Fiduciaries Should Be Wary of Private Equity in 401(k) Plans

President Trump issued an executive order to encourage adding private equity and alternative investments to 401(k) plans. However, finance expert suggests that workers don't need private equity in their retirement plans, as it can be complex, have longer time horizons, and higher fees. The Department of Labor is tasked with making this goal a reality, but some suggest the expansion could be limited to 10% to 20% of target-date funds.

President Donald Trump issued an executive order on Thursday, August 7, 2025, to expand the options for 401(k) investors by allowing access to private equity, cryptocurrency, real estate, and other alternative assets. This move aims to give retirement savers more investment choices, potentially increasing their returns and diversification [1].

The executive order directs the Department of Labor to re-examine its guidance and clarify its position on alternative assets within 180 days. It also instructs the Securities and Exchange Commission (SEC) to consider facilitating access to these assets for 401(k) plans. The goal is to provide Americans with broader investment options, potentially leading to better retirement outcomes [1].

However, the expansion of 401(k) options to include private equity and alternative investments is not without risks. Financial experts warn that these assets can be complex, have longer time horizons, and come with higher fees. Robert Brokamp, a financial planning expert at The Motley Fool, notes that private assets lack transparency and liquidity, making it harder for investors to sell their investments, especially during market panics [1].

Moreover, private equity funds can charge significantly higher fees than typical 401(k) investments like mutual funds and ETFs. Benjamin Schiffrin, director of securities policy at Better Markets, points out that private funds can charge 1% to 2% in management fees and up to 20% in performance fees, while target-date mutual funds holding stocks and bonds charge around 0.3% [1].

Despite the risks, some retirement plan providers are already moving to offer these investments. BlackRock, the world's largest asset manager, announced plans to launch a 401(k) target-date retirement fund that includes private investments by 2026. Empower, another retirement giant, plans to offer private investments in some workplace accounts later this year [2].

Experts suggest that the expansion of private equity and alternative investments in 401(k) plans could take months to materialize. For now, education and safeguards are key, especially for younger investors and those without access to professional financial advice. Financial professionals recommend limiting exposure to these investments to 5% to 10% of a portfolio to manage risk [1].

While the executive order aims to democratize access to private markets, it is essential for investors to understand the risks involved. The potential for higher returns comes with the risk of significant losses. Investors should approach these investments with caution and ensure they have a solid understanding of the risks before making any decisions [1].

References:

[1] https://www.nbcnews.com/business/personal-finance/trump-401k-changes-what-to-know-rcna223615

[2] https://www.usatoday.com/story/money/2025/08/07/trump-401ks-order-private-equity-retirement-investments/85565272007/