Semiliquid private funds show modest gains for retirement outcomes, Morningstar finds
Models reveal varying outcomes for 401(k) savers, with the biggest success ratios for those with higher balances and lower Social Security replacement rates.
A new Morningstar analysis suggests that adding semiliquid private market funds to defined-contribution retirement plans may offer incremental improvements to retirement outcomes, particularly for participants with higher balances and lower expected Social Security replacement rates.
The findings come as plan sponsors and advisors weigh the operational complexity and due diligence requirements of integrating private assets into workplace retirement portfolios.
The study, which modeled the experience of more than two hundred sixty-five thousand 401(k) participants, sought to reflect real-world plan features by incorporating Social Security, contribution limits, and company matches.
Unlike previous research that relied on traditional, illiquid private market vehicles, Morningstar says its approach focused on semiliquid collective investment trusts designed to meet the liquidity needs of defined-contribution plans.
“Preliminary results suggest that semiliquid private market allocations may improve retirement outcomes across participant cohorts – albeit modestly,” the report states. “Importantly, no scenario produced worse outcomes than the base case (without private markets), and higher-balance participants, especially those with lower expected Social Security replacement rates, saw the greatest benefit.”
Morningstar’s analysis grouped participants into three cohorts based on a “success ratio,” which the report defines as the ratio of sustainable retirement income – at the 25th percentile of simulated outcomes, including both 401(k) withdrawals and Social Security – to a retirement goal set at 70% of final salary. The prepared group had a success ratio of at least one, meaning their projected income met or exceeded the target. The vulnerable cohort’s ratio fell between seventy-five and one hundred percent, while the critical group fell below seventy-five percent.
For the prepared cohort, the report identified a median participant with a 401(k) balance of $148,193, a salary of $55,000, and a contribution rate of 9%. In comparison, the vulnerable and critical cohorts had median balances of $22,476 and $17,507, respectively, and lower contribution rates.
“Not surprisingly, we see that the cohort representative with the highest balance (USD 148,193) and the highest contribution rate, 9%, is the most prepared,” the report noted
For each group, Morningstar tested various allocations to private equity and private credit, capping the total exposure to semiliquids at fifteen percent of assets. The results showed consistent, if incremental, improvements in the success ratio for all cohorts. For example, the prepared cohort’s ratio increased from 1.18 in the base case to 1.23 with the maximum semiliquid allocation. The critical group saw its ratio rise from 0.577 to 0.582, a modest but positive shift.
The report emphasized that the majority of retirement income for most participants would still come from Social Security, and that the improvements from semiliquid fund allocations were not dramatic.
“It’s important to keep in mind that our cohorts are only saving a bit more than the company match. Small increases in savings could have significant impact on outcomes,” the authors wrote.
Morningstar’s modeling used historical data from PitchBook and Morningstar indexes, simulating thousands of possible return paths for each asset class. The study noted that semiliquid funds, by design, offer lower expected returns and volatility than traditional private funds, but still provide diversification benefits due to their appraisal-based pricing and lower correlation with public markets.
However, the report also highlighted several caveats. The analysis did not include all possible fund-level expenses, which could reduce net benefits. “At the relatively modest levels of incremental return, these could have a big impact and lead to very different results,” the report stated.
The authors also pointed out that public market exposures were modeled using broad, low-cost indexes with minimal dispersion, while private market returns are highly dispersed and dependent on manager selection.
The report concludes that while semiliquid private funds may have a role to play in defined-contribution plan design, the benefits are incremental and come with added complexity. Plan sponsors will need to consider the type and structure of the semiliquid product, as well as the impact of fees and expenses, when evaluating their potential role in participant portfolios.