Saving for retirement means making a few key decisions: when to start, how much to save, and where to invest. Recently, the investing decision has drawn more attention after an executive order from President Donald Trump.
The order directs regulators to create a framework that will allow 401(k) plans to offer access to alternative assets, such as private market investments, through target-date funds and managed accounts. The hope is that including private markets will increase returns and improve retirement outcomes for 401(k) participants.
Returns are only one component, though. In this article, we look at the interplay between savings and investment returns by comparing the decisions and outcomes of two retirement savers.
We conclude, even with optimistic return assumptions for private markets, that the simple investing principles of saving and saving early will have a bigger impact on outcomes than returns.
A Tale of Two Retirement Savers
It was the best of times to start saving for retirement; it was the worst of times to start saving for retirement. It was an age of meal prepping with chicken and rice, but also splurging on $18 artisanal salads. For Laura and JR, two 25-year-olds newly employed at the same company, in the same role, it was the first chapter of their retirement journey.
Step 1: Deciding to Save
Laura dreamed of sailing the world in retirement, and she wasted no time putting her plan into motion. On her very first day at work, she committed 10% of her $75,000 salary to her 401(k). That was enough to earn her company’s 3% annual match (it matches 50% up to 6%), earning her 13% in total savings. Even after contributing to her future, she still had room in her budget for weekends filled with free concerts at the park, the occasional new restaurant splurge, and an annual vacation trip.
JR, on the other hand, decided to enjoy his money today. For him, retirement was a far-off future, one that might never happen. Instead, like many other 25-year-olds, JR worried about the here and the now. Rather than putting money into a 401(k) he wouldn’t touch for decades, he enjoyed his $75,000 salary and new postgraduate freedom. That meant extended vacations on the company’s generous policy, nights at Chicago’s stadiums, and frequent dinners at the city’s Michelin-star restaurants.
Five years later, JR turned 30 and felt prompted to get serious about his future. He started by deciding it was time to build his nest egg. JR did not want to forgo too much of his paycheck, and he wasn’t sure how much to invest, so he opted for the minimum contribution rate to qualify for the company match, contributing 6% with a 3% match.
Step 2: How to Invest
Laura and JR’s employer offered employees a large selection of investment vehicles, two of which were target-date funds. The funds were similar, but one invested only in public stocks and bonds, while the other kept a 15% allocation to private equity and private credit across the glide path.
Laura preferred the public-only target-date fund given its simplicity and transparency. During her annual check-ins on her savings, she could glance at the financial news and understand why her portfolio was moving the way it was. Knowing there were no hidden currents lurking gave her more comfort that she was on track to reach her goals.
JR was also drawn to the target-date options and their ease of use. However, he went with the private market option since it promised higher returns. After all, JR felt like he had to make up for his late start. If private equity and credit delivered on all the hype he saw on social media, he figured he could quickly recover the five years of missed contributions. After all, he was only 30, with another 35 years until retirement.
From Earnings Years to Retirement
Laura and JR’s careers were mirror images. They both rose steadily through the ranks of the company to senior management positions. Their career progression, and their salaries, stayed in tandem. By the time they were both turning 65 and looking forward to retirement, each was earning $178,620 a year. Neither employee had changed their 401(k) contribution rate since they set it decades earlier, and there had been no changes to their company’s matching formula. As Laura and JR prepared to enter retirement, they each took time to review their 401(k)s.
JR was pleased to see that choosing the target-date fund with private markets had paid off. Over his 35 years of investing, the fund delivered an annualized return of 8.9%, compared with 8.4% for the public-only option. The difference left him with a balance of about $2 million. Combined with Social Security, this gave him confidence that he could enjoy retirement without the risk of outliving his savings.
The public-only TDF underperformed compared with the private markets TDF, but when Laura checked her account balance, she didn’t mind. Over her 40 years of investing, her 401(k) account balance grew to more than $3 million. By starting earlier and contributing more she was able to harness the power of compounding returns to a much greater extent than JR had.
JR’s private markets sleeve gave him a small edge (though, of course, that boost is not guaranteed in the real world), but Laura’s decision to start saving earlier and save more made the real difference. Compounding did the rest, turning her steady contributions into a balance far larger than JR’s.
The moral of the story is clear: It is far better to focus on how much to save and when to start saving, instead of the whims of the public and private markets.
Behind the Curtain
In illustrating the importance of saving early and saving more, we had to make several assumptions. For example, we assume Laura and JR earn the same salary and stay at the same employer for their entire careers, with no breaks in employment. While some of our choices may be overly optimistic, they do not undermine the story.
Our investment assumptions were deterministic. We assumed stocks, bonds, and private markets all delivered the long-term return expectations set by our colleagues at Morningstar Investment Management, without accounting for the wide range of possible outcomes around those baselines. Nor is it a given that a target-date fund with a 15% allocation to private markets would outperform a similar strategy focused solely on public stocks and bonds, especially after fees.
In fact, there is ongoing debate within academia on whether private equity funds outperform their public counterparts. Further, a recent Morningstar analysis concluded that private equity funds are best thought of as another form of active management, where a handful of funds may significantly outperform their peers, but median returns are similar (or worse) to public market funds.
Moreover, private markets present additional challenges for forecasting due to the heterogeneity in the underlying investments. An in-depth analysis of their impact would require examination of the underlying private assets and development of models that reflect the heterogeneity.
All in all, the results should be viewed as more of a best-case scenario for target-date funds with private market exposure.
Some of our examples were grounded. JR is not the only one getting a late start on saving. Only 54% of 401(k) plan participants aged 25 or younger contribute to their 401(k) plan according to Vanguard’s How America Saves 2025 report. That jumps to 82% for 25- to 34-year-olds. As human beings, we tend toward hyperbolic discounting, which is the process of valuing immediate rewards in lieu of long-term rewards. In investing, this usually results in pushing off savings until a later date, choosing to reap the rewards of income now versus stowing money away for a future date. Moreover, JR is not alone in choosing his contribution rate based on the company match. Existing research finds that many savers tend to anchor on the company match rate when deciding how much to contribute.
The returns we used in this analysis are based on Morningstar Investment Management’s capital market assumptions. The process used to generate the CMAs is available here.