In March 2026, Fitch Ratings reported that the default rate among U.S. corporate borrowers of private credit hit a record high of 9.2 percent. Financial and legal experts focused on the risks to investors who put their money in private credit funds, especially funds structured as nontraded business development companies (BDCs). Notably, nontraded BDCs and publicly traded BDCs can seek capital from retail investors, while other private credit funds are generally limited to raising capital from insurance funds, pension funds, endowments, and high-net-worth individuals. But the risks posed by those other private credit funds could still be transmitted to ordinary Americans and the financial system.

Many Americans who have no idea what a private credit fund is could be at risk. Workers who save for retirement through employer-sponsored retirement plans could be affected by private credit funds that do not perform well. Similarly, those who are already retired and receive a retirement annuity administered by a life insurance company, as well as those who hold insurance policies, could be affected by the growing investments of insurance companies in private credit funds. Those risks may multiply when insurance companies are acquired by private equity funds. And the risks can become more complex or hidden when private credit loans are packaged and sold as securitized debt products.

Finally, with the proliferation of linkages between private credit funds and traditional banks, insurance companies, private equity, and other nonbanks, banking regulators are facing growing challenges in monitoring risks to the financial system arising from debt that is hidden in private credit funds.

Risks to retirement savers who participate in employer-sponsored plans
In 2025, more than 80 million workers in the United States saved for retirement in a retirement plan sponsored by their employer—about 26 million in a pension plan and more than 65 million in 401(k)s and other retirement plans. Pension fund investments are made on behalf of the plan by pension fund managers. Between 2001 and 2021, pension plan allocations to alternative assets, which include private credit, increased from 14 percent to 39 percent. In 2025, U.S. pension plans allocated more than $47 billion to private credit.

Many managers of 401(k) plans offer investment options from which employees may choose. Managers of 401(k) plans have declined to offer private credit and other private market investment options to participants in the plans they manage due to potential liability if these opaque investments perform poorly and are later deemed imprudent investments for plan participants. Managers of both pensions and 401(k) plans are fiduciaries and thus required to act solely in the interest of plan participants—the employees.

In addition to the risks of private credit investments, all private credit funds, including all BDCs, charge fees that are often not transparent and usually significantly higher than those charged by public mutual funds and exchange-traded funds. These fees are often understated or inconsistently disclosed and likely include substantial incentive fees that are structured so that managers can easily meet their profit goals. These fees can significantly reduce the claimed returns from these investments.

Despite the risks of private credit and other private market investments, the Trump administration has taken steps to weaken the rules that have historically protected workers saving for retirement from these risky investments. The U.S. Department of Labor (DOL) proposed a rule in March that would allow investment advisers to market risky private investments, including private credit, to workers for their 401(k) accounts while protecting these fiduciaries—the fund managers—from prospective liability if those investments go bad. Yet the prospect of liability for bad investment offerings is an important mechanism to ensure that plan managers act prudently. The DOL received more than 46,000 comments—many from consumer groups, think tanks, and academics—warning of the risks of these private market investments and thus the inappropriateness of providing a safe harbor for investment advisers that offer them to retirement savers. The comment period closed on June 1, but no final rule has been released to date.

The average American has historically fared poorly when investing in assets that lack transparency. After the 1929 stock market crash, Congress passed laws requiring companies that seek investments from the public to disclose basic information about their operations, ownership, management, risks, and financial performance, so that investors could make sound investments and voting decisions. From then until the early 1980s, most large securities transactions were considered public offerings that required robust disclosures, while “private offerings” were generally limited to smaller transactions with a small number of investors—often family members—who had access to the same type of information required by public offerings.

Plan managers should be held to the highest standards in selecting investments for plan participants.
This principle has been significantly eroded over time as part of a long trend of financial deregulation. Loopholes and looser rules adopted since the 1980s have created multiple exceptions to this principle. For example, under the U.S. Securities and Exchange Commission’s Regulation D adopted in 1982, private companies or private funds can raise an unlimited amount of capital from accredited investors without having to comply with the rules required when shares are offered to the public. The term “accredited investor” includes pension funds and 401(k) plan managers who manage the retirement savings of millions of average working Americans—even though the workers themselves are not accredited and thus would be entitled to extensive disclosure were they to invest directly in the same funds. But pension, 401(k), and other retirement plan managers—no matter how sophisticated—need information to make sound decisions. Expertise alone has little value if not accompanied by disclosure of information needed to assess the funds or companies in which the expert might invest.

Workers saving for retirement in employer-sponsored plans need assurance that the investment advisers managing the plans are not taking inappropriate risks with their money. Plan managers should be held to the highest standards in selecting investments for plan participants.

Risks to retirees and policyholders who have annuities and policies administered by insurance companies
Many workers use their retirement savings to purchase an annuity when they retire. The retiree enters into a contract with an insurance company, in which the retiree agrees to pay a lump sum or periodic premiums to the company in return for the company providing regular checks to the retiree for the rest of their life. In addition to underwriting retiree annuity agreements, insurance companies provide insurance to a wide range of consumers seeking coverage for personal property, accidents, automobiles, homes, and much more. Insurance companies use the premiums they receive from retirees and policyholders to make investments that fund future payouts they must make. Since those payouts theoretically occur over many years, the insurance companies are able to make long-term investments.

In recent years, however, many of the largest insurers—especially life insurers that manage retirement annuities, among other policies—have invested heavily in private credit funds. According to the National Association of Insurance Commissioners (NAIC), private credit makes up 13 percent of cash and invested assets and 21 percent of bond holdings of U.S. insurance companies. The largest U.S. life insurers account for $352 billion, or 44 percent, of the industry’s $807 billion investments in private credit funds, most of which are illiquid because they are not publicly traded. Moody’s Ratings expects the industry to expand these investments, exposing insurance companies—and their clients and policyholders—to uncertainty in the valuations and default risk of private credit borrowers, concentration risks (i.e., too much investment in one type of asset), and an inability to quickly liquidate investments (i.e., convert them to cash) should the insurance company need to make huge payouts suddenly, for example, if a wide swath of policyholders is hit with a climate disaster all at once.

Read more  @americanprogress