Jerome Schlichter's Warning: What You Need to Know About Private Equity in Your 401(k)

The stage is set for a major shift in how Americans save for retirement. Wall Street firms are pushing hard to get a piece of the $14 trillion parked in workplace plans, and the federal government is moving to clear the path. But this push faces a formidable, and very expensive, obstacle.

On one side, you have a powerful policy directive. In August 2025, President Trump signed an executive order aimed at democratizing access to alternative assets like private equity for 401(k) investors. The order states that every American preparing for retirement should have access to these investments if a plan fiduciary deems them appropriate. It instructs the Department of Labor to clarify the rules, with the goal of curbing ERISA litigation that it says constrains fiduciaries' judgment. This is a direct signal that the regulatory wind is shifting in favor of these investments.

On the other side stands a legal expert who has made a career of challenging retirement plan fees and choices. Jerome Schlichter, a veteran attorney, has issued a stark "Buyer beware" warning to employers considering adding private equity to their plans. He's not just talking; he's backed it up with results. Over the past two decades, his firm has won more than $750 million in settlements from companies and universities over retirement plan fees and investment choices. His lawsuits have targeted everything from ABB to Yale University, arguing that excessive costs and poor performance have eroded workers' savings. The industry's response has been to label him and others like him as "pension predators," but the threat of costly litigation is very real.

The legal landscape is in flux. The executive order specifically directs the Department of Labor to consider rescinding the Department of Labor's December 2021 Supplemental Private Equity Statement, a piece of guidance that discouraged these investments. That leaves only a less restrictive 2020 information letter, which didn't outright prohibit them. This creates a regulatory gray area that the push for private equity is eager to exploit.

The bottom line is a clear conflict. The policy push is real and backed by executive power. Yet, the financial industry is stepping into a minefield of potential lawsuits, with a legal giant like Schlichter ready to challenge any plan that adds these complex, expensive assets without airtight justification. For the millions of participants whose savings are at stake, the message is simple: demand clear answers. The promise of higher returns must be weighed against the proven risk of high fees and the looming shadow of a $750 million legal threat.

The Hard Numbers: Performance and Fees

Let's cut through the marketing and look at the actual numbers. For retail investors, private equity funds have delivered a clear message: you're paying a premium for a worse return.

The performance gap is stark. In 2025, the median return for large private equity "evergreen" funds was 11.20%. That's less than two-thirds of the S&P 500's 17.43% return for the same year. Over the past three years, the pattern holds: these funds have returned a median of 11.24% annually, while the S&P 500 has nearly doubled that at 22.48%. In other words, for every dollar invested in these retail private equity funds, you've seen about 60 cents less in returns over the last three years compared to a simple stock index fund.

And the cost of that underperformance is high. These funds charge fees that are orders of magnitude above standard index funds. The median expense ratio for the funds reviewed sits at 3.76%, with some charging as much as 5.20%. To put that in perspective, a fund like the Vanguard S&P 500 ETF charges just 0.03%. That's a 125-fold difference in annual costs. Some funds also allow sales charges, or "loads," of up to 5% of your investment.

The industry points to long-term studies suggesting a benefit. A BlackRock study, for instance, found that adding private equity to a portfolio could boost returns by an average of 0.50% annually over 40 years. That sounds like a small edge, but it compounds. The catch is that it's an average, not a guarantee, and it's based on the performance of the entire private equity market, not necessarily these specific retail funds. More importantly, it doesn't account for the massive fees you're paying to get that tiny boost. In the short term, as 2025 showed, you're paying those high fees for a fund that simply isn't keeping pace with the broader market.

The bottom line is a simple math problem. You're handing over a significant chunk of your savings each year in fees, and in return, you're getting a fund that has consistently lagged behind the stock market. For a retirement plan, where every percentage point counts, this is a tough trade-off to justify.

Risks to You: Liquidity, Valuation, and Hidden Costs

The promise of private equity in your 401(k) sounds good on paper, but the real dangers are buried in the fine print. It's not just about underwhelming returns; it's about the fundamental mechanics of how these investments work-and how they can work against you.

The biggest, most immediate risk is a lack of daily liquidity. Even if a fund quotes a "daily Net Asset Value" (NAV), that doesn't mean you can sell your shares on demand. As one advisor's checklist notes, the real test is whether the recordkeeper can actually handle daily pricing and capital calls. The reality is that private equity is a long-term, illiquid asset class. If a large number of participants want to cash out at once, the plan could face a "liquidity dry-up." The fund might impose a "gate," temporarily halting redemptions, or force participants to wait for a quarterly or even annual payout. For someone relying on their retirement savings for emergencies or planned expenses, that kind of lock-up is a serious vulnerability.

Then there's the problem of knowing what your investment is actually worth. Private equity funds are notorious for "valuation smoothing." This means they use complex, periodic valuations rather than daily market prices, which can mask poor performance and hide real risk. As the advisor's guidance warns, oversight recommendations need to "un-smooth" these returns to show the true volatility. This creates a dangerous opacity. Participants see a steady, seemingly stable return on their statements, but the underlying assets may be struggling. You're being told your nest egg is growing, while the fund manager is quietly estimating its value based on less frequent and potentially less transparent methods.

Finally, the high fees and sales charges eat directly into your returns, making it harder to build a retirement nest egg. The evidence shows these funds charge a median expense ratio of 3.76%, with some hitting 5.20%. That's a massive drag on your savings. And it's not just annual fees; some funds also allow sales charges, or "loads," of up to 5% of your investment. In a year where the fund itself returned just 11.20%, you're paying a fee that could be 30% or more of that gain before you even see it. These costs are a direct subtraction from your principal, compounding over decades and making it exponentially harder to reach your retirement goals.

The bottom line is that private equity in a 401(k) introduces layers of complexity and risk that are poorly suited to the needs of most individual savers. It trades daily liquidity for the promise of higher returns, but those returns have been consistently lower than the stock market. It hides true value behind smoothed valuations, and it charges fees that are a significant portion of the gains it fails to deliver. For your retirement savings, that's a high-stakes gamble with a clear downside.

What to Watch: Catalysts and Practical Guidance

The regulatory path is clearing, but the legal minefield remains. For participants, the coming months will hinge on two key developments. First, the Department of Labor is expected to propose a new rule that clarifies fiduciary duties for alternative investments. This rule could create a "safe harbor," giving plan sponsors a clearer, more defensible process for adding private equity. That's the catalyst Wall Street is waiting for. Yet, as the legal expert Jerome Schlichter has made clear, a safe harbor doesn't erase the risk of litigation. His firm has won over $750 million in settlements by challenging plans that failed to meet the existing prudence standard. So, the rule may change the playing field, but it won't eliminate the need for airtight justification.

If your plan is considering this move, your first step is to demand a clear paper trail. Ask your plan sponsor for the documented rationale. This isn't about a marketing brochure; it's about the fiduciary process. They should be able to show you how they evaluated the investment against the existing prudence standard-weighing the higher expenses against the potential for greater long-term returns and diversification. As one advisor's checklist notes, the prudent answer for most plans is still "no – for now," and that's a position that needs to be backed by evidence, not just policy announcements. A committee that simply treats the executive order as a green light is setting itself up for a lawsuit.

More importantly, you need plain-language disclosures that cut through the jargon. The current setup is a recipe for confusion. Participants need to understand, in simple terms, that these funds lack daily liquidity. The promise of a daily Net Asset Value is often misleading; the real test is whether the recordkeeper can actually handle daily pricing and capital calls. If a large number of people want to cash out, the fund could gate redemptions or force a long wait. That's a critical vulnerability for retirement savings.

They also need to see the high fee structure laid bare. The median expense ratio of 3.76% is a massive drag on returns, especially when paired with the consistent underperformance against the stock market. A load of up to 5% on top of that fee is a direct subtraction from your principal. These aren't abstract numbers; they are real dollars that erode your nest egg. Demand that the plan provide a clear, easy-to-understand explanation of these costs and the lack of daily liquidity. Without that transparency, you're being asked to gamble on a complex, expensive asset with a proven track record of poor short-term returns.

The bottom line is that the policy wind is shifting, but the financial math and legal risks haven't changed. For your retirement savings, the smart move is to demand clarity, demand justification, and demand to see the real costs and constraints before you sign up.