In The News

Several state pensions have benefited from the surge in non-U.S. equities, including emerging markets.

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According to NEPC’s head of marketable equity research Nedelina Petkova, strong performance from financials, industrials, and defense-related businesses and ongoing improvements in Japan have helped international developed markets. Plus, Petkova wrote that EAFE (Europe, Australasia, and the Far East) performance “has been less dependent on a small number of technology companies and reflects a broader set of economic drivers than the U.S. market.”

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Like borrowing from a 401(k), the tactic can help short-term but carries big long-range risks.

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“Once you get much over a spending rate of 7%, consistently, you are an at-risk endowment,” said Kristin Reynolds, who advises endowment administrators on their investment strategies at consulting firm NEPC. She was speaking generally, not about a specific college.

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The ongoing challenges of active management were reflected in 401(k) plan fund changes in 2025, as concentration in large-cap equities and poor performing quality small-cap equities forced some plan sponsors to replace funds, according to defined contribution plan consultants.

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Mikaylee O’Connor, partner and head of defined contribution solutions at NEPC, said among their clients, active growth funds have faced more challenges than active value funds, because of the hurdles of the extreme concentration of the growth index with the dominance of tech stocks.

“(Retirement plan) committees really have responded in different ways. I will say some have moved to passive large-cap growth while retaining active largecap value, and I think that’s a recognition that this has been one of the top performing asset classes, and so they’re reevaluating how (to) actually deliver that to participants,” O’Connor said.

Others, she said, have moved to eliminating any style-specific large-cap funds and simply moved to a passive core allocation.

“I think the main theme there is that committees are revisiting their menu structures. We actually did a little bit more digging into this, and in the last five years, approximately 30% of our clients have made structural changes to their large-cap lineup,” such as swapping out active managers, she said.

“So it’s not just in the last year, but over the last five years, we’ve seen this trend of making some sort of (large-cap) change.”

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Fewer fiduciary risks, greater access to private markets investments, improved corporate governance and lower costs are among the reasons retirement plan sponsors choose outsourced chief investment officer services, producing an asset surge under OCIO management plus predictions that there’s more to come.

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Fiduciary risk is a “commonly cited reason” when DC sponsors consider OCIO services, said Aaron Chastain, partner and corporate solutions leader for the NEPC consulting firm.

Hiring OCIO services doesn’t eliminate fiduciary risk because sponsors have a fiduciary duty to monitor OCIO activities, and sponsors’ ERISA lawyers are “very involved” in making sure sponsors understand their responsibilities, he added

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For many sponsors, OCIO is “a more efficient way to access alternatives investments,” Chastain said. “It allows sponsors to focus on policy decisions” about which — if any — private markets investment they want to offer. OCIO handles the manager selections, he said.

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 “Employers first embraced OCIOs to outsource investment oversight, and PEPs are emerging as the next evolution, enabling them to offload much of the administrative burden of running a retirement plan,” Chastain said. “It allows organizations to focus on their core business while retirement plan experts handle the rest.”

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Recordkeepers are in a tight spot in the retirement industry.

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It is creating tension in the industry, according to Mike Contorno, principal in and head of defined contribution vendor management at NEPC, an investment consulting firm which does not operate under this business model.

“These issues have become much more prominent in discussions around provider selection and long-term strategy,” Contorno says.

This trend’s impact on day-to-day provider selection remains to be seen, but as consolidation continues and as firms seek greater scale, Contorno says revenue opportunities tied to participant assets and wealth management are becoming increasingly important factors in long-term partnership strategies.

He adds that the most tangible impact is in request-for-proposal pricing: Firms that generate significant revenue from participant assets, rollovers or wealth management services may have greater flexibility to reduce or even waive consulting fees. That is why full disclosure of all related revenue streams would allow plan sponsors a more transparent comparison of potential partners.

“Greater transparency around these revenue streams would help plan sponsors better understand the economic incentives involved and evaluate potential misalignment of interests when selecting a provider,” Contorno says.

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Small-cap equities are in the midst of a revival, leading U.S. public pension funds to take a closer look at their active managers that have not kept up with benchmark performance, industry experts say.

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Nedelina (Nina) Petkova, principal and head of marketable equity research at NEPC, said despite the Russell 2000 index’s double-digit gains, lower quality, higher beta and momentum-oriented stocks drove that strong performance.

“On the active manager side, there’s always a preference for quality, profitability, and downside risk discipline, so I think that’s really important as a backdrop,” said Petkova.

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“I think when we look back through history, quality often trails large market rallies. We saw something similar back in 2021 and it often comes back in favor shortly thereafter,” Petkova said.

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“Many of the stocks that are responsible for the majority of these returns have been a specific subset, and many of these names, in particular, have since exited the small-cap index with the latest June reconstitution,” Petkova said.

Going forward, the more frequent reconstitutions will impact the dynamics of the small-cap universe, and Petkova said she sees this as a positive.

“The problem was that rising volatility and an increase in the (rapidity) of winners and losers have led to index style drift, and the move to reconstitutions twice per year should level the playing fields and should help indices stay more aligned with their intended exposures,” Petkova said.

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GPs are increasingly using co-investments to strengthen relationships with LPs, tapping investors’ industry expertise and networks.

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Meanwhile at NEPC, while demand for co-investments has remained relatively consistent, the Hightower-owned advisory firm’s head of private equity investments Josh Beers sees increased interest in large private technology companies thanks to artificial intelligence, though he dismissed a lot of that as headline chasing and FOMO.

“Overall demand for co-investing has largely centered on fee-free exposure and, in some cases, shorter hold periods,” Beers told II in an email. “The increased curiosity around technology names has been driven primarily by headlines and a broader fear of missing out.”

Beers added that allocators can also use co-investments to help diversify their portfolios beyond listed and private companies in tech and AI.”

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Active U.S. fixed income still dominates the asset class, but passive strategies are steadily gaining ground in defined contribution plans as sponsors add more index options, consultants say.

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The growth of passive fixed income has been centered on investment options offered in defined contribution plans and is about choice rather than replacement, said Mikaylee O’Connor, partner and DC team leader at investment consultant NEPC, in an interview.

“The percentage of plans offering both active and passive fixed income has increased meaningfully, “ O’Connor said. Five years ago, 59% of the consultant’s DC plan clients offered both active and passive options and now 84% of those clients offer both, O’Connor said.

“Most of that was the addition of passive fixed income,” she said. “So, what that means is sponsors are building mirrored investment menus, so that participants can then choose between active and passive.”

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NEPC’s O’Connor also said another structural force supporting more assets moving into passive fixed income over the past five years is fairly tight performance dispersion.

“If you look at over the last five years, the return spread between the top and the bottom quartile managers within core fixed income has been relatively narrow, so it’s making right essentially harder for active managers to differentiate themselves after fees,” O’Connor said.

This makes passive fixed income an “effective building block,” providing very low fees and similar performance.

“I would say that the difference between core and core plus is wider, but not meaningfully, compared to what you see in the U.S. equity or international equity space,” she said.

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As family offices deepen their exposure to private markets, many are discovering that access alone is no longer sufficient to drive outcomes. . . Karen Harding, partner and private wealth team leader at NEPC, works closely with family offices navigating these challenges and advises on building more resilient, institutional-quality private markets programs.

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CM: How has the current distribution slowdown disrupted traditional capital recycling assumptions for private equity and credit portfolios?

KH: Historically, many private markets programs relied on a relatively smooth cycle of distributions to fund new commitments, but that assumption has been disrupted as distributions have slowed.

The result is that capital recycling is no longer as dependable as it once was. Family offices are adapting by rethinking pacing or slowing commitments, or by looking to alternative funding sources, such as liquid assets or credit facilities, to ensure capital calls can still be made in the absence of distributions.

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CM: For families that historically relied on relationships or brand to choose managers, what first steps do you suggest to move toward a more disciplined, repeatable process?

KH: The transition is less about replacing relationships and more about formalizing decision-making around them.

The first step is to define clear evaluation criteria: what constitutes a strong manager, how strategies fit within the broader portfolio, and how success is measured across cycles. From there, the focus shifts to building a repeatable process that applies those standards consistently.

A thoughtful, consistent approach to manager selection is one of the most important drivers of long-term success in private markets.