Private funds may improve investors’ retirement outcomes—albeit modestly, according to preliminary results from a Morningstar Investment Management study. While increases in retirement outcomes are undramatic, they appear consistent across investor types.
Our stylized study took a large number of real-life investors from Morningstar’s Retirement Manager database and ran them through a simulated retirement experience, including factors such as company matches, contribution limits, and most importantly, Social Security payments. In all cases, we found that the presence of at least one private markets investment made at least a small contribution to the investor’s retirement income. Notably, we had no outcomes in which the inclusion of semiliquid vehicles resulted in worse outcomes.
In contrast to many previous studies, we modeled private market funds as a semiliquid or “evergreen” collective investment trust comprising a true private component and a “liquidity sleeve” of cash designed to meet the ongoing net cash flow requirements of defined-contribution plans.
A key reason for the enhanced outcomes appears to be owing, in large part, to the appraisal pricing method of private market vehicles. This results in lower correlations and less volatility than public market equivalents. This isn’t to say that they engender less risk—this isn’t necessarily the case—but if liquidity is managed effectively, under a broad range of implied market scenarios, they add value through the pricing process.
It is early days for private market vehicles in defined-contribution plans, and the available data is extremely limited. However, our results suggest that plan sponsors and their consultants should consider them as a diversifier for a managed account or target-date offering.
Read more: Private Assets Are Redefining How Portfolios Are BuiltPrivate Markets and the Glide Path Model
We begin by calculating a set of base-case outcomes for our participant set. Before doing so, we prune it of investors contributing less than 1%, under the age of 21, and over the age of 60, giving us a test group of 265,375 people. Our input variables are age, gender, account balance, and, of course, contribution rate. We assume everyone retires at age 67 and is eligible for the full Social Security benefit. Company match rates are based on a weighted average of plans from Vanguard’s “How America Saves” survey and amount to 86% of the first 5% of contributions. We also apply the 2025 IRS contribution limits.
We assumed a salary growth curve using a common method pioneered by economist Jacob Mincer, which traces the evolution of real salary growth (inflation-adjusted terms) and set a “target” retirement goal of 70% of final salary. From this, we can calculate a “success ratio” defined as the ratio of Social Security and retirement-account-generated lifetime income to the retirement goal at the 25th percentile of the simulation distribution. In most cases, Social Security was the greatest contributor to retirement success. That is unsurprising but important to keep in mind, as a narrow focus on account performance can be misleading.
After running everyone through the model, we grouped investors into cohorts based on the success ratio. Participants with ratios of 100% or above—implying that they’re on track to meet their retirement goals—were deemed prepared. Those with ratios between 99% and 75% were classified as vulnerable, and those at 75% and below were deemed critical. We extracted the median attributes from each cohort to make the three representatives shown in Exhibit 1. We also show the median sustainable spending at the 50th, 25th, and fifth percentiles. Entries with an “ss” subscript include Social Security.
Private Markets and the Investment Model
Our base-case plan structure includes four market-normal (index) funds comprising US stocks, non-US stocks, investment-grade bonds, and cash. We use a common glide path, gliding from 93% to 36% equity. For private market exposure, we assume a semiliquid CIT with a 10% cash target and a diversified evergreen structure that allows for some trading of private market exposure on the rapidly expanding “secondaries” market. We also assume that cash flows across the funds—and within the CIT—are optimally managed and create a buffer that reduces the trading in and out of the semiliquid fund.
To simulate returns, we used a bootstrap resample technique commonly used when the statistical properties of the data are not well-captured by standard methods. This is particularly helpful when considering private market vehicles since their returns are statistically different from those of public market vehicles.
We then calculated the success ratios for each of our representative cohorts, programmatically allocating to private equity and private credit. We targeted a maximum allocation to the semiliquid CITs of 15% of assets, although there were cases in which this was breached. We show the results below.
Exhibit 2 suggests that adding semiliquids can improve participant outcomes, if modestly. Notably, the results were most meaningful for investors at higher income levels, or who are particularly well-funded (high account balance and higher contribution rate), where Social Security plays a smaller role in replacement income.
Conclusion: Private Market Exposure Should Be Considered Carefully in Plan Design
Our results provide clear, if undramatic, implications for anyone interested in defined-contribution plan design.
As private markets continue to evolve toward the defined-contribution space, plan sponsors and advisors will need to carefully consider the role private market vehicles may play in their plans. This includes weighing the potential investment benefit against any additional due diligence and operational requirements posed by adding private market exposure.