Private Equity in 401(k)s: A Regulatory Gamble with Retirement Savings?

The Trump administration's proposed executive order to allow private equity investments in 401(k) plans has ignited a fierce debate over whether retirement savers stand to gain or lose in this high-stakes regulatory shift. While proponents argue that access to private markets could diversify portfolios and boost long-term returns, critics warn of liquidity traps, exorbitant fees, and legal risks that disproportionately burden individual investors. As the Department of Labor (DOL) prepares to finalize guidance on this issue, retirement plan participants must scrutinize the fine print to avoid becoming collateral damage in a financial experiment.

The Regulatory Push and Its Underlying Motivations

The proposed order, first reported by the Wall Street Journal, aims to dismantle decades-old barriers that have kept private equity—a $4 trillion asset class—largely off-limits to retail investors. The DOL's 2020 guidance under Trump initially permitted 401(k) administrators to include private equity in professionally managed funds, but the Biden administration reversed this in 2021. Now, reviving that policy could open the floodgates to a market that has seen public companies shrink by 50% since the 1990s while private equity assets doubled by 2023.

The private equity industry, however, faces a paradox: while institutions like pensions and endowments have maxed out their allocations, retail investors lack the expertise to navigate these complex assets. As Senator Elizabeth Warren noted, “Private equity's '2 and 20' fee structure [2% management fee plus 20% performance fee] is a wolf in sheep's clothing for retirement savers.”

Data note: Both firms' stock performance reflects market skepticism about private equity's scalability for retail investors.

Liquidity Risks: The Silent Threat

Private equity's illiquidity—a defining trait—poses a critical risk for retirement plans. Unlike stocks or bonds, these investments are locked for 10+ years, leaving savers vulnerable to market downturns at retirement. The DOL's Employee Benefits Security Administration (EBSA) has explicitly warned that private equity may be “inappropriate for most 401(k) plans, especially small ones,” citing fiduciary challenges in valuing and monitoring these assets.

Consider this scenario: A 55-year-old worker near retirement might find their 401(k) stuck in a private equity fund that can't be liquidated until age 68. The EBSA's 2023 supplemental statement emphasized that fiduciaries lacking PE expertise—common in small plans—risk breaching ERISA if they proceed without qualified advice.

Fee Structures: A Hidden Tax on Retirement Savings

The “2 and 20” fee model endemic to private equity could erode retirement nest eggs. For example, a $100,000 investment would lose $2,000 annually to management fees, plus 20% of any gains. Over a decade, this could reduce a $1 million return to just $640,000—a stark contrast to the 0.1% fees of index funds.

Critics argue that 401(k) participants, who already face high administrative fees, lack the leverage to negotiate better terms. “This isn't about innovation—it's about asset managers seeking new revenue streams,” said one ERISA attorney.

Diversification: A Double-Edged Sword

Proponents argue that private equity's low correlation with public markets could reduce portfolio volatility. For younger investors with long horizons, this might justify the risks. However, the DOL's 2020 guidance required fiduciaries to ensure PE allocations align with participants' goals—a bar many 401(k) plans may fail to meet.

The Wall Street Journal reported that firms like Apollo and State Street have already launched target-date funds with PE components. Yet, these products lack transparency: valuations are often subjective, and redemptions may be restricted during market stress.

Investment Advice: Proceed with Eyes Wide Open

1. Assess Plan Details: Demand clear disclosures on fees, liquidity terms, and the PE fund's track record. Avoid plans where administrators lack PE expertise.
2. Prioritize Liquidity: For workers within 10 years of retirement, private equity should be off-limits unless explicitly hedged.
3. Monitor Fees: Use tools like the DOL's Fiduciary Toolkit to audit expense ratios. Avoid funds where total costs exceed 1% annually.
4. Diversify Wisely: If investing in PE, pair it with inflation-protected bonds or real estate to balance risk.

Conclusion: A High-Wire Act Without a Safety Net

The push to include private equity in 401(k)s reflects a broader shift toward privatizing retirement risk—a move that could enrich asset managers while leaving savers exposed. While the policy may benefit a few sophisticated investors, the majority face a lose-lose scenario: high fees if markets rise, and illiquidity if they fall.

As the DOL finalizes its guidance, retirement plan participants should demand safeguards: independent audits, caps on PE allocations, and fiduciary accountability. Without them, this regulatory shift may end up as a cautionary tale about the perils of conflating innovation with investor protection.