard.

⁵ See Glossary section for definition.

Notes:

For more information about any fund, visit workplace.vanguard.com or call 866-499-8473 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Investments in Target Retirement Funds and Trusts are subject to the risks of their underlying funds. The year in the fund or trust name refers to the approximate year (the target date) when an investor in the fund or trust would retire and leave the workforce. The fund/trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Trust/Fund and Income and Growth Trust have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Fund or Trust is not guaranteed at any time, including on or after the target date.

Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. Investment objectives, risks, charges, expenses, and other important information should be considered carefully before investing. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, Inc.

Vanguard is responsible only for selecting the underlying funds and periodically rebalancing the holdings of target-date investments. The asset allocations Vanguard has selected for the Target Retirement Funds are based on our investment experience and are geared to the average investor. Regularly check the asset mix of the option you choose to ensure it is appropriate for your current situation.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.

With private equity (PE) investments, there are five primary risk considerations: market, asset liquidity, funding liquidity, valuation, and selection. Certain risks are believed to be compensated risks in the form of higher long-term expected returns, with the possible exceptions being valuation risk and selection risk. For selection risk, excess returns would be the potential compensation; however, limited partners (LPs) must perform robust diligence to identify and gain access to managers with the skill to outperform. PE investments are speculative in nature and may lose value.

Market risk: Private equity, as a form of equity capital, shares similar economic exposures as public equities. As such, investments in each can be expected to earn the equity risk premium, or compensation for assuming the nondiversifiable portion of equity risk. However, unlike public equity, private equity's sensitivity to public markets is likely greatest during the late stages of the fund's life because the level of equity markets around the time of portfolio company exits can negatively affect PE realizations. Though PE managers have the flexibility to potentially time portfolio company exits to complete transactions in more favorable market environments, there's still the risk of capital loss from adverse financial conditions.

Asset liquidity risk: Various attributes can influence a security's liquidity; specifically, the ability to buy and sell a security in a timely manner and at a fair price. Transaction costs, complexity, and the number of willing buyers and sellers are only a few examples of the factors that can affect liquidity. In the case of private equity, while secondary markets for PE fund interests exist and have matured, liquidity remains extremely limited and highly correlated with business conditions. LPs hoping to dispose of their fund interests early—especially during periods of market stress—are likely to do so at a discount.

Funding liquidity risk: The uncertainty of PE fund cash flows and the contractual obligation LPs have to meet their respective capital commitments—regardless of the market environment—make funding risk (also known as commitment risk) a key risk LPs must manage appropriately. LPs must be diligent about maintaining ample liquidity in other areas of the portfolio, or external sources, to meet capital calls upon request from general partners (GPs).

Valuation risk: Relative to public equity, where company share prices are published throughout the day and are determined by market transactions, private equity net asset values (NAVs) are reported quarterly, or less frequently, and reflect GP and/or third-party valuation provider estimates of portfolio fair value. Though the private equity industry has improved its practices for estimating the current value of portfolio holdings, reported NAVs likely differ from what would be the current “market price,” if holdings were transacted.

Selection risk: Whether making direct investments in private companies, PE funds, or outsourcing PE fund selection and portfolio construction to a third party, investors assume selection risk. This is because private equity does not have an investable index, or rather a passive implementation option for investors to select as a means to gain broad private equity exposure. While there are measures an investor can take to limit risk, such as broad diversification and robust manager diligence, this idiosyncratic risk cannot be removed entirely or separated from other systematic drivers of return. Thus, in the absence of a passive alternative and significant performance dispersion, consistent access to top managers is essential for PE program success.