Private credit is emerging as a new addition to defined contribution plans, as sponsors look to expand their investment toolkits. While the goals include greater diversification and improved risk-adjusted returns, the path to implementation often runs through asset allocation solutions like custom target date funds, managed accounts, and white-labeled strategies. Successfully integrating private credit, however, requires careful alignment with plan design, regulatory considerations, and participant needs. This paper offers a practical guide to evaluating private credit within DC frameworks, with a focus on solutions tailored to the unique dynamics of the DC market.
Understanding ERISA capacity and fund structure
One of the first considerations for plan sponsors evaluating private credit is the fund’s ERISA capacity. Many private funds limit the amount of ERISA assets they can accept, which can create administrative burdens and underwriting challenges - especially as plans grow or new funds are launched. If a strategy reaches its ERISA limit, plans may be unable to allocate additional capital, disrupting asset allocation and diversification goals. It can also trigger compliance risks, as the fund may no longer be able to accept new ERISA assets without violating regulatory guidelines. This situation often necessitates complex administrative actions, such as transferring assets to new funds or vehicles, which can increase operational costs and create potential disruptions for plan participants. An evergreen private credit structure, such as a Collective Investment Trust (CIT), with meaningful, and in some cases unlimited, ERISA capacity offers a scalable, efficient solution - minimizing the need for cyclical re-underwriting and supporting long-term allocation planning within the unique constraints of DC plans.
CITs are a well-suited vehicle for private credit strategies within DC plans partially due to their strong alignment with ERISA requirements and operational needs. Additionally, most CITs provide a daily net asset value (NAV), generally offering the pricing transparency necessary to support frequent participant transactions such as contributions, withdrawals, and rebalancing. Furthermore, CITs can offer centralized administration and tailored reporting for retirement plans, reducing the administrative burden on plan sponsors and recordkeepers while facilitating smoother plan operations and enhancing the participant experience.
Opportunity set and risk management across the participant lifecycle
Private credit strategies differ widely in their use of leverage, risk tolerance, and downside protection. This variability is becoming increasingly visible as plan sponsors prioritize disciplined implementation to align with DC plan design and operational realities. Given these differences, it’s essential for sponsors to evaluate each strategy’s structure and suitability. For DC plans, the ideal private credit approach should aim to deliver consistent returns across the participant lifecycle while managing downside risk and enhancing diversification.
Private credit must provide clear benefits that justify the tradeoffs of reduced liquidity, higher fees, and increased complexity. This makes it essential to evaluate private credit through a fixed income lens, ensuring the strategy offers meaningful advantages over more liquid, cost-effective, and transparent alternatives.
A multi-sector approach spanning areas like fund finance, consumer finance, specialty finance, and other asset-based lending markets can provide greater flexibility to adapt to changing market conditions and economic cycles. This sector diversification may contribute to smoother returns and reduced volatility, which is particularly important for DC plans, where participants have varying time horizons and risk tolerances throughout their lifecycle.
For many plan sponsors, allocating to private credit assets represents an initial step into the asset class. Given this, it is especially important to prioritize a high-quality, disciplined approach that emphasizes downside protection and prudent leverage management. A well-constructed private credit strategy incorporates rigorous credit underwriting and robust protections to help mitigate losses during market downturns. This focus on capital preservation, combined with the potential for steady income generation, aligns the long-term retirement goals of DC participants by aiming to deliver consistent, risk-adjusted returns over time. (see Figure 1)
Figure 1: To define private credit, it’s important to answer two questions
Source: PIMCO as of 30 June 2025.
For illustrative purposes only.
Diversification benefits relative to existing holdings
Sponsors should evaluate how a private credit allocation may complement existing holdings within their current asset allocation offerings (i.e., target date funds or managed accounts). For instance, many DC plans already have exposure to corporate credit through public markets. A well-constructed private credit strategy that offers differentiated exposure—particularly in specialty finance sectors like Asset-Based Finance—can help enhance diversification and reduce correlation to traditional credit assets. The inherent complexity in sourcing, underwriting, and structuring these private credit investments often results in higher barriers to entry, which can potentially lead to superior risk-adjusted returns compared to similar credit risks in public markets. This diversification and enhanced return potential can be crucial for improving the overall risk-return profile of the portfolio and smoothing participant outcomes through market cycles. (see Figure 2)
Figure 2: Risk decomposition across fixed income strategies
Source: PIMCO. As of 30 June 2025. For illustrative purposes only. Figure is not indicative of the past or future results of any PIMCO product or strategy.
There is no assurance that the stated results will be achieved.
* Unless otherwise specified, return estimates are an average annual return over a 5-year horizon. Please refer to the appendix for additional information on estimated
returns. Estimated Cash Return = 3.40%.
1 Yield to Worst (YTW) is the estimated lowest potential yield that can be received on a bond without the issuer actually defaulting. The YTW is calculated by making worstcase
scenario assumptions by calculating the returns that would be received if provisions, including prepayment, call, or sinking fund, are used by the bond’s issuer.
2 See disclaimers for additional information regarding volatility estimates.
Risk factors and models defined on page 5.
Efficient capital deployment and minimizing cash drag
A key challenge in private credit strategies designed for DC plans is the timing mismatch between daily participant contributions and the less frequent capital calls made to the private fund. A capital call is a request by the private fund manager to investors to provide committed capital, typically on a quarterly or periodic basis, to fund new investments or expenses. In contrast, DC plan participants contribute or withdraw funds on a daily basis, creating a liquidity and timing gap that must be managed effectively.
Many private credit strategies held within CITs address this challenge by including an allocation to a more liquid vehicle alongside the private credit portfolio. This liquid allocation is intended to absorb participant inflows between capital calls and to facilitate participant-level redemptions when needed, promoting smooth plan operations. It is important for plan sponsors to understand what constitutes this liquid allocation and to ensure that it does not create a drag on the anticipated returns of the overall CIT.
A well-designed private credit strategy can address the timing mismatch between daily participant contributions and the less frequent capital calls typical of private funds. By incorporating an actively managed, well-diversified public credit sleeve with similar risk and return characteristics, a strategy can ensure that participant assets remain productively invested. This structure helps align the CITs, overall return more closely with the private credit allocation’s long-term expectations. It may also minimize cash drag, preserve performance potential, and support operational efficiency. By balancing liquidity needs with capital deployment, plan sponsors can better align the strategy with the realities of DC plan administration while pursuing optimal participant outcomes.
Conclusion
Incorporating private credit strategies into DC plans offers a compelling opportunity to enhance diversification, manage risk, and improve retirement outcomes. Unlike many recent competitor analyses that focus primarily on historical return streams, our approach emphasizes DC plan design considerations, balanced with a forward-looking view of potential shifts in both public and private market opportunity sets. For plan participants and sponsors, the decades ahead may look markedly different following the recent macroeconomic cycle, underscoring the need for a prudent balance between opportunities and risks.
Plan sponsors should consider prioritizing private credit strategies with unlimited ERISA capacity to address the complexities arising from plan asset status and participant actions. We believe the focus should be on diversified and flexible opportunity sets, differentiated return streams, transparent and stable fee structures, efficient capital deployment, and daily valuation capabilities. A private credit solution designed with these attributes and a participantcentric mindset can be uniquely positioned to meet the nuanced needs of DC plans, making it an attractive choice for sponsors seeking to allocate to private assets.
By carefully assessing private credit strategies through this lens, plan sponsors can confidently integrate private credit into their asset allocation frameworks, with the potential to support improved long-term value creation, participant-level alignment, and risk-adjusted outcomes within a defined contribution framework.
