April 2, 2025 - On Monday, March 31st, the LSTA submitted a letter to the House Financial Services Committee (HFSC) advocating for expanded access to private corporate credit for defined contribution plans. On February 26th, the HFSC issued a request for public feedback on capital formation. The request, which followed a hearing on the same subject, covered a number of topics relating to capital formation: access to capital, public markets and company lifecycle, investor access and participation, and technology and AI in capital markets. In its letter, the LSTA’s position is that private corporate credit assets can be a valuable investment option for defined contribution (DC) plans, like 401(k)s, if appropriate safeguards are in place.
Key takeaways from the LSTA’s letter:
- Retirement Plan Landscape and Investment Differences
- The majority (66%) of private sector workers have access to 401(k) plans, while only 15% have access to defined benefit (DB) plans.
- Institutional investors, including defined benefit (DB) plans, already invest in private market assets for diversification and enhanced returns
- Unlike DB plans, DC plan investment options are traditionally limited publicly traded equities or fixed income securities.
- Benefits of Private Corporate Credit in 401(k) Plans
- Can provide portfolio diversification, enhanced returns and exposure to a broader range of companies given the trend of companies staying private longer.
- Safeguards for 401(k) Plan Participants
- ERISA Protections:
- Fiduciaries must prudently select and monitor investment options to ensure they align with plan objectives.
- Plan sponsors rely on third-party consultants to evaluate investment options and ensure expertise in private corporate credit.
- Disclosure requirements ensure transparency regarding fees, risks, and performance.
- Private credit may have higher fees, but ERISA mandates that fees be reasonable relative to the value and diversification of the benefits offered, not that the lowest cost investment options are chosen.
- Liquidity: While private corporate credit assets are less liquid than public investments, their long-term nature aligns with retirement saving objectives. PCC managers can – and are – create vehicles which balance liquidity needs with preservation of the “buy and hold” benefits of PCC assets.
- PCC should be included in well diversified, professionally managed DC plans
The LSTA’s response emphasizes that incorporating PCC into DC plans—under professional management and with appropriate safeguards—could help millions of Americans achieve better retirement investment outcomes, similar to DB plans.
