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- [00:00]
A
So Dan, before we even get into product development or plan design or the options that are available to participants, I think it's helpful to take a step back and just tell us where we're at in this whole journey. This seems to have really picked up steam in the news over the last 18 months or so. But if you were to take a look at where we're at today versus where we're going in the future, where are we in that life cycle?
- [00:24]
B
People say that we are in the early innings of this effort to to bring private markets to define contribution. It's even earlier than that. I think we're still in spring training in terms of making sure people understand exactly what they can access and how. Partners group's been at the forefront of making sure that we understand and we can educate our clients on what they have access to. But we're at the early innings in terms of adoption because the masses have not been able to take advantage. As we've talked about, it's only the most sophisticated and well resourced plans that have been able to provide access to private markets. And that's what this administration is keenly focused on. One is what's the most effective way to allow fiduciaries to make the best decision on behalf of their participants? One thing is clear. This might not be for everybody, but it has to be up to the fiduciary to decide on behalf of the plan and plan participants whether or not that's the case. And I know that Department of Labor is working towards the February deadline for the executive order. A large piece of that will be how do we make it so that these asset classes, which are the majority of investment opportunity out there? Given the state of public markets, how are these asset classes more accessible to the rank and file investors who require access to what pensions have been accessing for many years, which puts them in the best scenario to retire successfully.
- [02:04]
C
Welcome to Capital Decanted. In this show, we say goodbye to tired market takes and superficial sound bites. Because here, instead of skimming the surface, we dive into the heart of capital allocation, striking the perfect balance and exposing the subtleties that reveal the topic's true essence. Prepare to have your perspectives challenged as we open up the issues that resonate with the hearts and minds of those shaping capital allocation. We've enlisted the wisdom of visionary leaders in the industry. And just like a meticulously crafted wine, we'll allow their insights to breathe, unfurling their hidden depths and transforming our understanding. This is season three, episode four private markets are coming for your 401k plans. I'm John Bowman. And I'm Aaron Filbeck and we are your hosts. Well, for the third year in a row, our title sponsor is once again our friends over at Alternatives for Franklin Templeton. They have been just a constant in supporting our efforts to bring compelling educational content to life here at Kaya, both on this podcast and elsewhere. Franklin Templeton has over 40 years of alt investing experience, over 260 billion of AUM. Now, Franklin Templeton specialist investment managers have expertise across six different asset classes. Real estate, private equity, private credit, hedged strategies, venture capital and digital assets. And of course, all of them operate with the client first mentality that has always defined Franklin Templeton to help prioritize investment outcomes. So thanks as always. Alternatives by Franklin Templeton. Well, Aaron, it has been quite a monumental year in Washington and I could just put a period there and we could have a long conversation, but I'm specifically talking about the summer of 2025. Washington pulled off one of the most consequential shifts, you could say, in U.S. retirement policy in decades. In August, specifically, President Trump signed an executive order expanding 401k investment options, specifically advising an easing of restrictions to allow plan sponsors and underlying savers access to private markets as well as digital assets. So at face value, I think my opinion would be that these are welcome advancements. It was simply no longer politically or socially acceptable to reserve these asset classes to the ultra rich or the large institutions any longer. And of course, diversification, as we at Kaya have said for 24 years, is the cornerstone of prudent long term investing. And so these segments of the economy were just too big to ignore anymore. But all progress, of course, is accompanied by potential peril and we may be solving with this new executive order the access problem, but perhaps underestimating other hazards, structural challenges, other risks. Because access, of course, without education and transparency and safeguards is just a risk masquerading as progress. Democratization isn't just about who gets in, it's about making sure that they thrive once they're there. So there are approximately US$46 trillion of US retirement assets. The largest of that segment is in IRAs, individual retirement accounts, followed by about 13 trillion of defined contribution plans. That is of course our topic today. So scoping that out, 13 trillion approximately, that is now exceeded the 12 trillion in DB plans, combination of both government and private or corporate DB plans, and the remaining 3 trillion is in annuity. So it's a big, big pool of cash and monies that needs proper investment and stewardship. So of the 13 trillion of DC assets, as I mentioned a moment ago, about 7 of 10 US workers have access to a 401k or an equivalent. And my understanding is just over half of that 70%, 56% or so participate in their corporate DC plan. Now, the response from this executive order has been fast and furious from the industry. BlackRock, State street and Power Partners Group, Fidelity, New Nuveen, JP Morgan and many others are beginning to design and or even launch retirement solutions with private market sleeves. The response elsewhere across the interwebs and mass media, however, not so much. That has been more circumspective in some cases bordering on what you might call apocalyptic in its nature. So how could there be such polarizing views of allowing more choices to retirees, you might ask? One camp sees this as the nectar of the gods and the other as nothing more than snake oil. So this is a classic lightning rod topic born, designed from the start for Capital Decanted. It is a modern day story of the Montagues and the Capulets, the Greasers and the socias. Tupac versus Biggie, Daniel LaRusso versus Johnny Lawrence. Should 401k participants have access to private markets? That is the question we're going to tackle today. And as with all these acrimonious debates in investment profession history, this one is layered. It's nuanced, it's complex. It is not black and white as you might assume if you read anything on social media or in mass media. We could use a little less carnal passion and a healthier dose of honest assessment of the trade offs and the risks and the rewards, the costs and the benefits. As much as the Montagues and the Capulets want to paint this as a black and white or good versus evil issue, it is just not that simple. So we're going to begin this episode by zooming out to some important framing questions before we dive into some of those structural considerations. First, what are we actually solving for? What is the problem? Is there a problem or a weakness, you might say, with the current system that even should suggest that we should debate the merits of adding something different or offering more opportunity? Second, are there other models or examples around the world that we can look to as proof points, or on the other hand, cautionary tales as the US considers implementation of something new? And third, why now? What are the catalysts that make today, in this case, recording in 2026, the right time to have this debate and to consider such a monumental change? And finally, as I've alluded to if we're going to do this, what are the structural considerations and the risks that are necessary so that when we implement this, we are protecting underlying investors and savers and citizens? So in preparation for this episode, as always, we've had a number of informative and helpful interactions. Read a ton across that spectrum of opinion I described earlier, and today you'll be hearing from two of those conversations to help bring light to this subject. First is Dan Cahill. He is head of US Defined Contribution at Partners Group. And Drew Carrington, who's a member of KAYA and is the Managing Director of Alternatives, quite newly minted Manager Director of Alternatives in Retirement Portfolios at I Capital. So those guests will join us and be interspersed throughout the narrative in the coming minutes. So, Aaron, with that introduction in mind, how has this tension entered your preparation? Have you felt the heat as you've read and studied and chatted with others on this subject?
- [09:11]
A
I certainly hope the end of this is not the same as Romeo and Juliet, because if you remember, John, that didn't end well. So I hope we have a better ending coming out of this discussion and where this ultimately goes from a regulatory perspective. But I think when I was preparing for this, a lot of the focus has been on the product side. So how do we get access to product to the individual participant in these DC plans? How do we build product that's going to be appropriate for those types of investors? So for me, the product conversation is an important one and we'll certainly talk about that. But the more I got into this, the more this turned into more of a systems wide conversation and a structural conversation. And so not to steal the thunder of some of the later conversations I'm sure we're bound to have, but there's a lot more than just the product that we need to solve for here. So excited to get into the discussion?
- [09:59]
C
Well, your roomy and Julio comment I think is fitting. I don't have any vials of poison or daggers handy. So while I want to leave you in suspense, I don't think you should worry too much about that. But good call. Out. Okay, so you're right, Aaron. I think this does come down to how do you do it effectively. But I think as I framed at the beginning, I think we first need to hit because I think a lot of the bluster and debate doesn't even get to how to design this stuff, but rather why are we even talking about this? Is this really necessary? And so I think as we design this episode, we first need to really unpack properly scope this fundamental question. It's a bit of first principles excavating this question of what the problem is we're actually solving for. Because I think there is a large chorus on what you might call the opposition of this move that in fact contends that this is a textbook example of a solution and by the way, a rotten one. They would argue, searching for a problem, and very much so, a money grab hunting and gathering for, you might say, its next victim, just to use a bit of hyperbole. So to be fair to that constituency that is sniffing greed in the air, you might say the timing of this does not look good. It ain't ideal. Interest rates have shot up, so obviously the cost of money is higher. And the combination of those higher borrowing costs with largely maxed out institutional allocations to private capital have put pressure on GPs to find their next source of fundraising. Where will they fish if most of the endowment and foundation and pension and sovereign wealth fund ponds are all dried up? So the optics are not good. So we need to be, I think, empathetic to that challenge to motivation of gps.
- [11:43]
A
So John Drew actually had some good thoughts here. While there's certainly an incentive for the industry to push product into an untapped space, the reality is that these investors technically don't have access to these markets in the first place. So if you zoom out, is that really fair? So let's listen to Drew talk through that here.
- [12:01]
D
I think the place to start is, rather than we're trying to solve a very specific problem, it's a more general problem, which is institutional investors across the globe. So whether you're talking about US defined benefit plans, or endowments and foundations, public defined benefit plans, or outside the U.S. the Australian defined contribution system as an example. In all of these cases, the fiduciaries, the professionals who are responsible for managing those portfolios, have access to the full toolkit of investments. They have access to all of the choices. And today, the folks who are running and overseeing defined contribution plans either don't have access or have chosen not to take advantage of the access to a broad set of private market asset classes. And I think it's really important to focus on the set of private market asset classes. So we're not just talking about private equity here. We're talking about private equity and private credit and private infrastructure and private real estate, which, by the way, has been inside defined contribution plans in the US for well over a decade. It's not a lot, but there are plans that have incorporated what we would consider traditional institutional private real estate in their defined contribution plan for a number of years. So I think the thing to really focus on is having access to that toolkit. Does it create better outcomes? And you can have a whole debate about the investment thesis of alternative assets or private markets. Do they add value? Do they contribute to the total portfolio net risk adjusted return? You can have a whole debate about that. But to the extent that other institutional investors have access to those tools in their toolkit, the 13 or so trillion in defined contribution plan assets should also have access to that toolkit.
- [14:06]
C
So I think it's fair, in light of that opportunism on behalf of the gps, to honestly assess exactly what is the weakness or opportunity for improvement that even suggests we should debate the merits of including private capital in D.C. plans. Is there truly something here to address? And I think honestly that we've had this incredible run of public equities that at surface value, understandably, has largely deemed any changes unnecessary. In fact, Aaron, I wanted to give you a little bit of quiz here. Since the GFC year of 2008, when it begun, do you know how many down years the S&P 500 has had in the last 17? So, 2009 to 2025 annual years, what's your guess?
- [14:46]
A
I'm going to guess two.
- [14:47]
C
Okay, well you're very close. In fact, with a little bit of a asterisk, you might actually be right. So the answer is three. Three down years out of 17 years. And by the way, this is not normal. Let me just put that disclaimer on there. And the reason you might actually be right is that in 2015, which was the first of these down years, it was effectively flat. It was down less than percent, so it barely counts. 2018 was down 6%. And then of course more recently 2022 after that horrendous first half, a bit of recovery. In the second half it finished down 19%. So that's it in 17 years. Otherwise you're talking about an average annual return of double digits well above the long term S&P 500 annualized return over a much longer period of decades of about 9%. So this is a classic case of if it ain't broke. And I think we need to ask ourselves that question, honestly. In fact, as I've said many times the recent past, if you're simply a slave to top line performance, recent market dynamics will actually, I think quite naively, but actually fool you into going a hundred percent equity. Why even bother? Is diversification itself dead forever? And by the way, I think that's another way to ask the same question that maybe doesn't incite quite the riot that private capital in D.C. portfolios does, because that is clearly a powder keg of emotion, as I've said. But let's ask it maybe this way. Should we just invest all of our nest egg or wealth in public equities? That's largely the same question with maybe a different set of clothes. The data of the recent past certainly supports this. So we're going to address this dual challenge, private capital specifically, and then this existential interrogation of diversification more broadly. So to do that, as I promised, I want to suggest three common arguments that we're going to need to study and opine on as far as what may be broken or what may need improvement in the current system. And as I talk through them, I think the public discourse, as I'll contend, often conflates and confuses several of them all at the same time. And in fact I think most of the bravado and the dart throwing, the nastiness seems to occur in the first at the expense of the second and third, which by the way, I personally think, as I'll mention are the stronger arguments. But let's explore that as we progress through these three. So first, as I said, the hot potato itself Performance. This is the zip code of most of the bluster it tends to all live here. Does adding private capital more explicitly to portfolios actually improve portfolio performance? Net of fees over a 60 40? And oddly Aaron, of the three I'm going to mention, this is the only mathematical and therefore objective of the three. So in theory this should be the easiest one to answer. But oh boy, it is not. So just a quick literature review of some of the more common cited studies all over this spectrum. So a BlackRock study contends that modest allocation builds of private assets through accumulation years, those years you're accumulating wealth, your younger years, let's just say 15 to 20% of the portfolio, followed of course by tapering in deaccumulation stages as you move towards retirement, would boost annual returns over a 60:40 allocation by about 50 basis points a year. Now through the power of compounding over 40 years of an average work life that could lead to 15% more money in your 401k at retirement. That's a lot of money. So these assumptions are built, I should mention, on forward looking capital market assumptions using BlackRock, Cambridge Associates and Prequent data. So that's one. A joint Georgetown University and Center for Retirement Initiative study concluded that combinations of small allocations to private equity and illiquid real assets yielded between 11 and 22 basis points of annual performance between 2011 and 2020 on top of a liquid portfolio. So the study claimed that the average retiree in this case would boost retirement savings by $2,400 per year, which again would make a huge difference for the average retiree over a long period of time. Morningstar ran simulations across their real life retirement database with small inclusions of semi liquid product all and found using their words that these vehicles may provide, quote, modest but undramatic improvements in performance. End quote. So let's just fast forward and move to the other side of this spectrum. Research at Boston College claimed that a 10% allocation to alternatives yielded no statistically significant impact on performance between 2001 and 2022. Former SEC commissioner Caroline Crenshaw and by the way, she just rolled off in January just at the time of this recording a few days ago. I think I'm going to quot her a few times during the course of this episode. She gave one of the most balanced and thoughtful speeches on the subject last September. But she noted in that speech that the State Street Private Equity Index underperformed the S and p for the first time ever on a one, three and five year basis when it was measured last year in 2025. And now my favorite Aaron, on this extreme side, on the long tail if you will, was better markets because in their fact sheet submission to the SEC, they cited a comparison of the average annual return of the top 50 pensions in the US over the last decade. So at the time the study was 2014 to 2024, the average return they found of those top 50 was 7.4% annually. And then they argued that a plain vanilla 6040 portfolio, on the other hand of public equity and debt returned 8.1% over the same period. So obviously, Aaron, if the mean of the top 50 pensions underperformed a 6040 and obviously, Aaron, because those top pensions have heavy allocations of private capital, then obviously, Aaron, private capital is detrimental to portfolios. So you talk about Olympic level gymnastics there. All of these better markets as an extreme, these are classic statistics problems and frankly the reason we sometimes struggle to if I may act like adults in the debate, we're talking around each other because if you listen closely to what I was saying, we are never comparing apples to apples. We cherry pick a time period. Are we actually talking about actual returns or forward assumptions like in the case of BlackRock? If it is actual, what is the return methodology? Is it irr is it cash on cash. If it's cash on cash, is it the GP or the LP return experience? Is it before or after fees? And instead of actual returns, if they don't use that, some use various benchmarks or proxy universes. Some of those are decent, some of them horrendous. Are we talking about alternatives, meaning private capital plus hedge funds, or are we talking just private capital, or are we talking just private equity? And sometimes, as I said in the case poor, better markets, we just extrapolate on plain poor logic and interpretation to suit the narrative that we want. So often these studies, in either direction, I should just add, are intellectually lazy at best, and they're striking examples of confirmation bias at worst. So as the old adage goes, if you torture the data long enough, guess what? It will confess to anything you want.
- [21:44]
A
John, I just want to jump in here because I had that quote in mind as you were starting to go through all these different studies as well. And I know this is mostly focused on private markets and you made a comment about just broader diversification, but you could replace the word private markets with any asset class. And I just remember there was conversations around fixed income in the mid 2010s. Should we even have bonds in the portfolio? And the international story has always been a challenge as well. So you can take any time period and make it say whatever you want. I'm glad you covered the different spectrums of pro and against, but I think just highlighting the fact that any of these can be spun in a way that's going to make your point.
- [22:21]
C
Yeah, I was going to mention this later, but you mentioned the international argument. I just mentioned it now. I think as some of the listeners might recall, I spent the first portion of my career as an analyst and then as a portfolio manager on IFA strategies. So non US developed market strategies. So I came up in the mid 90s and we had some wins with things like telecom and pharma and Asian software and so forth. So it wasn't all bad. But the reality was that you had this nearly decade of experience where the US public equity market always outperformed international markets. And a lot of the chorus sounds very familiar to what we're hearing now with the S&P 500 comparisons against private markets. And I remember that it was very tempting to, especially having been in that and constantly fighting in pitches with LPs to accept this diversifying opportunity with this great IFA strategy. And they would ask themselves, why should we ever have any allocation to international US always outperforms? Right. Well as you just alluded to, it works until it doesn't. And shortly after that in the early 2000s you had about a 10 year period, 8 year period maybe more likely where international outperformed us for quite a long period of time and a lot of that reversed. And then GUESS what, about 10 years ago you've had this very strong outperformance from the U.S. again, it keeps reversing itself like this seesaw. So the point is be careful, things don't always stay the same and there's always rotation, even if they're longer than we expect sometimes. So with all that apples and oranges in mind, I think the question is, is there a study? There's no silver bullet. I don't pretend to even suggest what I'm about to say is one, but is there any study that we can reference that gets pretty close to trying to neutralize agendas is a long enough time period to showcase multiple cycles. As I just mentioned, rotation in and out of different asset classes, different economic regimes and it uses an after fee pure cash on cash return that an LP meaning the investor would experience if you invested this way. Well, I think there is one that at least we can look to as the strongest of the collection I've mentioned. In May of 2025, Greg Brown, research director at the Institute of Private Capital and two of his fellow University of North Carolina professors released a comprehensive study that looked at nearly 8,000 private equity, private debt and real asset fund detailed cash flow and nav data between 1998 to 2023. So this is 25 years of data with a few boom and bust throughout. So this is not GP's reporting fund level performance. This is LP cash experience. Now the professors, those that put the study together risk adjusted. Each of these asset classes use various benchmarks for comparison. The headline is that they found that the US private equity asset class in total has outperformed its public market brethren by a little over 4% 400 basis points per year over the last quarter century. Again, I want to stress just to lower everyone's blood pressure, this is actual cash on cash returns to LPs after fees. So there's no irr sleight of hand happening here. And by the way, outside a bit of the scope of this episode. Contrary to popular opinion outside the US private equity particularly buyout direct alphas were even stronger than US direct alphas. So just an interesting tidbit. Private debt is nearly as strong as private equity with an annualized 3.9% of direct alpha over the same period and infrastructure funds provided about 3% of annual excess return. Now on the other hand, real estate funds, while they offer lower volatility and perhaps really strong diversification, were found to provide no reliable return benefit against publicly traded REIT indices. And interestingly, I mentioned private equity as a whole a couple minutes ago, but the venture capital portion of the private equity universe due to very high volatility again risk adjusted and of course the power law dynamics also delivers near zero or even negative excess returns. So I can't possibly do justice, Aaron, to all the combinations of asset class, geography, risk adjustment benchmark combinations that the study offers. But it is by far the most thorough that I've seen and I encourage all the listeners to use your own lens and spend some time with this study. It's fantastic. Of course we'll link to that in the show notes, but regardless of whether you think this is let's call it a 3 to 4% annual direct alpha is the silver bullet to the raging debate, and I'd argue that there is none. But even if you believe it, I think the lesson here is that we need to be discerning on time period methodology benchmark based on the source of the conclusion. And look, it's human nature. Everyone has a view and usually the data behind our view is what is manufactured after we've dug our heels in on an opinion. That's just the way we roll. So I love how an institutional investor opinion piece addressed this systemic problem of architecting a study to suit your views. He said, quote some have argued against this trend. He's referring to adding private capital to D.C. plans by narrowly pointing to performance comparisons between private equity and say, the S&P 500. Admittedly, it's been hard for private equity in the aggregate to outperform in recent years given the run large cap US equities have been on powered by Nvidia and the rest of the mega cap technology names. I find this to be something of a strawman argument seen as private markets comprise an incredibly wide array of strategies with a near infinite range of return targets, risk levels and liquidity characteristics. Highlighting one unflattering performance comparison strikes me as limited and facile. End quote. Now I should note, Aaron, before that sounds like a homer quote, that the title of this whole piece, which I'm going to get to later, is how an SNL sketch gets it right and informs the debate around private markets and 401k plans. So this author, his name is Gabe Altback, I don't know him, is far from a vested or a blind bull on the subject. And actually the purpose of his article is to largely raise a yellow flag on the self interest and conflict ridden and opaque financial services industry. But that main point aside, he recognizes amongst all that and specifically calls out the data and benchmark problem that we're getting to. So I think later we both probably will talk a little bit about the wide dispersion of private capital a little bit later. But it does create significant challenges to harvesting this problem in itself because there's no easy button from a beta product like on the public markets to get access to this capability, even if you believe that they theoretically offer this direct alpha we've been referring to. But I do think we need to avoid being duplicitous and recognize the underlying concentration of the US public markets as well over the last decade. And this gentleman Gabe Outback I think referred to this. So as most of us know, the MAG7, Facebook, Nvidia, Microsoft, Google, Amazon, Apple and Tesla make up over one third of the index about 35% and have overwhelmingly driven the performance over the last decade. So Mark Rowan, the CEO of Apollo recently said that quote, we have levered the entire retirement system to Nvidia. Where is the outcry when that goes down? End quote. So 35% of our wellbeing, meaning if we're invested in S&P 500 tied up in big tech is certainly more concentrated bet than I think we've ever seen. But the idea of public markets being driven by a very narrow set of companies is a defining feature of the public markets for actually the last century. So a famous University of Chicago study looked at 29,000 stocks over the last 100 years. Have you seen this study, Aaron?
- [29:48]
A
I have. It's great.
- [29:50]
C
So they found a few interesting things that I think are instructive for just when we compare the power law and the access issue and the dispersion issue of private markets in thinking about the public markets in comparison. So number one what they found was more than half the stocks had negative cumulative returns. So even if you remove all the bombs that had less than a year of data, the median and most of the companies still return even with those removed still return cumulatively negative returns. So there is a huge positive, very concentrated skewness pulling up the numbers. On the positive side, median life of a stock was only about seven years again across this hundred year of measurement. The most striking finding however to my point, was that an overwhelming amount of the performance was tied up in 30 stocks. 3030 stocks out of a universe of nearly 30,000. These cumulative returns and therefore contribution towards that annual index performance are just remarkable. You see for example Altria, the old Philip Morris at 2.64 million percent. These numbers are staggering. Emerson Electric, 2.41 million percent. But frankly, when you start to break down what that means annually, it's somewhat modest. What that equates to is an annual median performance of these top 30 at a moderate 13% per year and then fourth. The other I think finding is that while it doesn't even get close to reaching the cumulative top 30, the all time winner of annualized performance with over 20 years of data, at least you guessed it, Nvidia with an annual return of 33%. So remember what I said, the top 30 contributors of all time, 100 years at least to the S&P 500, averaged 13% low teens. Nvidia for the last 20 years has averaged over 33%. So I think there's some real important questions to ask yourself there. So I mentioned the study, as I said, just to remind us that the power law is just as present in the public markets as it is in the private markets. Being in the. The right stocks at the right time makes all the difference even across these very long time periods. And this is why broadly diversified portfolios, just to double down on my starting point through public market indices, even though most of those stocks go down actually, as we've just learned, or through a basket of private market funds, even though some won't perform and some will blow up, is always the most prudent investment principle out there.
- [32:11]
A
I just want to jump in here as well and underscore that point. No one really argues against the. Or maybe it's less of an argument against diversifying within an asset class like public equity, but it's the diversification across asset classes that can be challenging for people. So I think using a study like this to showcase that just like asset classes go up and down and some don't do well over long periods of time and others do, it's the same thing even within public equities that everyone is very familiar with.
- [32:38]
C
Exactly. And I think it's good to always keep ourselves honest with these comparisons. I do want to just put a bit of a asterisk or a caution on this 3,4% direct alpha over the long term because there is a caveat. And I mentioned Caroline Crawford's notation of that study. The recent data suggests that this direct alpha may be eroding that same group of academics. Brown Eyal ran the study in 2025 just last year for the trailing one, three and five year periods. Similar study to what I mentioned the State Street Private Equity Index did. And this was against the S and P. And the result, direct alphas across 1, 3 and 5 respectively were minus 2.5%, minus 4.1% and minus 1.7%. So not good. We could be seeing a change, there is no doubt about that. Perhaps that's understandable given the time period. In retrospect, interest rates have popped, as I mentioned. GP markets, very crowded, high amounts of dry powder. These are inflated EBITDA purchase multiples that are really hard to exit with any level of return. And fundraising as a result of all that is collapsing. So I personally think that some of this alpha will be getting rinsed out and it's a reflection of just maturity of the business. A lot of smart money is going after fewer and fewer deals. It's getting more competitive, more efficient, more expensive. That is good for the average investor. But it could mean that we might see some compression of those direct alphas over time. They've just gotten much more mature. So the bigger question though is by how much those returns will erode. Will these higher fees still be worth it? And you could say back to the dispersion issue. Will the winners and the losers begin to separate even more? And just as an instructive warning, just as I explain this recent phenomenon, if you ran that same study, 1, 3 and 5 in 2013 trailing 1, 3 and 5 excess returns for private equity just after the GFC, of course you got even worse results than you're seeing right now. So that was minus 9.6%, minus 1.3% and minus 2%. If you're in private markets and you see that, just run away, go home, retire. That's the temptation. Had you determined as an LP that private markets were not worth the cost? Or those excess returns were a thing of the past, just a reflection of those inefficiencies of the 90s and 2000s. And we should give up now. You would have missed out on the greatest private equity decade ever. So today in 2025, question again, is this a structural reset to a more modest return regime permanently or just another PE cycle that we've seen before? And diversification, therefore, is always a wise move over the long time. So, Aaron, as I mentioned earlier, we gave a couple examples of why that viewpoint is natural, why it's tempting to move away after several years of underperformance or more recent performance. I gave the example of my experience on the international side And I think at the time, emotionally it's a sensible stance. But I do think it misses this broader purpose of establishing effective portfolios. If you talk to a sophisticated lp, for example, this binary performance beauty contest that social media and traditional media and frankly the last 10 minutes of my discussion have been obsessed with is never really how they think. As I mentioned earlier, if every prospective investment was always about maximizing return expectations based on backward looking data, we would have 100% in US big tech right now, masquerading of course as the S&P 500. But you got to be careful because even beyond that you might also want to argue for 100% in Bitcoin or gold or Korean markets. Best performing market last year, the Brazilian real best performing currency last year is a really slippery slope. As you start to think about the logic of this.
- [36:19]
A
You're describing my 401, John. That's my complete allocation right there.
- [36:23]
C
Very wise, very prudent diversification. The foundation of solid long term portfolio construction designed to deliver steady risk adjusted returns over the long term is investment across a full buffet and collection of uncorrelated asset classes, risk premia, geographies and cash flows. So we have to be really careful to whipsaw just because of rotation. And so as I said, I think this is the one that is overdone. It's the one that everyone seems to center on and anchor on is this issue of does it give you extra performance? But a much more powerful challenge to the current 401k programs or DC programs more broadly is that I think it offers very poor beta exposure right now to the global economy. So let me explain what I mean by that. I assume that I don't need to remind most decanters on the line that the halcyon days of the public markets in many ways peaked in the US in the mid-90s. Since then, listed companies have halved, IPOs have cratered, and companies that do go public are waiting much, much longer. 90% of companies now are private and whether they're seeking equity or debt financing, they seem very content, very satisfied to pursue private market sources for that capital stack. The urgency and the burden to go public that drove the 80s and 90s public markets that I grew up with is now largely satisfied in a very mature, as I said, private market ecosystem. And so as such, most of the enterprise value creation is now happening in the private markets. And this is uniquely the case just to double down here for the new economy, emerging industries such as renewable energy, space technology, artificial intelligence, health, tech, Cybersecurity, electrification, biopharm, just to name a few. All of this, you can no longer pretend or argue in good conscience that the public markets are a good proxy for the broad economy any longer. So we should start with the argument that private markets are a necessary beta play in today's global economy. The world, whether we like it or not, is partly run on private companies. So that's two beta exposure. And then that leads me to the third and final problem, if you will, that this is attempting to address, and that is this issue of civic equity, of fairness. For the reasons I've just articulated. I think I said something like this a little bit earlier. It's simply no longer politically or socially acceptable to the populace at large that only the ultra wealthy or those that happen luckily to be included in an institutional DB plan, have access to a rapidly growing portion of the world's capital formation. This feeds the narrative, by the way, that the whole thing, meaning the whole financial services industry, is a rigged game of the haves and the have nots, and that only those with means and friends in high places, you could say, could get access to the good stuff. And I think, honestly, that was an acceptable argument 10 years ago. But alternatives are now in our numbers. $25 trillion of 120 trillion global investable pie, that's 20%. Half of that nearing 10% is private equity alone. So this is just too big to ignore. For decades, the US government has relied solely on homeownership, I should mention, for economic prosperity. And yet the income gap, which has gotten much larger, is explained almost solely by whether you either have equity participation or you don't. So by extension, extending more equity opportunity, obviously carefully, as we'll talk about across the population, would be very good for financial inclusion and creating durable wealth. So, as I close here and past you, Aaron Neely Singhani is an investment professional with Encore. I've never met her, but she wrote an excellent piece on this topic in Forbes and summed up the issue of representation, fairness, participation in the markets very well here. I thought so I'm going to finish with this quote. I've spent my career watching how real capital gets built. Private markets have long financed the businesses, properties and ideas that power the economy. Meanwhile, much of America's retirement wealth has been locked inside rigid structures that rarely touch that engine. That disconnect wasn't accidental. It was engineered. The 401k ecosystem was designed under the banner of consumer protection, not access or innovation. For decades, the industry insisted that private markets were simply too complex for the average saver, an argument that never sat right with me. Complexity shouldn't be an excuse for exclusion. Instead, what began as a call for prudent oversight eventually hardened into structural limits that determined who could participate in private growth and who could not. The industry held tightly to old assumptions and momentum to change, and it moved glacially. But in 2025, the world of retirement investing finally begun to mirror the world of real investing. And that alignment may prove to be one of the most consequential shifts in modern wealth building. Modern economic growth is driven by both public and private capital, and our retirement system should finally reflect the world they're meant to secure. End quote. So there you go, Aaron. The challenges this debate, at least from the way I see it, is attempting to resolve risk adjusted performance, beta exposure to the new global economy and civic equity, for lack of a better phrase. And to me, together, while not perfect, this is plenty of reason to at least progress to a debate on how you would go about doing this because we spend a whole lot of our energy and time on weather and I think that much more consideration is how we go about doing this and protecting investors. So the US is not the first to think about this. Australia, New Zealand, Chile, the Dutch and others have great systems in their population to gain access. So I know you've studied some of these models. What can we look to and what have you learned from as you've studied some alternative models as we think about.
- [42:06]
A
This in the U.S. as you said, John, there's a couple of different ways that other retirement systems have tried to solve for this issue. And I think moving beyond as you just said, the whether we should do this and focus on the how because the Pandora's box has been opened to a large degree through regulation and now product development. So now it's figuring out how do you build a system around all of this. So I did a couple of deep dives into a couple other systems that exist outside the US and was trying to learn from each of them in terms of how they do it and how they do it well. But when I was trying to compare other retirement systems to the US I found that a plan by plan comparison wasn't actually that helpful on a standalone basis basis. They're all so complex, they operate so differently from one another. But what was helpful was stepping back and talking through different approaches that they use to execute. And ironically or weirdly enough, the analogy that came to me might feel a little counterintuitive. And that was the harkening back to our digital assets episode. John and in the context of digital assets, there's a concept that's known as the investor trilemma, which basically holds that no protocol can be fully decentralized, secure and scalable. At the same time, you have to give up something in order for it to be successful. And a similar trade off to me exists in the defined contribution retirement system space in what I'll call the participant trilemma. And that there are three conditions that are very difficult, if not impossible, to maximize simultaneously. And the three things that are in the trade offs are one, first, full personal control, so the ability for participants to select options and build their own portfolios. Second is institutional style investing, which is access to large scale, illiquid, bespoke and operationally complex investment options. And then third is individual outcomes, and that the participant themselves bears the investment risk and actually owns the outcome. So different systems resolve this tension in different ways. But none of the models I'm going to talk about satisfy all three of those conditions at once. And I think this framing matters because private markets, broadly defined, were not defined or designed for a single generic retail investor, which is effectively what the DC market is trying to serve at scale. So with that, let me outline three different models that have different trade offs. So the first model incorporates institutional style investing plus individual outcomes, but at the expense of full personal control. And the two that I want to highlight here are Australian super and Nest. Both Australian super and UK's Nest prioritize institutional style investing while maintaining those individual outcomes. And of course the trade off is personal control. So effectively what these organizations are saying is we're going to invest like a large institution. You as a participant will own the outcome, but you have very limited control in terms of driving what goes in that portfolio. So let's start with Australian Super. Australian super operates as a profit for members superannuation fund with a strong emphasis on long term investing scale and cost discipline. It presents itself as a long horizon allocator capable of pursuing opportunities that require patience, specialist capability and size. So for most participants, the experience is default led and institutionally managed members have individual account balances and outcomes that are linked to markets, but they are defaulted into multi asset portfolios that change over time with those allocations and underlying manager decisions being made centrally rather than by the participant. Now, private markets are actually a core component of the Supers model. Australian super manages roughly 385 billion Australian dollars in assets and about 85 billion of that or roughly 27% is allocated to private markets. These exposures though are embedded in diversified pools. And managed by centralized internal teams across both fund investments and direct ownership. And what distinguishes Australian super is the extent to which it operates as an owner operator model at scale. They partner with other super funds across the continent as well as other asset pools globally. And they use the full institutional toolkit of CO investments, strategic partnerships and direct investments. You could almost think of their size, scale and capability as similar to those institutions like CalSTRS or CBP Investments. And the result is an institutional investor operating inside a DC wrapper, not a DC plan that simply just added private funds to its menu. So to be able to deliver on this approach, that personal control has to be sacrificed so that the underlying investments can have full breadth of opportunity for participants. The other example I mentioned is Nest. Nest, or the National Employment Savings Trust, is the UK government's sponsored defined contribution workplace pension scheme and is one of the largest DC plans in the country. It was created to support automatic enrollment and ensure broad access to retirement savings roughly 17 years ago. Now Nest has close to 14 million members, which is roughly 1/3 of the UK workforce, and manages right around 58 billion pounds in assets with significant ongoing inflows. Again, this is a relatively new setup from the UK government and there's more and more participants coming in every day. And in fact it's expected to double in size by 2030. Given the pace of inflows. Now participants in Nest are defaulted into a target date like fund based on age. There's a slight difference in what we see in the US and that the glide path differs from a typical US targeted fund. Early savers start relatively conservatively, increase their risk exposure mid career and then de risk approaching retirement. And the stated goal is to avoid discouraging new savers through early losses, so ramping up the balance and then investing more aggressively and de risking as retirement approaches. Now Nest has also publicly stated an ambition to increase private market exposure from roughly 17% of assets to 30% by 2030. Now structurally, Nest centralizes governance and asset allocation decisions, but outsources execution. So it sets strategy, it sets the targets risk constraints, but then they partner with external managers to implement those mandates. So this is slightly different from the Australian supermodel in that it's more of a traditional allocator approach instead of an owner operator. Now a good example is Nest's partnership with ifm, which is ironically majority owned by the supers in Australia. Recently, Nest acquired a minority stake in IFM's holding company to help scale private market exposure across private equity, private debt and infrastructure. IFM then structures and manages the investments on Nest's behalf while Nest dictates the exposure it wants. So in other words, Nest partners through managers rather than investing alongside them. So both of these models, while they're both different in terms of implementation, have that trade off, that personal control is held off at the benefit of actually investing like an institution.
- [49:13]
C
Hey Aaron, I just doubled down on a couple lessons there from those two examples too. Competition, particularly on the super side, is so important. It raises the stakes and the game and the quality of all that investing. So your CalSTRS example, it would be like a California teacher having lots of options in addition to CalSTRS. And that again just has a natural consequence of making everybody better as far as talent and due diligence and investing pressure, which is a good thing. The other thing I'd say is that you mentioned that these are internal investment teams. These are investment professionals, and with all due respect Currently to the 401k ecosystem, these are not plan sponsors, these are not record keepers, these are not relationship managers. These are truly folks that have managed money and are experts in a particular asset class and both sourcing, designing and structuring those deals. So I think those are two critical ingredients if we're going to do this. Well, that I think really manifest in those examples.
- [50:12]
A
Agreed. And when you look at things like Australian Super's performance track record, which they publish publicly relative to a more traditional balanced fund or the broader indexes, you can see the value add that that centralized investment team adds to the equation. So a hundred percent agree. So the second model is institutional style investing plus personal control. I'll put a caveat around that at the expense of individual outcomes. And the example that I want to use here is APG and the Dutch pension system. So the Dutch system implemented by APG resolves the trade offs differently. And this is where the model really diverges most sharply from the US experience. So APG manages 600 billion euro in pension assets for roughly 5 million participants across the largest Dutch pension funds. So the governance and policy are set by the pension boards and the execution is centralized within APG's resources across sourcing investment decisions and portfolio management. I kind of view this as a centralized, centralized model. Governance is centralized in one place and execution is centralized in a different place. And the equivalent would be here in the U.S. if Social Security, for whatever reason, were to be invested, they would partner with an organization like BlackRock or Vanguard to actually manage it all on their behalf. Formally, the system is defined contribution in that contributions are defined. However, the outcomes are not guaranteed and the employers do not carry a defined benefit style liability on their balance sheet. So it sits somewhere between DC and DB as we know it. So participants can log in, they can see their contributions and balances, but portfolio construction and risk exposures are set collectively. Risk is automatically adjusted based on age and other characteristics that are defined by the pension boards. And as I mentioned, outcomes are not promised, they can be smoothed so participants are not forced to lock in an outcome based on the market on the day that they retire. So this experience borrows elements from cash balance plans, targeted funds and public pensions without becoming a traditional DB plan as well, the structure also allows APG to invest like a large institutional investor, very similar, as I mentioned before, to major public plans. It controls portfolio construction across public and private markets, all of which is subject to the governance constraints set by the pension boards. And John, you may remember in our TPA episode we mentioned APG is one of the organizations that's trying to think through tpa and you can see how the governance setup would enable them to do that more effectively. Now, from a private markets perspective, the largest fund that APG manages, which is ABP, which is the Government Employees Pension, represents roughly 500 billion euro of the total. So the vast majority of the assets and approximately 25% of that is allocated to private markets. And recent reforms in the Dutch system have explicitly supported increasing private markets exposure. And so apg, as the centralized authority of managing those assets, is positioned to execute that mandate centrally. So the third and final model I want to highlight is personal control plus individual outcomes at the expense of institutional depth. And I'm going to use a different super in this example, which is Uni Super. So this brings us back down under Australia. But the Uni super operates within the same superannuation system as Australian super, but resolves trade offs slightly differently than Australian Super. And the key distinction is participant flexibility. Uni super allows members to hold multiple investment options, rebalance more frequently, and direct existing balances and future contributions differently as well. So private markets are integrated primarily through pooled options and external managers rather than extensive direct ownership. And compared to Australian Super, UniSuper preserves more personal control and cleaner individual accounting. But that flexibility for the participant constrains how far the fund can actually push into direct investments and bespoked private market offerings. So UniSuper actually looks probably the closest of the three to a traditional 401 model. Here in the US you've got more participation, choice, fully individualized outcomes and tighter limits on what can actually go in the box. So why does this comparison matter? Across all four systems that I highlighted here, the pattern is pretty consistent. No model delivers fully on personal control, institutional style, investing, or fully individualized outcomes. At the same time, the differences are not so much about innovation or the sophistication of the participants, but rather deliberate structural choices about where complexity, control and risk are allowed to sit. And that context is often missing when private markets are discussed in defined contribution plans. And it's through the lens in which the US conversation probably needs to shift and be more understood. Again, as I mentioned at the beginning of the episode, John, product is one element of this, but you can see the success from a lot of these different plans comes from how the system is set up and the participant experience is set up as well. Product is just one part of those pillars.
- [55:13]
C
I think there has been some buzz about the system, the structural wrapper around this debate around what's included in the pie. But I think you're right. It's long overdue to reconsider whether we've just diagnosed the problem completely wrong and placing more entrees into a bad system is just going to create a worse outcome. Sarah Williamson, who is a friend of ours, she's the CEO of Focusing Capital on the Long Term FCLT as it's often called. She both offended and inspired me with this Forbes article. I will say, and I'll explain why she did both, but she said the following quote finally these plans and she's talking about those that are more like this superstructure in Australia that you just mentioned could reflect the evolving nature of American society. Just like the 74 Oddsmobile Orisa no longer meets the needs of the average American. Vinyl interiors and ashtrays may have made sense in 1974, but not today. Similarly, our retirement system was built for an America that by and large no longer exists. The modern American workforce includes gig work, part time employment, gaps in traditional employment such as caregiving, and we also know that there is an enormous gender and race based retirement savings gap. A new system could address all of these issues. Now by the way, the reason she offended me is that my first car was an 86 Oldsmobile. So I don't like the fact that I'm being caricatured. My favorite car. That aside, I think she's getting at exactly the right issue is that we are long overdue Nest and the superannuation, structure and system APG these are not new. It's not that we are looking at these archetypes for the first time and they're still finding their way and determining their proof points. These are models that have been around a while and I do think it's time that we broaden the discussion a bit.
- [56:57]
A
I've heard more anecdotally, even just recently in the last 18 months, people whispering about, oh, it'd be great if we brought the DB plan back, which may or may not be a good idea, but the concept of having something that's structurally there for everyone. Again, this conversation is much broader than just do I have the right products in the mix? It's retirement and safety of retirement.
- [57:18]
C
I think what's attractive about the DB program is that you've got professionals that you're outsourcing to that are standing in for you with the appropriate expertise and trust and fiduciary responsibility that can deliver those investment outcomes without you. An individual retiree who in most cases are not an expert and shouldn't pretend to be. This is not as I'll get to in a moment. You wouldn't put you or I into a Formula one race car?
- [57:42]
A
I'll speak for yourself.
- [57:43]
C
But yeah, well, I wouldn't put myself in one. And it's a profession. So we just have to be really careful on how much control we put into these programs. So I mentioned earlier that this timing coincides with a weak fundraising environment. Now that we have some models that you've described to consider. But as I said, these models have been around a while. GPs are anxious to find that next source of AUM and clientele. So there's mobilization from the industry around that. But I guess the question I wanted to ask quickly, briefly before we move back to you, Aaron, for maybe the structural considerations on architecting these solutions is why now? Why is this suddenly hit a fever pitch? So I'm going to briefly run through a few here. I already talked about my first one, which is the maturity of the private markets. They've grown up enough to satisfy most people's comfort level, that there is efficiency and options and competitiveness and due practice and so forth. So they are broad enough for most to invest in. The second is product evolution. I made reference to this. We haven't talked about it a lot, but there's a proliferation of new vehicles that offer access to high quality private capital strategies in wrappers that provide for periodic liquidity. Now, we can debate whether that's necessary, but these are semi liquid funds, like interval tender funds with quarterly or monthly liquidity mechanisms and therefore they are in the news and being talked about much more. BDCs, non traded REITs. There are other examples of these hybrid products that, at least in theory are meant to service individuals, cater to their unique needs, try to solve for a number of different unique issues that an individual versus an institution faces. And by the way, this is not a new mechanism. But I will just say while we're talking about products, that the target date fund structure seems to me to be the most ideal place for private capital or any patient capital. Therefore, if you look at the data of all the 401 s, those of us that choose target date funds trade much, much less. So it's this set it and forget it, this patient plotting, deliberate approach to investing that I think mimics wise long term thinking. So I think TDFS were always ironically the best environment and laboratory for something like this. Third is what I'd call population conscious of private equity. This is just too big I mentioned earlier to ignore the experiential day of a typical citizen interacts with private equity all the time. I alluded to this a little bit earlier. We touched on this last season in our episode on private equity needing a new head of pr. But private capital is no longer these dark corners of consumer experience, just lifestyles of the rich and famous that we watch from a distance and with some dose of envy and cynicism all at the same time. Think of the everyday brands that surround every one of us. X, TikTok, M&M's, Trader Joe's, Publix, Aldi, Subway Chick, Fil A, Dunkin Donuts, Burger King, Tim Hortons, ChatGPT, Windex Pledge, Ziploc, Raid, Wawa, Pedigree, Ikea, Red Bull, SpaceX. This is what we're reading about. This is what we interact with through the course of our day. And so again, the conscience of the population for private companies is just higher than it's ever been as a result. Fourth is what I'd call back to our 100 year history study. I mentioned a little bit earlier the demographics or expectations for 6040 long term. It is no secret that the US Social Security system is running on fumes to say the least. So under current plans, Social Security in the US is due to exhaust its benefits, basically run out of money, go bankrupt in 2033, and therefore the majority of American citizens will now be wholly dependent on their defined contribution plans to fund their retirement lifestyle. And that is more pressure on the whole system to get this right and ensure long term returns to meet the future income needs of those retirees. And as I described earlier, if you think the 7030 portfolio, which is effectively what the large majority of 401k participants are invested in 70% public equity, 30% public debt or fixed income. If you believe that that will continue producing unfettered double digit annual returns, then we're just fine. But for those of us that are a little bit more skeptical that this big tech Ferrari can continue to drag the other 493 stocks along at this pace year after year, we may just need a broader palette of options to choose from. And remember that the very best performing stocks over the last century have had average low teens annual performance, the very top 30 and the Mag 7 has been more than double that. At least Nvidia has. And so is that really sustainable? I think is the question I'm just trying to ask you here. So that doesn't suggest the US equities or the US economy are out of favor or will no longer perform, but just a realization that normal markets rotate in and out and asset classes and geographies ebb and flow. So having a well diversified portfolio is protection. It's soothing balm for traditional capital market behavior to ensure you're not betting too aggressively. The old eggs in one basket or betting on one horse at the track fifth and the overwhelming reason, all that aside that this has become front page news, it's the reason I opened the entire episode with the regulatory change. So in the spirit of Marty supreme, have you seen the movie yet?
- [63:01]
A
I have. That's great.
- [63:02]
C
Chalamet won Golden Globe the other day. We have seen a nasty intense game of table tennis over the last three administrations. Okay, Trump won Biden and Trump two. It's a multi year ping pong rally began, as I said, with Trump won Department of labor in June 2020. That DOL letter was in response to an application on behalf of Pantheon Ventures and Partners Group. Again, one of our guests here soliciting DOL's views on whether inclusion of private equity into 401 s violated fiduciary duty. While the agency did note that private equity investments tend to be more complicated, have longer time horizons, less liquidity, and have higher fees than traditional investments, it concluded that fiduciaries would not violate their duties under ERISA solely by offering an asset fund with a private equity component, it did recommend quite importantly in my view, that private equity exposure should be pursued. To our point a moment ago on the supers through professionally managed and through structures like balanced accounts and target date funds versus direct investment. Now, unsurprisingly, only a year later, the new Secretary of Labor Marty Walsh's confirmation, the signature ink was barely dry, was probably still damp from his nomination under Joe Biden's new administration and the agency issued a which is a very kind way of saying it statement of clarification to tone down the perception that the previous letter had largely endorsed private equity. This letter stressed caution in pursuing private capital as the fiduciary skills, knowledge and experience in Selecting and monitoring GPs required significant experience and care. Wholly agree with that. That is right on. It also specifically suggested that smaller plan sponsors were unlikely to have this expertise and therefore would risk their fiduciary duty again getting a manager selection access dispersion. Completely right on that. And then of course finishing this ping pong rally, the aforementioned 2025 Trump executive order that broke open the jetty of hostility that we opened with on the subject and directed the industry, as I said, to ease restrictions on the inclusion of private equity, private real estate and digital assets in the 401 plans, aiming to boost diversification and returns for savers by re examining fiduciary guidance and reducing regulatory burdens. And interestingly, Aaron, no surprise, as part of this new order, they rescinded the second supplemental DOL letter noted above. Scratched from history. It never existed. Nothing to see here. So the sad thing here is this should not be a partisan debate, but it's whoever is in power, rescinds, revises or replaces the guidance of the previous administration. And by the way, this is the norm on Capitol Hill these days. This whole debate has become more personal than substantive. Both are claiming that they're looking out for the little guy, while the other side, of course blames them for simply lining their own pockets. But that's where capital Decanted is here for. Cut through that emotional rancor, irrational exuberance and try to calmly parse out the benefits and the risks herein. So maturity of the private markets, product evolution, population conscious retirement gap, and the Washington version of Marty supreme is what has made this headline new now. And so, Aaron, I think it's time with all this framing that we get down and dirty with how we might actually do this. What are the structural considerations? How do we design an architect to ensure that investors are protected and informed properly and investor professionals feel the weight of this fiduciary responsibility and accountability?
- [66:27]
A
Indeed. John, before you move on, I wanted to underscore a few things, and the first of which is that regulatory clarity, which I think Drew provided some excellent thoughts on. Again, this isn't about different stances, it's about clarity of those stances. So let's listen to him talk through that here.
- [66:47]
D
Look, the litigation environment has been that's a challenge for plan sponsors, employers across a wide array of topics. It's not just whether or not you're going to include private markets. Plan sponsors have been sued for having a money market fund instead of a stable value fund, and, and also for having a stable value fund and not having a money market fund. So the latest wave of lawsuits had nothing at all to do with the retirement plans, had to do with the voluntary benefit kinds of designs. So the threat of litigation has been a factor across a wide array of topics. The executive order really gave us a roadmap for how the DOL may address this set of issues. The question about litigation risk in 401 plans, it specifically called out reducing litigation risk right in the executive order. And this Department of Labor, this Employee Benefit Security Administration headed by Daniel Arinowitz, has made clear that they intend to try to make it easier for plan sponsors to make decisions. The fact that they came out with an amicus brief on behalf of a plan sponsor for the first time in decades earlier in the fall is a clear message. They also changed their stance on the ERISA pleading standards. In early December, the DOLs shifted their stance from the burden of proof is on the defendant to the burden of proof is on the plaintiff. So both of those are signals that the Department of Labor is trying to address this litigation risk question. As I mentioned, the executive order laid out a roadmap. One could argue, in fact, that what the executive order laid out is the policy of the federal government of the United States of America is make it easier for plan sponsors to incorporate a wider array of asset classes in their plans. It's not an information letter. It wasn't an opinion. Oh, we think this is okay. This is the policy stance and we're going to get some guidance in the next 45 to 60 to 90 days. And that may come in a variety of all the way from a full notice and comment regulation to sub regulatory guidance, things like information letters or FAQs, all of which are going to be designed to try to lay out for plan sponsors, advisors, consultants. Here's some of the things you need to do in order to prove that you've done your due diligence. And that's really part of the discussion here is making sure that you've done your fiduciary due diligence, you've gone through a prudent process, you've tapped expertise where necessary, you've documented that process. And if you've done those things, then you shouldn't be worried that well Because I was talking about this topic instead of some other topic. It's particularly radioactive. So I think we're going to see some clarity from this Department of Labor on that.
- [69:49]
A
The second thing that I want to highlight, highlight in reaction to your population conscience is Social Security. There's always a debate on whether this is going to go bankrupt. And I think politically it would be a nightmare for whoever is in office for this to actually go bankrupt. So we'll see if that actually happens. But yeah, you could have benefits that are slashed or a restructuring that takes place. But maybe the bigger conversation here is the role that Social Security plays in retirement income for lower income households versus higher income households. And it plays a role in all of them. But the replacement rate for post retirement income still needs to be made up by your personal investments. You still cannot live on Social Security alone. So you have to have some kind of a solution for participants that's going to enable them to retire comfortably. So to say that Social Security is the only thing that's going to help you through retirement I think is not a good or factual thing to say. So you've got to have a portfolio solution that's going to solve that problem as well. So on the structural considerations, and I want to focus on the differences here because I think when we talk about DC plans, and again, this comes back to product to a large degree, but even the framing of the conversation is that DC plans and wealth management are not the same thing. And as we know, both of those things are not the same as the institutional investor market. And again, as I said before, these differences matter because private markets in the broadest sense were not designed for this generic retail investor. So lumping them together really obscures the meaningful structural distinctions in expertise, governance, regulation and behavior. And the way that I want to summarize these critical differences between all three is how each of them handles complexity differently. Institutional investors tend to centralize complexity within formal governance structures that are focused on the long term. Investment decision making is embedded in committees, policy frameworks, multi stage approval processes, probably to a maddening degree. Due diligence is extensive, timelines are long, and accountability is collective rather than at the individual level. So when outcomes disappoint, the evaluation focuses on whether the investment thesis, the portfolio construction, or the processes were sound and not the result of a single position at a single point in time, losses are absorbed. At the portfolio level, decisions are theoretically judged over a large market, over a full market cycle, and relative to outcomes rather than a moment of stress. So the structure of institutional investing as we've hit on multiple times, allows institutions to tolerate illiquidity, valuation uncertainty, and operational complexity. So private markets align naturally with this environment because complexity is expected, it's monitored, and it's governed internally. Now, wealth management, as we've talked about in previous episodes, John, sits between institutional governance and individual decision making. So complexity therefore is partially internalized and then partially externalized. So CIO teams, investment committees, advisors establish frameworks, they select managers and they define guardrails. They act as translators and gatekeepers. But at the end of the day, the client retains decision authority over allocations, liquidity and timing. So even if the advisor claims discretion, it's at the service of the client. And so that shared responsibility introduces structural tension. Knowledge and expertise can vary across advisors and clients. Accountability for outcomes is personal rather than collective. And as a result, we've seen the rise of these products and investment structures that are often adjusted to accommodate not only scale and access, but also client preferences, most notably regarding liquidity and perceived control and optionality. So private market exposure in this channel is typically shaped by these constraints. Products are structured to manage behavioral responses to volatility and uncertainty, including the desire for optionality, even when long term capital is the stated objective. Now, defined contribution plans share one important feature with institutional investors. They are long term savings vehicles. So ironically, the constraint is not time horizon. The constraint is participation, heterogeneity and behavior at a wide scale. So DC plans must be offered broadly across an organization, regardless of financial sophistication, participant engagement, or personal circumstances. There's no translation that occurs between the investment structure and the participant. And if there is, that experience varies even more than what we see in high net worth circles. Just anecdotally, I've worked with plan sponsors, I've worked alongside other advisors, and the level of sophistication and knowledge is very wide in terms of dispersion. So therefore, we've tried to create this structural experience where decisions are implemented through default options as a way to just get participants on a path and invested. But again, those outcomes are born individually. So on top of all of this, plan design has to account for, first, uneven engagement and financial literacy. Second, liquidity demands such as loans, hardship, withdrawals, job changes. All of these have liquidity events such as distributions or rollovers that occur. And then third is participant driven reallocations during periods of market or political stress.
- [75:06]
C
Aaron. Sorry, I just want to jump in here and underscore that point you made on financial literacy. I don't think we could stress this enough. I think we have to understand the entire value chain on the 401k system has been programmed around a historical 60, 40, public equity and public debt model. And therefore the gatekeepers and the plan sponsors and the advisors and all the actors along these waypoints need significant upgrading of their skill and their acumen. You have to make sure your fiduciaries are focused on education and participant engagement. And it's less about the fund options, not that that's not important, but it's more about holding their hand through these really key decision points so they ensure that they can retire with dignity.
- [75:51]
B
The most important thing that fiduciaries can do on behalf of their participants is to make sure that they are most prepared for retirement and retire comfortably. What we can do is continue to educate the market on what's available and how we've done the majority of the work from a portfolio management perspective, from a product development perspective that enables plan participants to access private markets by way of a professionally managed solution. We'll continue to educate as to how that professionally managed solution benefits the investor by being a large part of a target date fund or a managed account. But at the end of the day, it's all about education and making sure people understand what their options are and make the decision on what's best for the participant and not what is the least expensive option. I think we'll get back to a defined contribution world in which decisions are made based on what's best for the participant and we'll get away from regulation by litigation.
- [76:57]
A
Yeah, John, I like Dan's perspective on this and even your lead up to setting that conversation up. I think it ties back to what Drew mentioned mentioned earlier on the litigation front. In some ways the investment options really take care of themselves. If you have the experience, the education, both at the participant level but also at the plan sponsor level set up. Now, as John mentioned, target date funds are a place where you have a lot of participants that set it and forget it, but there's still a good majority of participants who make those allocation decisions themselves. So these features introduce risks that do not exist in an institutional setting and are mediated differently in wealth management. There's still someone with their hands on the wheel. So complexity can't be explained away or managed through relationships. It has to be constrained at the system level to preserve fairness, liquidity and fiduciary defensibility. And this is why defined contribution plans have historically limited these types of complex options that can be embedded directly in the participant experience, even when the long term investment logic might suggest otherwise.
- [77:57]
C
Aaron I think this is such a good point you're making. First of all, the conflation between wealth management or retail broadly and retirement, I see all the time in some of the argument here, this issue of liquidity and the time horizon of a retirement account. There's this common reframe that suggests lack of daily pricing and liquidity somehow makes it riskier and therefore ill suited for retirement funds. And I think this is shortsighted and it's driven more, as you just said, by psychology, by poor conditioning and public market structure than it is investor protection. The amount of liquidity, as we've often said here at Kaya, whether it's daily to monthly or quarterly redemptions to fully locked up, is simply one of several features in the product specs. You need to weigh in your due diligence. It's neither a benefit nor a flaw. There's not a good and a bad spectrum here. So in fact, allowing enterprise value to take place effectively over a longer period of time without management having to react to every market tremor and emotional machination of the public markets actually might be a good thing.
- [78:59]
A
I totally agree, but I still think the products aren't there yet to support the investment. We actually spoke to both Dan and Drew about how they see the product side continuing to evolve and some of the challenges and opportunities that both product sets offer.
- [79:16]
B
I think the majority of GPs out there aren't today prepared to offer portfolios to defined contribution participants or individual investors. Although traditional drawdown strategies have been utilized in 401ks for probably two decades, it's not the most efficient way. It's generally only the most well resourced plan sponsors, the largest plan sponsors that have been able to to execute upon that. But as the market evolves, as innovation occurs, there are much easier ways for plans of all sizes to access private markets, generally through evergreen portfolios which allow investors to access private markets content immediately. There is no J curve, there is no gap between the commitment and the drawdown. It also allows for client money to be immediately reinvested. What's most important about the evergreen structure though, in my opinion, is the flexibility that it offers, which is so pertinent to the defined contribution channel. The evergreen capability allows a portfolio manager to be flexible with where that next dollar is going to go, take advantage of relative value opportunities, provide liquidity if necessary. Although it is a feature to have money be invested in a longer term opportunity through private markets, it's also important to be flexible because there will be cash needs for both participants and plan sponsors.
- [80:55]
C
Good stuff from Dan, let's move on to hear what Drew had to say.
- [81:00]
D
Inside a DC plan, flows are netted across the DC plan before you get to the underlying investment and have to liquidate those underlying holdings. I'm sure we are going to see additional innovation in both vehicles and product design. Whether that's around liquidity and valuation and are there layers of liquidity inside the products, I'm sure we're going to see continued innovation on that front. In the defined contribution plan world, the Collective Investment Trust or CIT is going to be really right now it functions like this universal adapter. You can put just about anything inside a CIT and once it's inside the cit, it can run on the rails of the DC system inside that DC ecosystem. And the thing about a CIT is that it's fully ERISA vehicle, so it's subject to ERISA and all of the transparency obligations that go along with erisa. So I think that's another point that's really important to focus on. So whether it's target date fund cits owning an underlying private market vehicle or it's a CIT that just owns private market assets that then other CITs or other structures can own, like a managed account, that's how we're unlocking the system.
- [82:26]
C
I mentioned Neely Sanghani or quoted her earlier and she said something really interesting here as well. She said quote, private markets on liquidity move on multi year cycles, not daily headlines. A helpful way to think about it is this. In public markets you place money in a box and you keep the key. In private markets you hand the key to the sponsor and they open the box when the investment has run its course. So it is just a different mindset with a new set of psychological foundations that is going to take a whole lot of education. As you once said. And I just see very little reason that most of your retirement fund needs any level of daily liquidity or daily marks. It just doesn't make sense to me.
- [83:06]
A
Yeah, agreed. And as I think, and you mentioned a couple of these throughout the balance of our conversation. But if I could boil it down to three things that need to be solved for beyond those structural differences. It's the regulatory clarity that you mentioned and the ping pong match between both sides has to stop at some point. There has to be some structural solution so that sponsors can feel empowered to make those decisions and do it for the long term. Second is education and behavioral coaching. The education needs to happen at all levels. Again, it's a system wide issue of the sponsor down to the participant and making sure that you may not need to go into the individual funds. If you look at an Australian super, I'm sure they're not going into, well, we own this fund versus this fund. But what is the experience and what can you and can you not do within the structure? And then, of course, maybe with the regulatory clarity is investor protection. How do you protect the individual participant who is not sophisticated? They don't have millions of dollars to lose. They're just trying to save for retirement to ensure that this industry doesn't ruin itself in trying to offer product to this new constituent. So I'd be curious if you have the same takeaways, if there's something I'm missing. But all of this boils down to those three points from my perspective.
- [84:19]
C
No, I think you've touched on all of them. I think this is partly education, partly structure, partly fairness. But I think the biggest risk to this whole thing, we touched on dispersion a little bit. And again, I don't think we need to go through the full quantitative data necessarily, but I think we all know that compared to public equity and public debt, the dispersion of top quartile and bottom quartile performance of these managers across private equity, private debt, private real estate is much, much wider, meaning you have to be in median or better at least, to justify the higher fees in which you're going to be paying for these strategies. And the biggest risk, I think, is that the retirement system gets the leftovers. They get the mediocre stuff that everyone else passes on. And I think that is the key, is that the system ensures that the same offerings are there and that the gatekeepers and the fiduciaries have built the relationships, the muscles of expertise, to find and deepen the relationships with these good managers, so that again, that these retirees are not paying more for effectively the same level of performance. And then the last thing I just wanted to double down on is this issue of regulatory clarity, fiduciary confusion passing the buck that I think is rampant in this whole industry. I've been on record a number of times saying that the private capital industry missed this golden opportunity in 2024, what was called the private Advisory Rule that was proposed by the sec that would have pushed forward a series of reforms that actually would have set this conversation up for a lot more healthiness, more transparency on fees, more consistency and equity among LP relationships. It would have crystallized fiduciary responsibility in certain situations that eliminated exceptions that you can get around best practices and this SEC guidance was far from perfect, but we threw the baby out with the bathwater. And private market regulatory playbooks are in just dire need. They are long overdue for modernization. And now these standards and stakes are way higher. The degrees of freedom are way narrower in the retirement world. And this is a lengthy quote I'm going to close here. But Caroline Crenshaw, again, as I said, I would just encourage you all to read her speech. But she, I think, challenges the hypocrisy, if I might say, of the industry in the way that we behaved in 20, 23 and 4 and then perhaps our rhetoric now. So she says, quote, unfortunately this expansion of private markets is coming at the same time the commission has backed away from the prospect of meaningful oversight over the private markets. Again, she's referring to the private markets Advisory rule. In the discussion about expanding retail access to private markets. It's curious and concerning that I haven't heard much about the need for corresponding expansions and oversight. Interestingly, in recent days I've noticed some new talk about the need for guardrails from proponents of retail access to private markets. Well, I certainly agree, but I'll admit I'm a little bit confused. I love the snarkiness here because some of those same voices actively opposed a prior commission's efforts to actually install those same guardrails. We cannot just give lip service to the importance of these protections and we cannot use the promise of some hypothetical future protection as an excuse to let retail investors ride into 100 mile per hour traffic today. After all, as we've discussed, the reason that the private markets are allowed to function with less oversight and less transparency than the public markets is precisely because they are not available to Main street investors. The principal challenge she goes on to say that opponents to the rules raised two years ago was that Congress intended to draw a sharp line between private funds and funds that serve retail investors. And the petitioners argued that the rules cross that line and ultimately the rules were vacated by the Fifth Circuit. And so she closes here. But where is the enthusiasm for that same sharp line now that private funds want retail investors money? Apparently to some, the public private markets divide should exist only when it's being used to resist regulatory oversight. Mic drop. The import of our public and private markets divide should be clear. If you let retail investors onto the Autobahn, there must be highway patrol, end quote. And I think she's right on. Sarcasm aside, she's right on. There is huge contradiction in the moments by when it's convenient to want more oversight in guardrail and the moments where it's not. And we've got to get this right. It is critical.
- [88:45]
A
Yeah. And I think the industry should welcome this. And I know that there's always a resistance to this to some degree, but if something goes wrong on Main street, it's over. This will not be successful long term. So even if you think you're doing the right thing, making sure that collectively we're all doing the right thing, I think is something we should embrace. And I know that there's minutiae and nuance into how regulations are created, but there's gotta be something there.
- [89:08]
C
Well, maybe private equity needs a new head of pr. Aaron.
- [89:12]
A
Ooh, callback. Love it.
- [89:14]
C
Check that episode out. We touched on a lot of the same issues there as well. There's a little bit of blinders. I think that it would be beneficial if they were taken off. So, again, I hope we have honored what we set to do, which is to attack this from multiple touch points, to give room and platform to all voices, the rightful concerns, even the hypocrisy and contradictions, but also backing up to first principles and what are we actually trying to accomplish here? And the power of diversification long term, which has not gone away just because we've seen a very unique capital markets behavior over the last decade or so. So we're going to leave it there. Thanks so much for tuning in to this episode and we will see you out there.