Private credit looks more like a portfolio tool than a menu option in DC plans, says T. Rowe Price
Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're exploring the assets and retirement solutions that make up defined contribution (DC) plans.
Private credit is notably making its way into defined contribution (DC) plans. And while the hype is real, the path forward demands a mix of caution and enthusiasm, DC experts say.
Kathryn Farrell notes the growing interest in private credit within DC plans as part of a broader evolution in how retirement plans are designed rather than a response to a new problem. The fundamental challenge - helping participants build enough savings for a retirement that could stretch decades - remains the same.
What’s changed, however, is the range of tools available to address it.
“The toolkit has expanded and I think private assets like private credit could potentially be useful if they can demonstrate a unique net of fee benefit without compromising things like liquidity and fee discipline and fiduciary responsibility,” said Farrell, portfolio specialist at T. Rowe Price.
“There's this need for diversification and broader access to income and return. Also, private markets have grown. Private credit, for example, is similar in size to the high yield or floating rate loan areas of the market. It's become a meaningful opportunity set. We've also seen a lot of innovation from the product side. There's new vehicles that are a lot more compatible with the defined contribution market today and how they work in operation. So I think the conversations really shifted from ‘Is this possible?’ to ‘How can we do this prudently?’” Farrell added.
The clearest path for private credit in DC plans is through professionally managed multi-asset strategies, like target date funds, rather than as a standalone menu option, said Farrell. She underscored these assets are too complex to be dropped into a plan lineup without careful oversight, because issues like liquidity, governance, and implementation are just as important as the investment thesis itself. She believes private credit is more likely to gain traction when it’s folded into an existing diversified portfolio that’s already being actively managed, where those operational challenges can be handled in a more controlled way.
Farrell’s colleague, Taylor Pideon, is quick to highlight how target date funds have long included real asset portfolios with exposure to publicly traded holdings like listed real estate, natural resources, and commodities. The shift toward private allocations, however, introduces a different dynamic.
“When you look more towards private allocations like private equity or private credit, sometimes that correlation benefit improves, the volatility of the overall portfolio becomes lower," said Pidgeon, senior relationship manager, defined contribution for the Americas division of T. Rowe Price. “So there may just be more enhancement to the risk adjusted returns of the overall portfolio, which is creating some appetite.”
Additionally, there’s been a structural shift in how companies access capital as a key reason private credit has become relevant for DC plans, Farrell said, noting how far more companies are choosing to stay private for longer, and the shrinking number of smaller banks has pushed borrowers into alternative lending markets.
"The number of billion dollar valued private companies has ballooned from five 15 years ago to over a thousand today. That's shifted some of the investable market from public to private markets," she said.
Farrell acknowledged that plan sponsors are still learning the mechanics of private markets in DC plans and still working through the complexities around liquidity, valuation, governance, and overall structure, particularly on the DC side where private assets remain relatively new, but implementation is no longer theoretical, she noted.
Consequently, she suggests private credit is emerging faster than other private market strategies because its features are easier for plan sponsors to get comfortable with. Characteristics like a maturity date, coupon payments, some natural liquidity, and a lower fee profile than other private assets make it more likely to gain traction sooner, she said.
According to Farrell, two decades ago, these opportunities were largely out of reach for DC plans. But the combination of market evolution and product innovation has brought the asset class to a point where it can be sized within a diversified portfolio and have a meaningful impact on participant outcomes.
When it comes to performance of a plan, private credit has historically delivered a return premium over public fixed income, which is why it is drawing attention in the DC space.
“Even a small allocation could have a meaningful impact on returns, if you could get a few hundred basis points more in net of fee performance,” she noted.
She also suggests that any allocation has to be sized carefully, especially in target date strategies where liquidity still matters. The right exposure would likely vary depending on where someone is in the glide path, but she indicates that a mid- to low-single-digit allocation could be large enough to add value without creating liquidity problems.
Yet, Farrell acknowledged there’s still confusion around what private credit represents and how it compares with more familiar asset classes. One common misunderstanding, she suggests, is the idea that private market borrowers are fundamentally different from public market ones.
According to Farrell, in many cases, large companies are active in both markets and simply choose the financing route that best suits their needs. The real change has been the growth of the private market opportunity set, not necessarily a dramatic change in borrower quality.
She also pushes back on the way risk is sometimes discussed in private markets. Lower reported volatility, she suggests, can partly reflect the fact that private assets are priced less frequently, rather than indicating lower underlying economic risk. That smoother return profile may still be useful, particularly in a target date strategy where participants are not trading in and out regularly, but it does not remove the need for disciplined credit analysis. Her broader point is that plan sponsors should not mistake less visible price movement for less risk, and that manager quality remains critical when underwriting private credit exposures.
“This is an area where active management really matters. This isn't an asset class you're going to be able to access from a passive perspective," she said. "It's not just 'I want private markets,' it's who is doing that, and what is their history and process and track record."
Farrell sees a prudent approach to private credit in DC plans as one that starts small and intentional, with a clearly defined purpose within the broader portfolio - whether that’s generating income, improving diversification, reducing volatility, or preserving capital.
"The allocation has to have a clear role," she said, noting it needs to justify its place on a net-of-fee basis.
While she expects allocations to remain modest at first, Farrell suggests they could grow over time as vehicles mature and operational infrastructure, like daily valuations and liquidity frameworks, become more established.
"Any allocation has to earn its place net of fees and be consistent with the liquidity needs of a daily valued vehicle, like a targeted strategy or something in a DC plan," she said.
