The Diversification Deficit: Opening 401(k)s To Private Markets, SEC Commissioner Mark T. Uyeda, Remarks At The ICI Retail Alternatives And Closed-End Funds Conference, New York, NY, Nov. 20, 2025

Good morning and thank you for the invitation to speak with you today.[1] Historically, this conference has been focused on closed-end funds, but it has been since re-branded to include retail alternatives. Today, my remarks will focus on the future use of private investments as part of diversified portfolios in defined contribution plans.

Before we discuss the future, however, let us turn to the past. By the early 2000s, it was clear that there had been a sizable shift in how workers were to provide for their retirement needs. Previously, many could rely on Social Security and company-sponsored defined benefit pension plans. Now, individuals are increasingly dependent on participant-directed vehicles, such as 401(k) plans, which moved the burden of accumulating sufficient assets for retirement to them. Accordingly, individual Americans are responsible for constructing and managing their own retirement portfolios, which can be challenging. 

In 2006, Congress made this task a bit easier by enacting the Pension Protection Act, which amended the Employee Retirement Income Security Act (ERISA).[2] One provision addressed the practice of many defined contribution plans at the time to automatically default participants into money market funds, stable value funds, and similar vehicles, should the participant not actively select an investment choice. While these types of investment options present little risk of capital loss, they will not provide returns over time sufficient to generate adequate retirement savings. Thus, Section 624(a) of the Pension Protection Act required the adoption of regulations to provide guidance on designating default investments with a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both.

In 2007, the U.S. Department of Labor (“DOL”) adopted regulations that designated target date retirement funds as one of the qualified default investment alternatives.[3] Target date funds are designed to make it easier for investors to hold a diversified portfolio of assets that is rebalanced automatically among asset classes over time without the need for each investor to rebalance his or her own portfolio repeatedly. Target date funds generally invest in a diverse set of asset classes, including stocks, bonds, and money market instruments. As the specified year approaches, a target date fund shifts its asset allocation in a manner that is intended to become more conservative.

How did I become so familiar with target date funds? It is because I was, as an SEC staff member, the project leader on the Commission’s 2010 target date fund rulemaking proposal issued after the financial crisis.[4] Despite my involvement, I had significant concerns with the proposed approach and was relieved when this proposal was ultimately not adopted.

How have target date funds performed since 2010? According to Morningstar, “the strategies have flourished,” and “owing largely to a market that has charged steadily upward over this time, even with major drawdowns along the way, workers who invested in 2025 target-date funds since they took off in the years following the DOL’s fiduciary guidance and now retiring in 2025 have fared well.”

Target date funds offered in 401(k) plans, however, often invest only in public equities using a fund-of-funds structure because they are open-end funds. Yet, as the Commission recognized in 2019, for funds with target dates significantly far into the future, the intended holding period may be better aligned with the limited liquidity of securities from exempt offerings relative to other types of open-end funds where the intended investor holding period may be shorter.[5] By investing only in other open-end funds, target date retirement funds forgo exposure to private investments and the potential diversification that they might bring.

Today’s Landscape: Challenges, Choices, and the Case for Diversification

Economic Rationale: The Case For Diversification

Diversification is not just a theoretical construct—it is a widely accepted foundational principle of sound investing. Diversification is about managing risk while preserving the potential for return. It is the mechanism by which investors can reduce exposure to any single asset or market event, thereby potentially improving the stability and resilience of their portfolios.

Modern portfolio theory, developed by Nobel laureate Harry Markowitz, posits that a portfolio composed of diverse, uncorrelated assets can achieve a higher expected return for a given level of risk than any single asset alone.[6] This insight has shaped institutional investing for decades.

Yet in today’s market environment, diversification is increasingly difficult to achieve through public securities—whether equities or fixed income—alone. Market concentration has grown. A handful of large-cap technology companies now represent a disproportionate share of major stock indices. While these firms have delivered strong performance, their dominance raises questions about whether passive investing can deliver the kind of diversification that is optimal for long-term retirement savers.

According to recent data, the top 10 companies in the S&P 500 now account for nearly 40% of that index’s total market capitalization.[7] That level of concentration means that even broadly diversified index funds may be more exposed to sector-specific risks than many investors realize. In such an environment, the case for expanding the investment universe to include exposure to alternative investments becomes even more compelling.

Private investments—such as private equity, private credit, venture capital, infrastructure, and real estate—offer return profiles that may be less correlated to the traditional public markets. When included as part of a diversified portfolio, these assets can enhance overall performance and reduce volatility. This is not speculative theory; it is observable in the asset allocation strategies of pension funds, endowments, and sovereign wealth funds, which have long embraced private markets as a core component of their investment approach.

The key metric is not nominal return, but risk-adjusted return—the return achieved per unit of risk taken. Private investments, while less liquid, can offer a premium for that illiquidity. For long-term investors—such as those saving for retirement—this tradeoff can be not only acceptable but desirable. These investors do not require daily liquidity and may benefit from the higher expected returns associated with longer holding periods.

Of course, illiquidity can obscure risk. Valuations of private assets are infrequent and often subjective, which can create the illusion of stability. This underscores the importance of fiduciary oversight and professional management in evaluating, selecting, and monitoring such investments.

Exposure to private investments through 401(k) and other defined contribution plans expands the investment opportunity set for retail investors—providing access to assets that would otherwise be unavailable. While some publicly traded vehicles—such as business development companies, venture capital trusts, SPACs, and closed-end funds—offer partial access to private markets, they do not fully replicate the characteristics or performance of direct private investments.

Academic literature reflects this complexity. For example,

• Ang et al. (2018) find that private equity returns are not easily replicated by passive strategies using public securities, suggesting a unique premium associated with private market exposure.[8]
• Stafford (2022) argues that certain public market strategies can mimic private equity returns, but often require leverage and accounting assumptions that may not be suitable for all investors.[9]
• Driessen et al. (2012) highlight the challenges of estimating private equity performance, noting mixed results across venture and buyout funds, with varying levels of market beta and alpha.[10]

While there might be debate on what is the optimal level of exposure to private investments, what is clear is that the answer is NOT zero. Regulation should not presume that zero percent exposure is inherently safer or preferable. The absence of access is not the same as the presence of protection. A blanket exclusion from defined contribution plans denies both investment professionals and investors alike the ability to make informed choices about risk and reward.

The data backs this up. Earlier this year, CalPERS reported a preliminary 11.6% return on its investments for fiscal year 2024–25.[11] That result, according to CalPERS, was driven largely by the strength of its private equity portfolio, which delivered a 14.3% return—adding $12.1 billion to the overall value of the fund, net of fees.[12]

This is not an isolated case. Recent performance data from other public pension systems across the country reinforces the value of private equity in long-term retirement portfolios. The Vermont Pension Investment Commission reported in its Annual Report dated January 15, 2025 that its 10-year private equity portfolio return was 20.48%.[13] Similarly, the Massachusetts Pension Reserves Investment Trust reported annualized returns of 18.5% from private equity over the past 10 years, leading all other asset categories.[14] The Florida Retirement System also highlighted strong performance, with private equity generating an 8.1% return for the 2023–2024 fiscal year, significantly contributing to the system’s overall gains.[15]

These results are not anomalies—they reflect a consistent pattern across public pension funds: private equity has delivered superior returns over both short- and long-term horizons.[16] This performance underscores the importance of including private market strategies in retirement portfolios—not as a luxury, but as a prudent and effective tool for enhancing retirement security.

These benefits are real, measurable outcomes that support the retirement security of millions of Americans. The lesson is clear: when managed prudently, private investments are not only compatible with retirement plans—they enhance them. So why can’t the average American worker who is not employed in state or local government have access to a similar investment portfolio?

The Fallacy of Zero Exposure

There remains a persistent and misguided notion that everyday Americans should have zero exposure to private investments in their 401(k) plans and their individual retirement accounts. This stance is not only imprudent, but also intellectually dishonest when dressed up under the guise of investor protection.

A zero percent allocation to private investments is not a neutral default—it is a policy choice. Arguments that paint private investments as inherently unsuitable—citing illiquidity, valuation opacity, or fee structures—ignore a core principle of ERISA: the duty of prudence. ERISA does not ban private investments. It requires that fiduciaries act with care, skill, and diligence. When managed prudently, private investments can offer meaningful diversification and long-term value. In 2020, the DOL, under the leadership of then-Secretary Eugene Scalia, issued an information letter that precisely makes that point.[17]

However, the Biden Administration did not want to accept that black letter interpretation of the law and issued supplemental guidance in 2021 that strongly discouraged fiduciaries from even considering private equity in 401(k) plans.[18] This posture was not protective—it was paternalistic. It presumed that retail investors, and the fiduciaries who serve them, are incapable of navigating private markets responsibly. Exclusion is not protection—it is limitation. Regulation should provide guardrails, not gates. Fortunately, the Trump Administration moved quickly to remove the ill-conceived supplemental guidance.[19]

The idea that zero percent exposure is somehow safer or more prudent than a carefully considered allocation is a fallacy. It reflects a lack of trust in the very fiduciaries and investors we claim to serve. To date, I have not heard a single person advocating for 100% exposure to private investments for retirees and senior citizens in their retirement accounts. The outright exclusion of private investments denies participants the opportunity to diversify beyond public equities and fixed income—particularly at a time when the correlation of returns among those traditional portfolios appears to be increasing.

Democratizing access to alternative assets must be accompanied by fiduciary rigor rather than unsupported fearmongering.

Foundations and Evolution: The Journey Toward Broader Investment Access

Shaping the Future: Legal Clarity and Litigation Reform

On August 7, 2025, President Trump issued an Executive Order on democratizing access to alternative investments for 401(k) plan participants and beneficiaries.[20] This action reflects a bold and thoughtful commitment to expanding financial opportunity for all Americans.

However, access alone is not enough. To create an ideal future for retirement investing, we must address the significant litigious environment that surrounds fiduciary decision-making under ERISA for plan sponsors considering including private assets in defined-contribution plans. Lawsuits in this area are often driven by hindsight bias and very permissive pleading standards.

The risk of getting sued creates a chilling effect. Even when ERISA fiduciaries act prudently and in good faith, the fear of being second-guessed in court can deter them from offering innovative or diversified investment options.

We need litigation reform that mirrors the principles of the Private Securities Litigation Reform Act (PSLRA)[21]—a bipartisan act that recognized the significant negative impact that greedy and corrupt plaintiffs’ lawyers[22] were imposing on innovation and the American economy. Similar to how the PSLRA raised the bar for securities fraud claims by requiring plaintiffs to plead with specificity, retirement plan litigation should require clear, particularized allegations of fiduciary breach. It is not enough to allege merely that a plan included private investments; plaintiffs should be required to identify specific recommendations, decisions, or processes that allegedly failed to meet ERISA’s standards of prudence and loyalty.

This is not about shielding bad actors. It is about ensuring that fiduciaries who act responsibly are not punished for making decisions that, in hindsight, did not yield the highest possible return or failed to surpass a securities index. ERISA does not require perfection. It requires prudence. Prudence must be judged based on the information available at the time the decision was made—not with the benefit of hindsight.

Without such reform, the threat of opportunistic lawsuits will continue to chill innovation and discourage fiduciaries from offering more diversified investment options—even when those options are in the best interest of participants. A modern retirement system must include not only access and oversight, but also legal clarity and fairness.

Institutional Experience: A Roadmap for Inclusion

Private investments are not new nor experimental. They are a well-established component of institutional portfolios around the world. Pension funds, university endowments, and sovereign wealth funds have long relied on them to meet the evolving needs of their beneficiaries.

These institutions invest in private markets not as a speculative play, but as a strategic allocation that offers diversification, long-term growth potential, and access to sectors of the economy that may not be represented in the public markets. Their experience demonstrates that, when managed with care and diligence, private investments can play a vital role in meeting long-term obligations.

The same principles can—and should—apply to defined-contribution plans. With appropriate safeguards, fiduciary oversight, and thoughtful design, private assets can be responsibly integrated into retirement portfolios. The institutional track record is not a reason for exclusion; instead, it is a roadmap for inclusion.

Shaping the Future: Collaboration, Trust, and Expanding Opportunity

Regulatory Collaboration: Aligning Missions, Advancing Access

To achieve these goals, there needs to be regulatory alignment between the SEC and the DOL. The SEC’s mission to protect investors and facilitate capital formation must be harmonized with the DOL’s responsibility to safeguard retirement assets.

To improve a retirement system that works for all Americans, we must create a unified framework that balances investor protection with market access under both ERISA and the federal securities laws. That means acknowledging and addressing legitimate concerns—such as disclosure standards, fee transparency, conflicts of interest, valuation practices, and custody safeguards. These are solvable challenges, not insurmountable barriers.

By coordinating efforts, the SEC and DOL can ensure that fiduciaries have the tools and clarity they need to evaluate private investments responsibly. A harmonized approach will help avoid regulatory fragmentation, reduce compliance uncertainty, and ultimately empower plan sponsors to make decisions that serve the best interests of their participants.

Vision for Tomorrow

As we reflect on the progress of defined contribution plans, we must ask: are we doing enough to ensure that these plans reflect the full range of investment opportunities available in today’s markets?

Since our nation’s founding, we have trusted individuals—not governments—to decide how to allocate capital, take risks, and pursue opportunity. That principle has shaped our capital markets and continues to drive innovation, economic growth, and wealth creation for individual Americans.

Nowhere is this more evident than in the success of the defined contribution system, particularly 401(k) plans. These plans have empowered millions of Americans to participate in the markets and provide an opportunity to retire with dignity.

As we look to the future of retirement security, the question should not be whether private investments should be considered, but rather whether we are willing to build the infrastructure that allows responsible exposure to private investments. The goal is not to turn every retirement saver into a venture capitalist. The goal is to ensure that the returns of innovation, long-term capital formation, and broad diversification are more broadly available.

Recent reforms have also lifted outdated constraints, such as the lifting of the 15% cap on closed-end funds previously imposed by SEC staff, signaling a broader recognition that diversification and innovation can coexist with investor protection.

Over the next several years, I look forward to working with my colleagues at the SEC and DOL, as well as the many other parties involved in retirement savings, to expand opportunity, uphold fiduciary standards, and ensure that the next generation of American workers has the ability to accumulate wealth over the long term.

Thank you.