With closed-end commingled private capital assets under management having grown nearly 20-fold since the turn of the millennium, the next phase of expansion appears poised to come from broadening access beyond the traditional institutional investor base. To this end, fund sponsors are increasingly complementing traditional structures with open-end vehicles, separately managed accounts and sources of permanent capital—strategies that have helped private markets reach $22 trillion in aggregate assets under management. Building on this momentum, retail distribution represents yet a further frontier of growth, with the potential to unlock new pools of long-term capital and to diversify investor participation in private markets in a way that builds on the democratization of public-market investing that took place decades earlier.

One area receiving particular attention in the drive to provide retail access is the defined contribution (DC) segment of the retirement market. This segment has the potential to provide individual retirement accounts with exposure to private market investment strategies, especially in light of recent developments. Executive Order 14330, issued on August 7, 2025, declares it “is the policy of the United States that every American preparing for retirement should have access to funds that include investments in alternative assets when the relevant plan fiduciary determines that such access provides an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.” The executive order further states that the Trump administration will relieve regulatory burdens and litigation risks in connection with such investments.

Opening up even a fraction of this $13 trillion pool of capital to private market investment could be pivotal to the industry’s ability to provide individual retirement account holders access to investment opportunities long enjoyed by institutional investors. While the interplay of federal securities laws and ERISA regimes generally does not currently permit sponsors to add 401(k) sleeves to their private closed-end fund structures, sponsors may be able to structure future funds to accommodate DC capital alongside traditional institutional investors.

Asset Allocation Funds: A Promising Pathway

One promising pathway by which private capital exposure can be introduced to DC platforms is the asset allocation fund (AAF)—a type of fund, sponsored by a third-party manager, that invests in a diversified mix of asset classes to meet investment goals of target investors. AAFs are a common offering on DC platforms, and while AAFs currently can include private capital exposure, ERISA plan fiduciaries have generally shied away from including AAFs with private capital exposure on such platforms. Part of this reluctance is due to litigation risk. In the past, the Department of Labor (DOL) has taken steps to address this risk. In 2020, DOL issued regulatory guidance noting that plan fiduciaries can, upon engaging in an “objective, thorough, and analytical process,” include private equity as an AAF component. However, in 2021, DOL supplemented its 2020 guidance, stating that its prior guidance should not be interpreted to suggest that private equity is generally appropriate for typical 401(k) plans. Most recently, five days after the executive order was issued, DOL withdrew its 2021 guidance. While the industry welcomes recent DOL activity, we believe uncertainty will remain until further steps are taken to alleviate litigation risk.

The Challenge of Liquidity

Even if litigation risk is mitigated, AAFs seeking to include private capital exposure will need to confront another challenge. Closed-end private funds generally require an upfront commitment and a lockup of investor capital for seven to 12 years (or longer), providing very limited ability to withdraw capital before the term expires. DC AAFs, on the other hand, are generally structured to provide daily liquidity, both to enable employees to contribute portions of their periodic earnings and to facilitate withdrawals due to retirement and other life-changing events. To meet these liquidity requirements, AAF managers that include closed-end private fund investments will be compelled to select relatively liquid assets to comprise the balance of the asset mix, and they will need the private fund products they do include to provide greater liquidity than is typically available in closed-end buyout funds.

Accordingly, we believe AAFs offering closed-end private capital exposure will require more active management than AAFs comprising only publicly traded securities. Managers will need to pair private fund investments with sufficient liquid assets to support AAFs’ necessary liquidity. DOL has suggested that fiduciaries consider following the SEC’s liquidity rule, requiring registered open-end investment companies to cap illiquid investments at 15% of net assets. Absent definitive regulatory guidance, AAF managers, together with plan fiduciaries, will need to determine the appropriate asset mix, which will in part depend on the underlying liquidity of the funds being included. For example, including exposure to buyout funds, which often make proceeds available later in their terms upon investment disposition, will generally require a greater portion of liquid investments in the asset mix than would be needed alongside investments in credit funds, which provide current proceeds from underlying credit investments throughout their terms.

Looking Beyond Closed-End Funds

Sponsors can provide a solution to the liquidity challenge by expanding beyond traditional closed-end private funds to offer products that permit recurring capital commitments and pretermination liquidity. Indeed, to meet AAF liquidity requirements, private funds into which AAFs invest will likely need to be structured as open-end or evergreen. Open-end funds are typically operated at net asset value and facilitate regular closings on subscriber capital and regular redemption rights. Multi-tranche evergreen funds more closely resemble traditional closed-end funds, with subscriptions and liquidity occurring between tranches rather than on a calendar basis. Each tranche is akin to a closed-end fund, and the successive staging of tranches permits sponsors to repeatedly raise funds under evergreen umbrella structures. Open-end fund mechanics are generally more conducive for the recurring liquidity that AAF managers need, but multi-tranche vehicles—particularly in the credit space—could also work given the liquidity available throughout tranche terms and the ability for managers to increase commitments to subsequent tranches in connection with DC inflows.

Considerations in Raising Combined DC and Institutional Investor Funds

Sponsors are highly attuned to the size of the funds they raise relative to their predecessor funds and funds raised by their competitors. While greater structuring flexibility will be available for sponsors to raise fund products dedicated exclusively to 401(k) investors, bringing DC subscriptions into private funds that comply with federal securities laws and ERISA regimes, alongside traditional institutional investors, will be an enticing option.

Embracing an Indefinite Term

For private fund managers used to offering closed-end products, multi-tranche products will be more similar to their existing offerings than open-end structures, which may be appealing from a fund-documentation perspective for both sponsors and their existing investors. Fund administration will be generally similar between closed-end and multi-tranche structures, as compared to NAV-based unit pricing utilized by open-end funds, which require frequent valuation and provide for different economics. In addition, sponsors looking to raise DC capital will be keen to retain investors from their predecessor closed-end funds, who will be familiar with closed-end fund documents and who may be more receptive to pivoting to multi-tranche structures than to the more significant changes required with open-end funds.

Working with AAF Managers and Plan Fiduciaries

Although the Executive Order provides support for the regulatory changes necessary to facilitate retail participation in private funds, the contours of those changes are still unknown. Even so, ERISA fiduciaries will likely continue to require “objective, thorough, and analytical process[es]” to offer AAFs that include private capital investments. Fiduciaries not as familiar with private capital will need to understand the complexities of these products and may outsource certain functions to third parties. Sponsors will need to hire internal experts that understand the DC retirement space to work with plan fiduciaries to educate them regarding the nuances of including private investments on DC platforms.

It will also be prudent for sponsors to develop relationships with traditional distribution partners who understand this market and who can facilitate allocations by AAF managers in their funds, like the partnerships recently announced between State Street and Apollo, between Voya and Blue Owl and between Empower and a number of sponsors. Given the scale of the largest AAFs and the DC plans to which they are offered, inclusion in even just one such fund has the potential to provide sponsors with exposure to significant additional capital.

Preparing for the Expansion into DC

Private fund sponsors have long sought to expand the universe of their potential investors to include retail capital. The executive order has brought that goal one step closer to reality. Under more permissive regulatory treatment, AAF managers will be less constrained from including private fund exposure in their funds. By working with AAF managers and plan fiduciaries, private fund sponsors may be able to bring in DC subscriptions alongside the institutional investors that have traditionally comprised their funds. Threading this needle has the potential both to unlock substantial new pools of capital and to provide retirement investors private markets access long enjoyed by institutional investors.

Private Equity Report Fall 2025, Vol 25, No 3