While integrating private assets into target-date funds can give plan members income-generating and diversification benefits at an attractive risk profile relative to traditional asset classes, these assets aren’t without complications, said Brett Goldstein, senior vice-president and head of asset allocation portfolio management at Franklin Templeton Investment Solutions.

Speaking during Benefits Canada’s 2025 Defined Contribution Investment Forum, he said DC plan sponsors and target-date fund providers can minimize those risks by sharing de-smoothed returns, using dynamic funding sources and putting a reasonable cap on private assets’ share of the overall portfolio.

Franklin Templeton simulated return data comparing target-date funds of various vintages to the same funds with private assets incorporated. With private assets incorporated, the simulated returns improved, volatility reduced across all vintages and participants experienced smoothed returns.

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An allocation to private assets of between five to 20 per cent is probably “going to be the sweet spot for most plans,” said Goldstein, depending on the assets in which plans are invested, since different vehicles can have different constraints. In a sample fund where the public markets allocation was scaled down to 80 per cent, private equity began as 15 per cent of the portfolio and scaled down to four per cent at maturity, while private credit and private real estate started at three per cent each and scaled up to eight per cent each at maturity.

An allocation level of 20 per cent or below can help to avoid an illiquidity issue during market downturns, he said. In simulations of the three most recent market crashes, a 20 per cent alternative allocation would have drifted up to between 25 to 35 per cent of the portfolio and up to 40 to 45 per cent if those events were coupled with a 20 per cent liquidation event.

“That’s certainly much higher than you would ever want, but again the majority of your assets are in public markets and you still have ample liquidity.”

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Goldstein suggested private equity allocations are funded directly from public equity, because on a de-smoothed basis the asset class is often riskier than public equity over time. Private credit and private real estate would be funded differently. Early on in the glide path, he recommended maximizing how much of those allocations come from private market equities and, over time as the glide path shifts, funding the assets from a mix of fixed income and public equities.

He also stressed the importance of de-smoothing the returns of private assets. “If you’re measuring [different asset classes] on different scales, you’re going to get to inefficient solutions that create all sorts of problems in your portfolio.”

Read more coverage of the 2025 DC Investment Forum here.