By Aaron Filbeck, CAIA, CFA, CFP®, CIPM, FDP, Managing Director, Content & Community Strategy, CAIA Association
The discourse surrounding the integration of private markets into defined contribution (DC) plans has intensified in recent years, prompting extensive discussion and analysis. While the potential benefits of such integration are compelling, the foundational assumptions underpinning the conversation often lead to a misplaced focus on product development rather than systemic architecture. A deeper examination, particularly through comparative international models, reveals a fundamental challenge – a "participant trilemma" – that dictates inherent trade-offs in balancing investor control, institutional-style investing, and individualized outcomes.
This exploration is not merely academic. The landscape of retirement savings is undergoing a significant evolution. As of late 2024, numerous studies and white papers, including one co-authored by this author, have highlighted the growing imperative for DC plans to evolve beyond traditional public market allocations. However, the persistent difficulty in successfully incorporating complex, illiquid asset classes like private equity, private debt, and infrastructure into broadly accessible DC frameworks suggests a more profound, systemic issue. The current approach, which attempts to retrofit new investment products into an existing retirement system, overlooks the critical question of whether the system itself is adequately structured to accommodate them.
A recent podcast episode, delving into international DC systems, provided a crucial lens for this investigation. By analyzing how other nations have managed to integrate less liquid fund options, the research sought to identify the underlying structural reasons for their relative success compared to the U.S. experience. The findings were illuminating: a simple plan-by-plan comparison proved less insightful than understanding the fundamental structural problems these systems were designed to solve.
This comparative analysis brought to mind a concept prevalent in the digital asset world: the "investor trilemma." In blockchain technology, protocols often face a trade-off between decentralization, security, and scalability; it is exceedingly difficult to maximize all three simultaneously. A similar, yet distinct, dynamic appears to be at play within defined contribution plans, which I term the "participant trilemma." This trilemma posits that it is exceptionally challenging, if not impossible, for a DC system to simultaneously maximize three key conditions:
- Institutional-Style Investing: The ability to invest like large, sophisticated institutional investors, leveraging scale, expertise, and access to a wide range of opportunities, including private markets.
- Personal Control: The degree to which individual participants can make specific investment decisions, choose from a broad array of options, and actively manage their portfolios.
- Individualized Outcomes: The extent to which each participant’s retirement savings reflect their unique investment choices and market performance, with clear accounting and direct responsibility for the results.
Different countries and their respective DC systems have resolved this inherent tension in various ways, making deliberate trade-offs. None of the models discussed herein perfectly satisfy all three conditions while robustly incorporating private markets. This is a critical point, as private markets, by their very nature, were not originally designed for the broad, undifferentiated "retail" investor that defines the scaled DC market.
The following three models, drawn from international comparisons, illustrate the practical manifestations of these trade-offs, offering a framework for understanding the challenges and potential pathways forward for private market integration in DC plans.
Model 1: Institutional-Style Investing with Individual Outcomes, at the Expense of Personal Control
This model, exemplified by Australia’s AustralianSuper and the United Kingdom’s National Employment Savings Trust (NEST), prioritizes the sophisticated investment strategies typically employed by large institutions, ensuring participants benefit from these approaches and experience market-linked outcomes. However, this comes at the cost of significant personal control over investment selection. Participants own the ultimate outcome of their investments, but the allocation and management decisions are largely centralized.
AustralianSuper: The Owner-Operator Superannuation Fund
AustralianSuper operates as a "profit-for-members" superannuation fund, a structure deeply embedded in the Australian retirement system. Its philosophy is rooted in long-term investing, achieving economies of scale, and maintaining rigorous cost discipline. The fund positions itself as a patient allocator capable of pursuing opportunities that demand specialized expertise and substantial capital.
For the vast majority of AustralianSuper members, the experience is default-led and institutionally managed. While individuals have account balances and experience market-driven outcomes, they are automatically enrolled in diversified, multi-asset portfolios. These portfolios evolve over time, with asset allocation decisions made centrally by experienced investment teams. This approach allows AustralianSuper to operate with the agility and scope of a major institutional investor.
Private markets form a significant pillar of AustralianSuper’s investment strategy. With approximately A$385 billion in assets under management, the fund allocates roughly A$85 billion to private markets. These exposures are not typically offered as standalone options but are integrated within diversified investment pools and managed by specialized teams. AustralianSuper distinguishes itself through its extensive direct ownership and co-investment activities, partnering with other super funds and global asset managers. This owner-operator model, utilizing the full institutional toolkit, allows for deep engagement with private markets. Consequently, personal control over the specific underlying private market investments is considerably constrained.
NEST: The Government-Sponsored Workplace Pension Scheme
NEST, the National Employment Savings Trust, is the UK’s government-sponsored defined contribution workplace pension scheme, established to facilitate automatic enrollment and broaden access to retirement savings. It has grown to become one of the largest DC plans in the country, serving nearly 14 million members, approximately one-third of the UK workforce. As of recent reports, NEST manages around £58 billion in assets, with substantial ongoing inflows projected to roughly double its size by 2030.
NEST participants are automatically enrolled into target-date funds, with their investment allocation adjusting based on age. A notable divergence from typical U.S. target-date designs is NEST’s approach: early savers begin with a more conservative allocation, gradually increasing risk exposure mid-career before de-risking as retirement approaches. This strategy is intended to mitigate the risk of deterring new savers with early investment losses.
NEST has publicly articulated an ambitious goal to significantly increase its private market exposure by 2030. Structurally, the scheme centralizes governance and asset allocation decisions while outsourcing the execution of these mandates to external managers. NEST sets the overarching strategy and investment constraints, then collaborates with selected managers to implement these objectives. A prime example of this strategy is NEST’s partnership with IFM Investors. NEST acquired a minority stake in IFM’s holding company, a move designed to scale its exposure across private equity, private debt, and infrastructure. IFM manages the underlying investments, while NEST defines the desired exposures, effectively partnering through investment managers rather than directly alongside them. This model ensures institutional-level investment capabilities are brought to bear, but personal choice regarding specific private market assets remains limited.
Model 2: Institutional-Style Investing with Limited Personal Control, at the Expense of Individual Outcomes
The Dutch pension system, largely managed by APG, represents a distinct approach to resolving the participant trilemma. It enables institutional-style investing and offers a degree of control through collective adjustments, but the concept of purely individualized outcomes is moderated.
APG and the Dutch Pension System: Balancing Collective and Individual
APG is a major pension administrator in the Netherlands, managing over €600 billion in pension assets for approximately five million participants across the largest Dutch pension funds. While governance and policy are set by pension boards, the execution of investment strategies, including sourcing and portfolio management, is centralized within APG.
Formally, the Dutch system operates as a defined contribution plan: contributions are defined, but outcomes are not guaranteed, and employers do not bear traditional defined benefit-style liabilities. However, in practice, the participant experience often blurs the lines between DC and DB. Participants can view their contributions and account balances, but the construction of their portfolios and their overall risk exposure are determined collectively. These allocations are automatically adjusted based on age and other participant characteristics. While outcomes are not promised, the system aims to smooth returns, preventing participants from being forced to lock in unfavorable results due to market timing at retirement.
This structure empowers APG to invest as a large institutional investor, with the authority to construct portfolios across both public and private markets, subject to stringent governance oversight. The largest fund managed by APG, ABP, accounts for roughly €500 billion of the total, with approximately 25% allocated to private markets. Recent reforms within the Dutch system have explicitly supported an increased allocation to private markets, and APG is strategically positioned to execute this mandate on a centralized basis. This model allows for deep integration of private markets but at the cost of granular individual control over specific asset selections.
Model 3: Personal Control and Individualized Outcomes, at the Expense of Institutional Depth
Returning to Australia, UniSuper offers a contrasting approach within the same superannuation framework. While it allows for significant participant flexibility, leading to more personalized control and cleaner individual accounting, this flexibility inherently constrains the fund’s capacity for deep, bespoke private market investing.
UniSuper: Participant Flexibility and its Constraints
UniSuper’s key differentiator lies in the flexibility it offers its members. Participants can hold multiple investment options simultaneously, rebalance their portfolios more frequently, and direct both existing balances and future contributions in distinct ways. This enhanced participant choice and control is a hallmark of its model.
Private market exposure within UniSuper is primarily achieved through pooled investment options and the utilization of external asset managers. This contrasts with AustralianSuper’s extensive direct ownership strategy. While UniSuper preserves greater personal control and ensures clearer individual accounting for its members, this flexibility limits the extent to which the fund can engage in direct, highly customized private market investments. In U.S. retirement plan terms, UniSuper’s structure bears a closer resemblance to a traditional 401(k) plan, offering more participant choice and fully individualized outcomes, but with tighter constraints on the pursuit of complex, institutional-grade private market strategies.
The Broader Implications: A Structural Imperative for U.S. Defined Contribution Plans
Across all four of these illustrated systems – AustralianSuper, NEST, APG, and UniSuper – a consistent pattern emerges: no single model successfully delivers comprehensive personal control, institutional-style investing, and fully individualized outcomes simultaneously. The differences observed are not merely a matter of innovation or participant sophistication but are the result of deliberate structural choices regarding the allocation of complexity, control, and risk.
This context is often conspicuously absent from the ongoing U.S. debate surrounding the integration of private markets into defined contribution plans. The conversation tends to revolve around the "how" – how to develop products, how to manage liquidity, and how to educate participants. However, a more fundamental understanding of the "why" – the underlying structural trade-offs inherent in any DC system seeking to incorporate illiquid assets – is crucial.
The implications for U.S. plan sponsors and policymakers are significant. Simply introducing more private market products into existing DC menus without addressing these structural tensions is unlikely to yield the desired outcomes. It risks creating a misaligned system where the complexity of private markets clashes with the fiduciary responsibilities and participant-centric design of DC plans.
Supporting Data and Context:
The global pension landscape is vast and diverse. For instance, the Australian superannuation system, where both AustralianSuper and UniSuper operate, has a long history of institutional investment and scale, with total assets exceeding A$3.5 trillion. The UK’s NEST was specifically designed to address a retirement savings gap exacerbated by the decline of defined benefit plans, making it a critical component of national retirement security. The Dutch system, with its strong tradition of collective defined contribution arrangements, offers a unique model of risk-sharing and long-term investment horizons.
Timeline of Evolution:
The push for private market integration in DC plans has been building for over a decade, accelerating as institutional investors have increasingly recognized the potential for diversification and enhanced returns. The development of pooled funds, liquid alternatives, and the emergence of dedicated DC-focused private market solutions represent key milestones in this evolutionary journey. However, the structural challenges have remained a persistent hurdle.
Broader Impact and Implications:
For U.S. defined contribution plans, understanding the participant trilemma suggests a need for a more nuanced approach. Potential pathways forward might involve:
- Rethinking Default Structures: Could default investment options be designed to incorporate private markets more systematically, leveraging institutional expertise while maintaining participant oversight?
- Phased Integration: A gradual introduction of private market exposures, perhaps starting with less illiquid or more diversified private credit strategies, could be a pragmatic step.
- Enhanced Fiduciary Frameworks: Clearer guidance and support for plan fiduciaries navigating the complexities of private market investments are essential.
- Participant Education: While not a solution in itself, improved education on the long-term nature and potential illiquidity of private markets is vital for managing participant expectations.
Ultimately, the successful integration of private markets into defined contribution plans hinges on a frank acknowledgment of the inherent trade-offs. By framing the challenge through the lens of the participant trilemma, stakeholders can move beyond product-centric discussions to address the fundamental structural decisions required to build a more robust and effective retirement savings system for the future. The lessons from international models provide a valuable roadmap, underscoring that the path forward requires deliberate architectural choices, not just innovative product design.
