'The use of alternatives in target date solutions in Canada is less novel than it is in the US,' says T. Rowe's Jessica Sclafani
Defined contribution (DC) plans are showing fresh signs of evolution, particularly when it comes to incorporating private credit, according to recent T. Rowe Price research.
What was once considered a niche, hard-to-access asset class is now being explored not just as part of diversified target date funds (TDFs), but as a standalone component in professionally managed multi-asset strategies.
Jessica Sclafani is quick to highlight that private credit isn't being slotted in as a core menu option or standalone fund participants choose on their own. Rather, it’s gaining traction within the more controlled environment of custom or off-the-shelf multi-asset solutions.
“This is not a conversation about adding private credit or private equity as a standalone investment option for participants to allocate to. It’s within the confines of a professionally managed multi-asset solution,” said Sclafani, global retirement strategist at T. Rowe Price.
According to T. Rowe, the main reason DC plans are increasingly using private credit is to enhance portfolio diversification and improve risk-adjusted returns, particularly within the fixed income allocation.
After recent periods of market volatility, where both equities and traditional fixed income declined, plan sponsors are seeking alternative sources of yield and downside protection. Private credit offers the potential for higher returns compared to public fixed income, as well as lower correlation to traditional asset classes, which can help smooth out overall portfolio performance.
For plan members, private credit offers several potential benefits. It can deliver higher yields than traditional fixed income, potentially improving retirement outcomes. By diversifying away from public markets, it also helps reduce exposure to market swings.
The active management typical of private credit strategies may provide added downside protection, particularly valuable for those nearing retirement. Additionally, DC plans offer access to private credit, an asset class that’s typically out of reach for individual investors.
Part of the shift to private markets, according to Sclafani, is being driven by a combination of regulatory tailwinds, market volatility, and a re-evaluation of the active-passive balance within plans.
“This summer, we saw an executive order from the current presidential administration that instructed our Department of Labor to issue clarifying guidance on a fiduciary's responsibility when offering private assets or alternative investments within a professionally managed multi-asset portfolio,” she said, noting the deliberate language in the executive order - especially its call for litigation reform - as a sign of support for plan sponsors.
“In the US, we can have a dynamic whereby plan sponsors want to implement innovative offerings for their plan members, but feel as though they can't because of litigation concerns,” she added.
Methodology behind T. Rowe Price’s fifth annual DC consultant study noted that the 2025 research drew responses from 36 firms representing nearly $9 trillion in assets under advisory. That figure reflects over 70 per cent of the US DC market.
While the study is U.S.-focused, Sclafani emphasized its relevance across borders, pointing out that several participating firms have Canadian subsidiaries.
The research centered on five key themes: investment trends, target date funds (TDFs), managed accounts, retirement income, and financial wellness.
Among the more notable findings was the growing momentum behind hybrid or blend TDF strategies. These combine active and passive investment components to deliver a cost-effective approach that still allows for active management’s potential upside.
“We saw strong support from both the consultant and advisor community for target date solutions constructed with both active and passive strategies,” Sclafani noted, adding that this approach is now gaining traction in both the US and Canadian markets.
According to Sclafani, while the US is generally seen as a more mature DC market, Canada has taken a lead when it comes to integrating alternative investments into target date solutions.
“The use of alternatives in target date solutions in Canada is less novel than it is in the US. That’s one area where the Canada market is more advanced than the US market,” she said.
Sclafani explained that target date solutions dominate DC plan contributions in both the US and Canada, though the structure of adoption has differed between the two markets. In Canada, a larger proportion of plan assets are already invested in target date funds, whereas in the US, some older participants remain outside these solutions due to their delayed designation as default investments.
Still, she acknowledged that target date solutions are the most prevalent and most commonly used fund within the US and in Canada. That widespread usage, she noted, makes them a logical vehicle for incorporating retirement income features.
Based on the research, most consultants and advisors believe that if alternatives like private credit are to be introduced in DC plans, it will happen within the structure of a target date fund—whether custom-built or off-the-shelf, emphasizing that it's not being treated as a standalone investment option for plan participants.
“What would be the most impactful or immediate way to reposition the DC plan to also accommodate members’ retirement income needs? It would be through a target date solution where most of your members are already using it,” she said.
While target date funds remain the dominant default due to their simplicity and cost efficiency, Sclafani also noted a growing interest in managed accounts, especially for older participants nearing retirement who may benefit more from a personalized approach.
She explained that managed accounts are primarily a US-focused solution in DC plans and are distinct from target date funds in a key way; they allow for individual personalization rather than applying a uniform glide path across all participants.
Despite their potential, managed accounts come with higher costs, which has limited their adoption as default options.
“I don't think that we'll see managed accounts eclipse target date solutions but it is a continued area of interest and does offer potential benefits,” she said.
