How best to expand investment opportunities inside retirement accounts and other portfolios?
Private credit is not the answer
Abstract: Expanding investment options inside defined-contribution plans and other investment vehicles is a worthy policy goal. However, the introduction of illiquid private credit into retirement accounts would not improve financial outcomes for workers and retirees. Other innovations which warrant consideration include allowing the purchase of Series I bonds in retirement accounts, increased use of bond ladders instead of bond funds in all retirement accounts, and increased use of higher risk bond funds in 401(k) plans. A short section of the paper under the paywall discusses the potential use of a modified private credit asset inside a redesigned 529 plan.
Key Findings
Expanding retirement options inside retirement plans is a worthy goal.
Reforms which deserve consideration include removing restrictions on the purchase of Series I bonds inside retirement accounts and the facilitation of increased use of bonds with fixed maturity dates instead of bond ETFs inside 401(k) plans.
SEC regulated junk bonds are better suited for retirement plans than private credit instruments with their low levels of transparency and gating restrictions.
There may be a role for redesigned private credit inside a redesigned 529 plan. (This option is succinctly presented to paid subscribers.)
The landscape of retirement savings is undergoing a significant policy shift as federal regulators and the Trump administration aggressively push for the inclusion of private credit within defined-contribution plans. These regulator initiatives follow several years of explosive growth in the private credit market.
The effort to expand the use of private credit began with Executive Order 14330 in August 2025. This order mandated that federal agencies identify and reduce barriers preventing retirement plans from accessing private credit and private equity. This was followed by a Department of Labor proposal in March 2026, which sought to establish a process-based safe harbor. This rule clarifies that plan fiduciaries may include alternative assets if they follow rigorous due diligence, signaling that these complex investments can meet the prudent person standard under ERISA.
The Retirement Investment Choice Act (H.R. 5748) was introduced in Congress to codify these principles into federal law. However, the push for expanded private credit hit a major wall recently as market stresses began to emerge. The narrative of stable, high-yield growth was challenged when several major funds were forced to implement strict limits on withdrawals, commonly known as gating, as they struggled to meet redemption requests.
Blue Owl Capital took the unprecedented step in February 2026 of permanently closing redemptions on its $1.6 billion OBDC II fund, leaving retail investors trapped in a vehicle with no clear exit.
BlackRock’s $26 billion HPS Lending Fund and Morgan Stanley’s North Haven Private Income fund also faced massive redemption requests—nearly 10% of their assets—forcing them to fulfill only about half of the requested payouts.
Blackstone had to intervene with $400 million of its own capital to satisfy $3.8 billion in withdrawal requests for its BCRED fund to avoid an outright gate.
These liquidity issues were compounded by the “software loan problem.” Private credit has a heavy concentration in the technology sector—accounting for nearly 20% of direct loans by end-2025. As AI disruption began to squeeze the Software-as-a-Service (SaaS) sector, these loans faced valuation obscurity. Because these loans are not traded on a public exchange, their “book value” remained high while the underlying companies struggled, creating a “valuation freeze” that hid real losses from 401(k) participants. This led to a surge in payment-in-kind (PIK) interest—where companies pay debt with more debt—which drove nearly 60% of private credit defaults in early 2026.
The deregulatory push did not stop due to adverse events in the market. The focus shifted from legislation in Congress to executive actions by the Administration.
The administration’s concern that retirement portfolios are underperforming due to legal and institutional restrictions affecting investment opportunities inside retirement accounts is valid. However, the lack of investment opportunities in private credit is not the primary problem caused by restricted investment options.
Key Questions:
Why is the Administration and the Republican Congress so fixated on expanding opportunities for private credit while ignoring other more meaningful investment restrictions, including the use of Series I bonds inside of retirement accounts and the use of bonds with specific maturity dates inside 401(k) plans?
Furthermore, why is there so little interest in the expanded use of low-investment grade bonds inside retirement plans, a risky asset for sure, but one that is potentially less risky than private credit?
Series I Savings Bonds offer individual savers the best possible defense against inflation, featuring guaranteed capital protection backed by the U.S. Treasury. Yet, federal rules dictate they can only be purchased directly via Treasury Direct in individual taxable accounts. Savers are legally barred from holding these powerful inflation-fighting assets inside their 401(k)s or IRAs, where they could provide vital portfolio protection during the inflationary spikes of the early 2020s and in the current geopolitical crisis.
I have written extensively about Series I Savings Bonds on this blog including a practical guide for investors, and a study comparing returns on Series I bonds to returns on a conventional bond fund.
Typical 401(k) plans force savers into open-ended bond ETFs or mutual funds, which lack maturity dates and whose prices which fluctuate wildly based on interest rate movements. When rates skyrocketed, the traditional 60/40 portfolio collapsed because the “40% bond cushion” bled value. Had the financial infrastructure instead facilitated simple defined-maturity corporate or Treasury bond ladders within 401(k)s -- allowing securities to be held to maturity for a guaranteed return of principal -- retirement accounts would have fared significantly better.
This article observes that even in liquid brokerage accounts the advisor focus is often on bond mutual funds or ETFs with no maturity date over individual bonds and bond ladder, which can be held to maturity.
I do not understand why the Administration is so focused on the expansion of risky investment options when current rules and institutional practice preclude less risky investments which would improve overall portfolio risk and return in both retirement accounts and regular brokerage accounts.
The aggressive push to expand private credit within defined-contribution plans appears less like a retail-saver renaissance and more like an institutional bailout. This policy shift is heavily driven by a structural need within the private equity ecosystem to sell more private credit instruments to investors because safer alternatives already exist for pursuing higher fixed-income yields, including the expanded use of sub-investment-grade bonds and bond funds.
Data tracked by industry groups like the Investment Company Institute suggests that standalone high-yield corporate bond funds are rarely offered as core menu options, seemingly restricted to a small minority of larger corporate plans due to fiduciary caution. Instead, high-risk public debt appears primarily integrated behind the scenes within multi-asset target-date funds, where institutional managers routinely allocate a small fraction of the fixed-income sleeve to high-yield bonds to boost performance.
The policy irony is stark: the infrastructure already exists to sprinkle diversified high-risk public debt into retirement plans via institutional oversight. The new push seeks to duplicate this structure, but replace transparent, SEC-regulated junk bond funds with opaque, direct-lending private credit vehicles.
If both private credit and public junk bonds are wrapped inside diversified funds, a critical question arises: which vehicle is riskier for a retail investor? The private credit fund with redemption issues carries vastly greater structural risk.
While a junk bond fund and a private credit fund both hold diversified pools of corporate debt rather than single instruments, their regulatory and operational protections are fundamentally mismatched:
Regulatory Oversight: Public high-yield bond funds are registered under the Investment Company Act of 1940 and subject to strict SEC disclosure laws. Private credit funds are exempt from standard SEC registration, and their loan covenants are privately negotiated in darkness.
Valuation and Transparency: Public high-yield bond funds feature daily, market-driven pricing determined by active public trading exchanges. Private credit funds rely on quarterly mark-to-model book values and are highly prone to subjective valuation freezes.
Sector Allocation Risk: Public high-yield bond funds are broadly diversified across heavy industry, retail, healthcare, and energy. Private credit funds carry severe concentration in tech and Software-as-a-Service (SaaS) sectors, which account for roughly 20% of direct loans.
Current Default Profile: Public high-yield bond funds experience a trailing 12-month default rate of approximately 3.4%, which is transparently reflected in real-time. Private credit funds experience a trailing 12-month default rate of approximately 5.5%, which is heavily masked by payment-in-kind debt structures.
Liquidity and Exit Risk: Public high-yield bond funds offer continuous daily liquidity, as these funds cannot unilaterally block investor withdrawals. Private credit funds suffer from structural illiquidity and are prone to gating, redemption halts, and capital lockups.
Public junk bonds have largely avoided the worst excesses of the current credit cycle because their pricing is exposed to daily public market scrutiny. If a borrower underperforms, the public fund’s Net Asset Value adjusts instantly and transparently.
In contrast, a private credit fund experiencing redemption issues shifts the burden of structural illiquidity directly onto the investor. Pushing private credit into retail plans hides this systemic distress by burying opaque, un-tradable assets inside target-date funds, resulting in quiet underperformance that investors cannot see or react to.
A critical risk shared by both public junk bond funds and proposed private credit retail funds is the lack of a definitive maturity date, which exposes investors to severe interest rate and price risk.
When an investor builds an individual bond ladder, each security has a fixed maturity date. If interest rates spike and bond prices fall, an investor holding an individual bond to maturity faces zero capital loss; they are legally guaranteed to receive their full principal ($1,000 par value) back at expiration.
Mutual funds and ETFs do not behave this way. To maintain a constant investment mandate (e.g., maintaining a high-yield portfolio with an average duration of 5 years), fund managers must continuously sell bonds approaching maturity and buy new, longer-term debt. Consequently, a bond fund never matures.
Because bond funds never hit a maturity finish line where principal is guaranteed to return, they behave like perpetual directional bets on interest rates. When interest rates climbed rapidly, public bond funds suffered massive, unmitigated capital losses on paper. The traditional 60/40 portfolio can fail miserably at times, as discussed here and in other articles in the financial press.
By inserting private credit funds—which also lack true maturity structures for the end investor—into the 401(k) ecosystem, regulators are expanding an asset class that suffers from this exact same perpetual duration trap, while layering on severe redemption restrictions.
Consider a scenario where a standard, daily-liquid 401(k) mutual fund or target-date fund holds a seemingly conservative 5% allocation to a private credit vehicle managed by an institution like Blue Owl or Blackstone. If that underlying private credit vehicle hits a wall and enforces a strict redemption gate, the broader 401(k) mutual fund cannot liquidate that 5% asset.
Because the 401(k) mutual fund is legally obligated to provide daily liquidity to plan participants, its managers will not attempt to force a redemption from the gated private credit firm. Instead, the mutual fund is forced to internalize the illiquidity. The book value of that 5% private credit holding will either freeze at an artificial price or slowly mark downward based on internal models.
A retiree attempting to shift capital out of the mutual fund into cash will be forced to sell their shares at a loss, permanently locking in the hidden, depressed valuation of the frozen private credit slice.
A younger worker rebalancing their portfolio to buy the dip will unwittingly pump fresh capital into a mutual fund that is forced to use that liquidity to subsidize a structurally frozen, underperforming, and illiquid asset class.
Portfolio Design: Integrating Private Credit for Long-Horizon Goals
While private credit introduces severe liquidity mismatches within daily-liquid retirement frameworks, Modern Portfolio Theory (MPT) does validate its inclusion in specialized, long-horizon portfolios.
Literature Synthesis: The Theoretical Case for Illiquidity
Markowitz (1952): Establishes that expanding the asset menu optimizes the efficient frontier, provided the alternative asset offers a structural “alpha” or risk-adjusted return uncorrelated with the broader portfolio.
Ang (2014): Demonstrates that institutional and long-horizon investors can harvest a distinct “illiquidity premium”—excess returns earned by holding assets that cannot be readily traded—acting as a compensated factor for capital lock-up.
Munday et al. (2018): Provides empirical validation, showing that private credit funds historically deliver persistent outperformance relative to liquid public debt (such as high-yield bonds), justifying the underlying structural complexity and fees.
Harry Markowitz’s foundational theory demonstrates that a broader asset base can optimize an investor’s efficient frontier, maximizing returns for a given level of risk—provided that the alternative asset offers an “alpha” (excess return) that is structurally uncorrelated with the rest of the portfolio (Markowitz, 1952).
Most proposed expansions of private credit to relatively unsophisticated retail investors with limited liquidity are structurally flawed. When market volatility strikes and redemption gates slam shut, a seemingly stable asset collapses in value leaving investors a choice between taking a large loss or sitting still on an illiquid asset with uncertain future value.
For our paid subscribers, we have engineered a proprietary structural solution, which would allow for the use of a modified private credit instrument into a newly redesigned 529 account.
