The Infrastructure Question Behind Investing in Private Assets in Retirement Plans

Jared Porter

If you pay attention to the retirement industry, you have probably noticed a topic that keeps coming up: Should private market investments be available inside 401(k) plans?

What Most People Are Missing

Most of the private asset debate focuses on investment strategy. Should we or shouldn’t we? What is the right allocation? Is it good for participants?

Those are fair questions, but they skip something fundamental: Can the systems that run retirement plans actually handle private assets? Retirement plan infrastructure was built for a simpler world of mutual funds, daily pricing, standardized transactions and straightforward fees. Private assets challenge all of those assumptions.

What the Recordkeeping System Actually Has to Do

A standard defined contribution recordkeeping system runs on a daily cycle. Mutual funds strike a net asset value at 4 p.m. ET, and the recordkeeper allocates contributions and trades, and posts updated balances overnight. What we see is private assets break that rhythm. Many private vehicles strike a NAV monthly or quarterly. The recordkeeper either holds a stale price between strikes or estimates one, and each option has accounting and disclosure consequences. To allow daily participant transactions inside an illiquid asset class, the structure usually holds a cash sleeve of 5% to 20%. The system has to track that sleeve, project drawdowns and trigger redemption gates when it runs thin.

Edge cases are where the strain shows up. A hardship withdrawal, a qualified domestic relations order, a required minimum distribution or a participant termination can each force a partial liquidation against an illiquid holding. The platform has to decide whether to draw from the cash sleeve first, prorate across all holdings or queue the request for the next valuation date. It has to document that decision so it holds up under audit. None of that logic exists by default in legacy systems. Building it is a real engineering effort, not a configuration change.

How the Fee Math Actually Works

I’m not a mathematician, but it’s important to know how this all works. A typical mutual fund has a single expense ratio applied as a static daily accrual. Private asset structures usually have at least three layers. There is the vehicle-level fee, which often includes both a management fee and a performance fee or carry. There is a fund-of-funds layer, via which the wrapper invests in underlying private funds with their own fees. Beneath that, there are operating costs at the portfolio company level. Some structures add a fourth layer, when a model portfolio sits on top.

The hard part is the performance fee. It is supposed to accrue daily against a high-water mark and crystallize at period end. Moreover, most legacy DC recordkeeping systems were never built to accrue a performance fee daily, because the rest of a 401(k) menu does not require it. Without daily accrual, participant balances are inaccurate on every day except crystallization day. The system also has to reconcile accrued fees against fees actually charged. That reconciliation feeds Form 5500 reporting; disclosures to comply with Section 408(b)(2) of the Employee Retirement Income Security Act; and the participant statement, all designed around a single static expense ratio per fund.

What the Participant Actually Sees

Public market mutual funds report time-weighted returns. Private market investments are typically quoted on an internal rate of return, which is money-weighted and depends on the timing of cash flows. There is no industry-wide standard for translating an IRR into something that fits cleanly next to a mutual fund return on the same page. Recordkeepers have to pick a methodology, document the choice and explain it to participants in language that does not require an industry designation to understand.

Reporting lag is the second issue. The underlying NAVs in most private vehicles are not released until weeks or months after quarter-end. A participant who logs in on the 15th of the month is used to seeing same-day balances. With private assets in the lineup, the participant may see a private market balance reflecting a NAV from 60 or 90 days ago, sitting alongside mutual fund balances current to yesterday.

Net of fees is the third issue, and it matters most for participant trust. A statement should show the gross return, the fee layers in plain language and the net return at the account level. Most statements today show a fund-level expense ratio and a net return on that basis. They do not walk a participant through the chain of fees. If private assets are going to live inside a participant-directed plan, the participant has to see, in numbers they understand, exactly how much of the gross return they actually keep.

5 Questions Fiduciaries Should Be Asking

If you are evaluating private assets for a plan, focus on these:

1. Was this structure built for a retirement plan or was it adapted from an institutional product? How a vehicle was originally designed shapes how it behaves inside a 401(k).
2. What happens at the edges? Terminations, hardship withdrawals and required minimum distributions are where liquidity frameworks get tested. If those scenarios have not been modeled, the framework is not ready.
3. Can you trace every fee from top to bottom? Map the full chain. If you cannot explain in clear terms how those fees affect the returns participants actually receive, the due diligence is not done.
4. How wide is the gap between good and bad managers in this space? In private markets, the dispersion can be enormous. You need clear selection criteria and a plan for replacing an underperformer without disrupting participants.
5. Will participants understand what they own? If private assets end up in their fund lineup, they should be able to explain, in plain terms, what the investment does and why it is there.

Where This Goes Next

Automatic enrollment authorized by the SECURE 2.0 Act of 2022 is bringing in millions of new savers, most defaulting into professionally managed portfolios. They are trusting the system to decide on their behalf. At the same time, private credit, real estate and infrastructure are being packaged in new ways that may work inside retirement plans.

The bottleneck is not the asset class. The recordkeeping system, the fee calculation and the participant statement are where this gets decided. The product is second, but the plumbing is first.

Jared Porter is the chief market strategy officer and co-founder of 401GO, where he leads operations and growth strategy, helping scale the company’s proprietary, fully integrated 401(k) platform that simplifies plan setup, administration and adviser integration. 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.