The Case for Private Assets in 401(k)s: Risk, Illiquidity, and the Trump-Backed Shift in Retirement Strategy

The U.S. retirement landscape is undergoing a seismic shift. On August 7, 2025, President Donald J. Trump signed an executive order to democratize access to alternative assets—private equity, real estate, digital assets, and more—in 401(k) and defined-contribution (DC) plans. This move, framed as a bid to expand diversification and competitive returns for 90 million Americans, has reignited debates about the feasibility of integrating illiquid, opaque investments into mass-retirement portfolios. While proponents argue that private assets could reshape long-term wealth-building, critics warn of systemic risks, pricing opacity, and the potential for fiduciary missteps.

The Illiquidity Conundrum: A Double-Edged Sword

Private assets, by design, lack the liquidity of public markets. Unlike stocks or bonds, which can be traded instantly, private equity and real estate investments often require lock-up periods of five to seven years. For 401(k) participants, this raises critical questions: What happens if an investor needs cash during a financial emergency? How do they value their holdings in the absence of real-time pricing?

Simon Tang, head of U.S. at Accelex, underscores the challenge: “Private markets are a different ballgame. There's no real-time information, no ticker, and no standardization—just fragmented documents and unstructured formats.” This lack of liquidity is compounded by the fact that many 401(k) participants are unprepared for long-term commitments. A 2024 survey by the Employee Benefit Research Institute found that 43% of workers would struggle to cover a $1,000 emergency expense. Forcing them into illiquid assets could exacerbate financial vulnerability.

Pricing Opacity: The Hidden Cost of Complexity

Even if investors accept the illiquidity of private assets, the lack of transparent pricing remains a hurdle. Publicly traded assets are valued daily based on market consensus, but private investments rely on internal appraisals or limited third-party valuations. This opacity can lead to mispricing, overvaluation, or undervaluation, distorting portfolio assessments.

Consider the case of a 401(k) participant allocated to a private real estate fund. If the fund's valuation is based on optimistic projections rather than market data, the participant may believe their investment is growing when, in reality, it's underperforming. This risk is amplified during economic downturns, when private assets may lose value without clear signals. As Andrew Herzog, associate wealth manager at The Watchman Group, notes, “The supposed diversification benefits of private assets may be illusory if their true value remains unknown during a crisis.”

Fiduciary Safeguards: A Regulatory Tightrope

The executive order mandates the Department of Labor (DOL) to reexamine fiduciary duties under ERISA, including the potential rescission of the 2021 Supplemental Private Equity Statement. While this signals a more permissive stance, it also places immense pressure on regulators to balance innovation with investor protection.

Fiduciaries must now navigate a complex calculus: evaluating the long-term returns of private assets against their high fees and illiquidity. Private equity firms, for instance, typically charge 2% management fees and 20% of profits—far exceeding the 0.51% average for ETFs. These costs can erode returns, especially for smaller investors who lack the bargaining power of institutional buyers. Charles Massimo, a financial advisor, warns that “introducing the allure of private equity to unsophisticated investors could lead to poor decisions, as managers often reserve the best deals for high-net-worth clients.”

Market Volatility and Systemic Risks

The inclusion of private assets in 401(k)s also raises broader systemic concerns. Senator Elizabeth Warren has highlighted the risks of private credit's entanglement with the banking system, noting that nonbank financial institutions could destabilize the economy during a crisis. Digital assets, while more liquid, introduce volatility that could destabilize retirement portfolios. For example, a 401(k) heavily allocated to cryptocurrencies might see its value swing by 20% in a single day—a scenario incompatible with the long-term, stable growth goals of most retirees.

The Path Forward: Education, Structure, and Caution

For the policy shift to succeed, three pillars must be addressed:
1. Investor Education: Participants must understand the risks of illiquidity and pricing opacity. Clear disclosures and educational campaigns could mitigate misunderstandings.
2. Structural Safeguards: Regulators should encourage the use of pooled vehicles—such as mutual funds or ETFs—that combine private assets with liquid holdings, reducing individual exposure to illiquidity.
3. Fiduciary Vigilance: Plan sponsors must conduct rigorous due diligence on managers, fees, and strategies, ensuring that private assets align with participants' risk profiles.

Conclusion: A High-Stakes Experiment

The Trump-backed shift toward private assets in 401(k)s is a bold experiment in democratizing access to alternative investments. While the potential for diversification and higher returns is undeniable, the risks of illiquidity, pricing opacity, and systemic instability cannot be ignored. For average investors, the key takeaway is clear: these assets require careful consideration, robust safeguards, and a long-term perspective. As the DOL and SEC finalize their guidance, the success of this policy will hinge on whether regulators can strike a balance between innovation and protection—ensuring that the pursuit of alternative returns doesn't come at the cost of financial security.

For now, the market watches closely. The next 18 to 24 months will determine whether this shift reshapes retirement portfolios for the better—or exposes millions to a new era of hidden risks.