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Investing October 15, 2026
Private Assets in DB Plans: ‘It’s Not the Medicine; it’s the Dosage’
Experts say optimal allocations can help corporate defined benefit plan sponsors match their assets and liabilities.
Reported by
Emily Boyle
While the role of private market investments in defined contribution plans has been a recent subject of debate, the role the assets play in corporate defined benefit plans seems long settled.
Defined benefit plans are “natural investors in illiquid strategies” because their liabilities are payable long into the future, says Jared Gross, head of institutional portfolio strategy at J.P. Morgan Asset Management. “Generally, the benefits have outweighed the risks … these asset classes have provided levels of additional return [and] diversification.”
When considering the risks of illiquidity in private market assets, Rick Ratkowski, managing director of investment strategies at NISA Investment Advisors, says his philosophy is the old adage “It’s not the medicine; it’s the dosage,” emphasizing that a fund’s allocation to illiquid assets can—and should be—manageable when compared to the magnitude of its benefit payments.
Investing Prudently
For a fund to determine a “prudent … baseline” level of liquidity, Gross says he usually recommends subtracting a fund’s assets from its liabilities, which should be calculated by adding together the liabilities the fund will incur during the next five years of benefit payments and the liabilities incurred by the fund’s terminated, vested employees.
Gross says managing the risks of illiquidity is a question of “How much private market investments can you safely own?” The answer lies in how much liquidity a plan could access during a market downturn or shock.
Pensions have long invested in private markets and were among the earliest investors in asset classes such as private equity, hedge funds and real estate. More recently, the funds have moved into classes such as private credit, infrastructure and transportation.
When asked which private asset classes have fit best in DB plans, Gross says all classes have done what they were “intended to do”—capture exposure to parts of the economy that public markets alone might not access.
However, Gross says all alternative asset classes, similarly to traditional assets, go through cycles. For example, private equity has recently experienced challenges realizing exits at desired valuations, resulting in a somewhat diminished capacity to return capital to investors.
“You can’t always diversify the risk to zero, but you can manage it across time,” Gross says.
Open, Closed or Frozen
According to Gross, open, unfrozen DB plans may be the heaviest investors in private markets because they have the highest implied return targets. He says open plans must cover not only the discount rate attached to their liabilities, but also the service cost of the new liabilities that are created each year.
Aaron Chastain, a partner in and the corporate solutions leader at NEPC LLC, says open plans’ return needs are driven by high hurdle rates: the minimum annual return the plan investments must earn to cover their liabilities.
Research from Russell Investments shows that return needs for DB plans can vary significantly—from a fully funded, closed and frozen DB plan requiring returns as low as 4% to 5% per year to an underfunded, ongoing plan with return needs in the double digits.
“That’s not to say you have to use private markets if you’re an open plan, but certainly [private markets] fit the plan characteristics probably more neatly than [they do a] closed or frozen [plan],” Gross says.
Because it does not accrue any further liabilities, a frozen plan will have a shorter time horizon over which its remaining liabilities will pay out, according to Gross. However, he says even a “shorter” horizon in the DB world can be long enough for private assets to “bear fruit and still potentially play a role” in generating returns.
However, a sponsor of a frozen plan might have a need for more liquid assets if the plan is on the path to eventual termination, Gross says. In the case of a pension risk transfer, a sponsor might transfer merely a portion of its liabilities to an insurance company. The most liquid assets would likely be used to fund the transaction, leaving less-liquid assets remaining in the fund.
A closed and frozen plan would be less likely to take on illiquidity to “marginally improve investment performance,” Gross says, especially if the fund closed years ago and only has a small population of active participants remaining. But a closed plan could still have a large population of active participants and a high return target over a long time horizon.
The size of a fund’s allocation to private markets—whether open, closed or frozen—“depends where [it] is in its journey,” Ratkowski says.
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