TL;DR:
- Private equity access in 401(k)s may expand under future regulation.
- Illiquidity, higher fees, and lack of transparency pose risks for average investors.
- Regulatory changes could pressure employers to reevaluate fiduciary responsibilities.
- Market experts are divided on whether private equity adds meaningful diversification or return.
Private Capital’s Next Frontier: Retirement Accounts
Private equity firms are eyeing America’s massive pool of retirement savings as their next big funding source. Most 401(k) plans today don’t offer options to invest in private equity. However, with regulatory shifts potentially on the horizon, that could change.
As of late 2024, just 2.4% of 401(k) sponsors reported offering private equity as an option (Plan Sponsor Council of America). That may seem small, but the momentum is building thanks to lobbying pressure from financial institutions and signals of policy easing from political leaders.
Why It Hasn’t Happened Yet
There are good reasons for the slow adoption. Private equity funds are typically:
- Opaque: Disclosures and performance data are limited.
- Expensive: Fees are much higher than mutual funds or ETFs.
- Illiquid: Withdrawals may be restricted or delayed.
For employers, the risks are substantial. Under ERISA, employers must act in their employees’ best financial interest. That includes offering prudent, fairly priced investment options. If an employer offers risky, opaque private funds and employees lose money, it could trigger costly litigation.
“This is fraught with danger. A company that puts private equity in its 401(k) is undertaking a serious risk of breaching its fiduciary duty,” said Jerry Schlichter, ERISA attorney and leading advocate for 401(k) participants (Schlichter Bogard).
Political Winds May Shift Access
According to Jaret Seiberg, a financial policy analyst at TD Cowen, the Trump administration is expected to push for greater access to alternative investments like hedge funds, private equity, and private real estate within retirement plans.
This could include:
- Executive orders to expand investment access.
- Department of Labor guidance loosening ERISA interpretations.
“The administration could require agencies to create rules expanding alternative investment options in IRAs and 401(k)s,” Seiberg wrote in a daily note (TD Cowen Research).
What Are the Potential Benefits?
Advocates argue that private equity offers exposure to companies that never go public, giving investors a more comprehensive stake in the overall economy.
“To have a truly diversified portfolio, you need both public and private market exposure,” said Robert Goldstein, COO at BlackRock, in a recent Morningstar interview.
There’s also the correlation argument: public stock and bond markets are increasingly moving in sync, while private assets may behave differently and offer a hedge.
But that depends on performance — which isn’t always clear.
ETF Holdings Breakdown
| Fund Type | Typical Expense Ratio | Liquidity | Transparency |
| Index Fund | 0.05% – 0.15% | Daily | Full disclosure |
| Private Equity | 2% + 20% performance | Limited | Minimal |
| Source: Morningstar |
What Are the Risks?
Transparency & Valuation: There’s no centralized, regulated method to compare private equity performance to traditional index funds. Retail investors often don’t know what’s in the fund.
Liquidity: Unlike mutual funds, private equity vehicles often lock up capital for years, with only periodic liquidity windows.
Cost: Fees are high — often a 2% annual management fee plus 20% of profits.
Fiduciary Complications: For employers, offering these funds adds legal exposure. If the investment performs poorly, the company could face lawsuits.
Motivation Matters: Critics like Benjamin Schiffrin at Better Markets argue this push isn’t consumer-driven.
“This isn’t about workers wanting complex private funds. It’s about private equity firms needing new capital sources as traditional institutional funding dries up,” Schiffrin said.
Moody’s Rings the Alarm Bell
In a recent report, Moody’s warned of systemic risks from rapidly increasing retail access to private markets.
“Retail investors expect ready access to their money. But these funds can’t always deliver liquidity during market turmoil,” the agency wrote.
Such a mismatch — if large numbers of retail investors try to cash out simultaneously — could stress the entire financial system.
Does Private Equity Deliver Higher Returns?
The supposed payoff is that higher risk and fees will bring stronger returns. But the data is mixed.
“There’s no guarantee retail investors will benefit meaningfully,” said Jason Kephart, senior analyst at Morningstar. “Public markets have served long-term investors very well.”
Kephart also noted that private companies are just as vulnerable to economic headwinds like inflation, interest rates, and global shocks.
“Being private doesn’t shield you from the world.”
Should You Invest If Offered?
If your plan eventually includes private capital options, consider the following:
- Are the fees clearly disclosed?
- How often can you redeem your investment?
- Can you assess performance and risk?
And finally — does it fit with your retirement horizon, risk tolerance, and need for liquidity?
Until clear, cost-effective, and transparent options emerge, many experts urge caution.
Bottom Line
Private equity access may become more common in 401(k) plans, but it’s not a clear win for average savers. The complexity, cost, and legal exposure make it a controversial addition. If the political climate enables these changes, fiduciaries and investors alike will need to tread carefully.
