Private Equity in 401(k)s: Why Retirement Savers Should Be Skeptical
A subtle shift is unfolding in the retirement investment world—and many investors aren’t aware it’s happening.
Trump’s executive order opened the door for private equity and other alternative assets to be included in 401(k) plans. At first glance, this might seem like a step toward democratizing access. Private equity has long been associated with strong returns for institutions and ultra-wealthy investors. So why not offer it to everyday savers too?
But that logic misses a crucial point: what works for billion-dollar endowments often doesn't translate well to individual retirement accounts.
The Sales Pitch: More Options, More Returns?
Proponents argue that private equity brings diversification and the potential for higher long-term returns. Because private assets don’t trade daily like public stocks, their performance appears smoother on paper—less volatile.
But the reality is far more complex.
Private equity investments are illiquid, opaque, and layered with fees. These traits pose serious challenges for retirement investors managing accounts that may need to last 20 to 30 years.
And critically, this "smoother ride" is often a mirage. Fund managers—not the market—set valuations, a practice that some experts call “volatility laundering.” Just because prices don’t fluctuate doesn’t mean the risk has disappeared.
Even the Pros Are Wary
In the CFA Institute’s 2024 Global Member Survey, a majority of investment professionals expressed skepticism about including private equity in defined contribution plans like 401(k)s.
Their reasoning is straightforward: private equity requires long time horizons, deep due diligence, and intensive oversight. These are standard in institutional portfolios but rare in the average retirement account.
Even sophisticated investors—those managing their own portfolios or working with advisors—are voicing concerns.
As Jason Zweig from the Wall Street Journal rightly points out:
“What works for billion-dollar endowments often doesn’t work for everyday savers. Private equity investments come with steep fees, limited liquidity, and opaque valuations—conditions that don’t belong in retirement accounts meant to be simple, transparent, and flexible.”
Who Benefits?
The push to include private equity in 401(k)s isn’t driven by investor demand. It’s being led by private equity firms seeking a new source of long-term capital.
Why now?
Traditional exit strategies—such as IPOs and corporate buyouts—have slowed. Many private equity firms are stuck with aging investments that are difficult to sell. Secondary-market sales of fund interests have shown discounts as steep as 20%, underscoring the challenges. Even elite endowments like Harvard and Yale are looking to offload positions.
Retail investors, through retirement plans, offer an attractive alternative—just as institutional interest is waning. Once again, when institutional capital needs a sucker buyer, they look to retail investors.
What Could Go Wrong?
For most retirement savers, the risks outweigh the potential rewards:
Illiquidity: Private equity funds often lock up capital for 7 to 10 years. That’s a major drawback if an investor needs to rebalance or access funds unexpectedly.
High and Hidden Fees: These investments carry multiple layers of costs—management, performance, and administrative fees. Total expenses can exceed those of index funds by a factor of 20. These costs are rarely disclosed in a clear, accessible way.
Lack of Transparency: Unlike public companies, private equity holdings aren’t required to publish financials. Valuations are self-reported, which can overstate stability and mask risk—especially in volatile markets.
Higher Risk Doesn’t Always Mean Higher Returns: While some private equity funds outperform public markets, many underperform—especially after accounting for fees. These investments are often riskier than public equities, but the illiquidity and lack of transparency can turn risk into regret.
Retirement Investing Needs to Be Simple, Not Exotic
The strength of the 401(k) lies in its simplicity: clear choices, daily liquidity, and low-cost index funds. Asset allocation should consider individual circumstances such as time horizon and risk tolerance. Adding private equity introduces complexity that most plan participants—and even plan sponsors—aren’t equipped to manage.
➡️ How to Approach Asset Allocation: A Practical Guide.
There’s also a legal dimension: employers offering 401(k) plans have a fiduciary duty to act in the best interest of participants. That’s why most have steered clear of private equity. Without regulatory “safe harbor” protections, the legal risks are significant.
The Bottom Line
Private equity is being packaged as the next frontier in retirement investing. But for most 401(k) participants, it’s a product in search of a problem.
Savers are better served by investment options that are low-cost, transparent, and liquid. Before embracing private equity in a retirement plan, ask yourself: is this about helping people retire better—or helping someone else offload a tough investment?
➡️ Also see Key Considerations for Adding Alternative Assets to a 401(k)
Additional Reading
Wall Street’s Big, Bad Idea for Your 401(k)
https://www.wsj.com/finance/investing/wall-streets-big-bad-idea-for-your-401-k-f1003137This New Investing Idea Isn’t Right for Your Retirement Plan
https://www.wsj.com/finance/investing/this-new-investing-idea-isnt-right-for-your-retirement-plan-480582dePrivate Equity Wants a Piece of Your Retirement Savings (Bloomberg)
https://www.bloomberg.com/news/articles/2025-02-24/private-equity-wants-a-piece-of-your-retirement-savingsPrivate Equity Interest in 401(k)s (Bloomberg Video)
https://www.bloomberg.com/news/videos/2025-02-27/private-equity-interest-in-401-k-videoPrivate Equity in 401(k)s Isn’t as Smart as It Seems (Bloomberg Opinion)
https://www.bloomberg.com/opinion/articles/2025-06-06/private-equity-in-401-k-s-isn-t-as-smart-as-it-seemsPrivate Equity: Fooling Some of the People All of the Time (CFA Institute Blog)
https://blogs.cfainstitute.org/investor/2020/01/20/private-equity-fooling-some-of-the-people-all-of-the-time/
Disclaimer
Your True Wealth is not a registered investment adviser. Our intent is to provide professional and credible financial education—resources often reserved for the affluent—in a way that is accessible to everyone. Therefore, this is financial education—not advice—and no buy or sell recommendations are provided. Every individual’s situation—and risk tolerance—is different, so readers should think critically, do their homework, and stay focused on long-term goals. Consult a licensed professional for personalized advice.