Key Insights

• Expanding investment options in 401(k) plans to include alternative assets makes strategic sense given capital market evolution, but plan sponsors should maintain realistic expectations. 

• While alternatives provide valuable diversification and market representation benefits, they are unlikely to change retirement outcomes for most participants dramatically.

• Basic Capital uses the features inherent to alternative assets (lower volatility, cash flows, and structured liquidity) to give employees more control over their financial goals and potentially meaningfully enhance retirement outcomes. 

  
  
  
  

The Capital Markets Evolution

Alternative Assets Represent Growing Market Share

Private equity, direct lending, real estate, and infrastructure have grown to represent a larger portion of capital markets than ever before. This shift reflects fundamental changes in how companies finance operations and growth:

• Private Company Growth: More companies are choosing to remain private longer, accessing capital through private equity rather than public markets

• Credit Market Transformation: Private credit markets have expanded dramatically, with direct lending expected to grow from approximately $1.5 trillion in 2024 to $2.64 trillion by 2029

• Infrastructure Investment: Aging infrastructure and climate transition requirements have created substantial private investment opportunities

Retirement Portfolios Should Reflect Market Reality

Traditional retirement investing relies on investments that represent the overall growth of the economy, with different asset types providing diversification and offsetting correlations. If more companies are staying private or borrowing money in private credit markets versus public bond issuance, then retirement portfolios should logically represent those market evolutions.

However, recent analysis suggests that while this logic is sound, the practical impact may be more modest than anticipated.

A recent Mercer report indicates that retirement portfolios incorporating alternatives increase annualized expected returns by approximately 1% with no meaningful impact on reducing volatility.

Recent Policy Developments

President Trump's August 2025 executive order, "Democratizing Access to Alternative Assets for 401(k) Investors," directs the Department of Labor to reevaluate fiduciary guidelines and provide clearer guidance on alternative assets in retirement plans.

This builds upon 2020 DOL guidance that explicitly permitted private equity inclusion in diversified target-date, target-risk, or balanced funds.

The executive order represents regulatory recognition of market evolution rather than a fundamental policy shift. It removes barriers and provides clarity, but doesn't mandate or necessarily encourage wholesale adoption of alternatives in DC plans.

Plan Sponsor Evaluation Framework

Corporate benefit directors face three primary considerations when evaluating alternative assets for their retirement plans:

1. Will Alternatives Improve Retirement Readiness?

Expected Return Enhancement: The addition of alternatives may improve returns, but the enhancement is typically modest over long time periods. The 1% annual improvement suggested by recent research, while beneficial through compounding, should not be viewed as transformational.

Diversification Benefits: The low correlation of alternatives with traditional assets helps smooth day-to-day valuation changes, providing participants with less volatile account balance fluctuations. However, outcomes measured from point to point over full market cycles show less dramatic differences.

Access to Economic Growth: Alternatives provide exposure to economic sectors and growth drivers not captured in public markets, ensuring participant portfolios better represent the full economy.

2. Will Alternative Assets Increase Plan Engagement?

Educational Complexity: Alternative investments require more sophisticated explanation than traditional asset classes, potentially creating communication challenges with participants who lack investment expertise.

Professional Management Advantage: When wrapped in professionally managed vehicles like target-date funds, alternatives can enhance portfolio sophistication without requiring individual participant expertise.

Performance Perception: The smoother valuation patterns typical of alternative investments may reduce participant anxiety during market volatility, potentially supporting consistent contribution behavior.

3. Do Available Investment Options Meet Fiduciary Obligations?

Product Evolution: Asset managers have developed evergreen private asset funds specifically designed for DC plans, addressing traditional concerns about liquidity and daily valuation.

Fee Considerations: Alternative investments typically carry higher fees than traditional options due to complexity and active management requirements. Plan sponsors must evaluate whether incremental expected returns justify additional costs.

Liquidity Match: Retirement plans have inherent liquidity advantages for alternative investments since participant funds are generally locked up until retirement age, making the wrapper more suitable for less liquid investments than many other contexts.

Basic Capital's Approach

While traditional approaches to alternative asset inclusion focus on modest return enhancement through diversified target-date funds, Basic Capital more directly addresses the fundamental challenge of retirement readiness.

Capitalizing on Alternative Asset's Core Characteristics

Basic Capital accesses 40 Act Funds in the direct lending space, representing a specific expression of alternative assets with unique characteristics: stability, low correlation with traditional markets, and high cash distributions. 

Rather than simply adding these assets for diversification, Basic Capital uses these inherent features as the foundation for a financing solution.

Amplifying Investment Power

The Basic Capital approach offers financing against these stable, income-generating alternative assets to provide employees with increased investing power.

This strategy uses the predictable cash flows and low volatility of direct lending investments to support enhanced wealth accumulation within the tax-advantaged retirement plan wrapper.

Meaningful Impact on Retirement Readiness

Unlike traditional alternative asset inclusion, which typically adds a 1% annual return enhancement, the Basic Capital approach can meaningfully improve retirement readiness through increased investment capacity. This addresses the fundamental challenge that many employees face: insufficient account balances at retirement.

Increased Engagement Through Optionality

Alternatives exposure and asset financing is entirely optional within Basic Capital 401(k) plans, allowing employees to tailor their exposure to alternative investments based on their financial goals and risk tolerance. This personalization and the tangible benefit of increased investing power create stronger participant engagement with retirement planning.

The increased investment capacity makes employees more likely to maintain or increase their contributions over time, creating a positive feedback loop that compounds the retirement readiness benefits beyond what traditional passive alternative asset allocation can achieve.

Conclusion

While alternatives provide valuable diversification and modest return enhancement, they are unlikely to solve the fundamental retirement readiness challenges facing many American workers.

For corporate benefit directors evaluating alternative asset inclusion, the question should not simply be whether to add these investments for diversification, but how to leverage their unique characteristics to create the most meaningful impact on employee retirement security.