The Democratization of Private Assets in 401(k)s: A Paradigm Shift in Retail Retirement Investing

The August 2025 Executive Order titled “Democratizing Access to Alternative Assets for 401(k) Investors,” signed by President Donald Trump, marks a seismic shift in the U.S. retirement investing landscape. By directing the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) to revise regulations governing private and alternative assets in 401(k) plans, the order aims to bridge the gap between institutional and retail investors. This move, however, introduces complex risks and opportunities that demand careful scrutiny.

Opportunities: Diversification and Long-Term Growth

The executive order explicitly defines alternative assets as including private equity, real estate, digital assets, commodities, and infrastructure projects [1]. Proponents argue that these investments offer diversification benefits and access to high-growth sectors, potentially enhancing long-term returns for 401(k) participants. For instance, private equity and real estate have historically outperformed public markets over extended horizons, though this is not guaranteed [2]. The DOL’s rescission of the 2021 Supplemental Private Equity Statement—a move that had discouraged such investments—signals a regulatory pivot toward flexibility [3].

Moreover, the order emphasizes balancing higher fees and illiquidity against potential long-term gains. For example, private equity funds often charge 2% management fees and 20% performance fees, which critics argue erode returns [4]. Yet, for patient investors, these costs may be justified by access to non-correlated assets that perform well during market downturns.

Risks: Illiquidity, Complexity, and Fiduciary Liability

Despite the allure of diversification, private assets pose significant risks. A 2025 study from the Johns Hopkins Carey Business School questioned the suitability of private equity in 401(k)s, citing high fees, illiquidity, and long investment horizons that conflict with the expectations of retail investors [5]. Critics, including the Center for Retirement Research at Boston College, argue that private equity has not consistently outperformed traditional assets in pension plans [6].

Illiquidity is a critical concern. Unlike publicly traded stocks, private assets cannot be quickly sold, locking participants into investments for years. This creates challenges for retirees needing to access funds. Additionally, the complexity of valuing private assets—often based on subjective appraisals—can obscure true performance [7].

Fiduciaries face heightened legal exposure. The DOL’s directive to reduce litigation risks does not eliminate the potential for lawsuits if investments underperform. For example, a 2025 case study highlighted how a plan sponsor faced litigation after a private equity fund in its 401(k) returned negative returns due to poor due diligence [8]. The recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo further complicates matters, as fiduciaries can no longer rely on agency guidance to shield them from legal challenges [9].

Regulatory Implications: Clarity or Chaos?

The executive order mandates that the DOL and SEC collaborate to create “safe harbors” for fiduciaries offering alternative assets, but regulatory clarity remains elusive. The DOL’s 180-day deadline to reassess fiduciary duties under ERISA is ambitious, given the need to address layered fee structures, tax implications (e.g., unrelated business taxable income), and international reporting requirements [10].

The SEC’s role in revising accredited investor rules could further democratize access. For instance, lowering barriers for retail investors to qualify as accredited purchasers might enable broader participation in private funds. However, this could also lead to overleveraging or misallocation of capital if participants lack the expertise to evaluate risks [11].

Participant Education: A Critical Missing Link

Data from Schroders (2025) reveals that 45% of 401(k) participants would consider investing in private assets, but only 12% feel knowledgeable about them [12]. This gap underscores the need for robust education initiatives. Fiduciaries must develop clear, accessible materials explaining the risks of illiquidity, fees, and valuation challenges. For example, a hypothetical educational module could contrast the volatility of private equity returns with the stability of index funds [13].

Conclusion: A Paradigm Shift with Caveats

The democratization of private assets in 401(k)s represents a paradigm shift, aligning retail investors with institutional strategies. However, this shift requires careful navigation of regulatory, operational, and educational hurdles. While the potential for enhanced returns is compelling, the risks of illiquidity, complexity, and fiduciary liability cannot be ignored. As the DOL and SEC finalize guidance, stakeholders must prioritize transparency, participant education, and prudent governance to ensure this policy achieves its goal of empowering, rather than overwhelming, everyday investors.

Source:
[1] White House. Democratizing Access to Alternative Assets for 401(k) Investors. August 7, 2025.
[2] UBS. Private Investments in 401(k) Plans. 2025.
[3] DOL. Rescission of 2021 Supplemental Private Equity Statement. August 12, 2025.
[4] Forbes. Private Markets In 401(k) Plans: Balancing Risk, Reward, and Responsibility. September 3, 2025.
[5] Johns Hopkins Carey Business School. Private Equity, 401(k)s Do Not Mix. 2025.
[6] Center for Retirement Research. Workers Do Not Need Private Equity in Their 401(k) Plans. 2025.
[7] Sidley Austin. Alternative Assets - the Next 401(k) Plan Investment? August 2025.
[8] Ogletree Deakins. Executive Order Opens Door to Alternative Assets in 401(k)s. August 2025.
[9] Benefits Law Advisor. A Fiduciary's Next Steps After Trump's August 2025 Executive Order. August 2025.
[10] EisnerAmper. New Executive Order Expands 401(k) Investment Options. August 2025.
[11] Morgan Lewis. Crypto, Private Equity, and Real Estate in Your 401(k)? August 2025.
[12] Schroders. Nearly Half of Plan Participants Would Invest in Private Assets. 2025.
[13] Benefits Law Advisor. A Fiduciary's Next Steps After Trump's August 2025 Executive Order. August 2025.