CONTRIBUTORS
Jonathan Schreiber, CFA
Solutions Portfolio Manager
Franklin Templeton Investment Solutions
Lavina Mehta, CFA, RMA
Institutional Retirement Solutions
Franklin Templeton Investment Solutions
Peter Blue, CFA, CAIA, FRM
Head of Private Market Solutions
Franklin Templeton Investment Solutions
Executive summary
Target date funds (TDFs) have become the default investment solution for millions of defined contribution (DC) plan participants. As the role of target date funds has expanded, so too has the evolution of glide path design—prompting consideration of whether traditional public-market-only approaches are sufficient for long-term retirement objectives.
Against this backdrop, private assets have gained increasing attention as a potential complement within a target date framework. When thoughtfully implemented, private assets such as private real estate, private credit and private equity may enhance diversification, improve risk adjusted returns, and contribute durable retirement income without compromising liquidity or fiduciary standards.
This paper outlines the case for incorporating private assets into TDFs, evaluates their impact on portfolio risk and return, examines liquidity considerations under stress scenarios, and highlights the critical importance of manager selection.
Case for private assets
When evaluating whether an allocation to private assets enhances participant outcomes, the focus should be on how they impact expected return, diversification and retirement income. To assess their true impact, investors should take a critical look at the historical returns delivered by private markets in relation to the level of risk taken to achieve those returns.
One of the unique features of some private assets is that they are reported with apprais-al-based valuations and less-frequent price observations than public markets. As a result, the realized return stream can appear artificially smooth. When designing long-term investment strategies, it is critical to adjust (or “desmooth”) the volatility and correlations used in capital market assumptions so that inputs better reflect the underlying economic risk. This prevents an overallocation to private assets due to artificially low volatility estimates.
Conclusion
As DC plans continue to evolve, thoughtful fiduciaries are asking how private assets can be implemented responsibly in pursuit of better participant outcomes. Private assets are not a universal solution for all multi-asset portfolios, nor are they appropriate for all investors. However, when thoughtfully integrated into a target date framework, they can enhance diversification, improve risk adjusted return potential, and support retirement income generation—without compromising liquidity or governance.
The path forward is clear: Use desmoothed, economically grounded capital market assumptions; size allocations thoughtfully within the glide path; rigorously stress test liquidity under severe but plausible scenarios; and treat manager selection as an essential function, overseen by an experienced investment team. A modest allocation to private assets—implemented within a well-designed target-date framework—can potentially improve portfolio efficiency and help retirement savers achieve better outcomes.
DISCLOSURES: HYPOTHETICAL PERFORMANCE
Performance in this paper is for illustration only and includes simulated returns where indicated. It does NOT represent or guarantee the performance of any Franklin portfolio.
This paper contains hypothetical performance information and analysis for the period specified therein of proposed portfolios constructed by Franklin Templeton Investment Solutions (“FTIS”). The proposed portfolios are not actual portfolios managed by FTIS. There can be no assurance that the proposed portfolios accurately represents the recipient’s portfolios or an actual institutional portfolio. Any indices contained in the proposed portfolios are unmanaged, may not be investable and have no expenses.
Hypothetical performance results are inherently limited and should not be relied upon as indicators of future performance. The hypothetical returns do not represent actual recommendations or trading and may not reflect material economic and market factors. The results presented should not be considered a substitute for the investment performance of an actual portfolio. No representation is made that any account will or is likely to achieve returns similar to those presented. The hypothetical returns are unaudited. Additionally, there is the possibility of loss when investing in any FTIS Fund or account.
The hypothetical data results shown herein are applied with the benefit of hindsight and knowledge of factors that may have positively affected its performance and cannot account for all financial risk that may affect the actual performance of the indexes. The actual performance of any fund or strategy may vary significantly due to assumptions regarding fees, transaction costs, liquidity or other market factors.
Any indexes contained in the proposed portfolio have been (i) selected based on research conducted by FTIS or (ii) designed by FTIS to represent an example of a proposed portfolio. The information presented herein is hypothetical in nature, and is for informational purposes only, and must not be relied upon as the basis for an investment decision.
Simulated results shown herein are based on a static portfolio without active management by FTIS, and generally reflect the reinvestment of dividends and distributions. The simulations may not reflect the impact of material economic and market factors that would have influenced FTIS’ decision making if the proposed portfolio were actually managed during this time period. Actual results would have been different had the simulations been actively managed as are most of the FTIS Funds or accounts.
Important data provider notices and terms available at www.franklintempletondatasources.com.
WF: 9243260