Private Equity in 401(k)s: A New Frontier for Retirement Investing—Opportunity or Risk?

The retirement savings landscape is undergoing a seismic shift. For decades, private equity—a realm of high-stakes, high-reward investing once reserved for institutional investors and the ultra-wealthy—has been inching its way into the 401(k) portfolios of everyday Americans. By Q2 2025, 3.9% of plan sponsors offered alternative investments in their retirement plans, up from 2.2% in 2023, according to the PLANSPONSOR Recordkeeping Survey. This growth is not accidental. It is the result of a confluence of regulatory tailwinds, industry innovation, and a generational appetite for diversification. But as private equity gains traction in defined contribution plans, a critical question emerges: Does this democratization of access to alternative assets empower workers—or expose them to new vulnerabilities?

The Case for Democratization: Why Private Equity Appeals to Retirees

Private equity has long been celebrated for its potential to outperform public markets. Over the past two decades, net private equity returns averaged 14.3%, compared to 8.1% for the MSCI World Index. For retirees seeking to hedge against inflation and market volatility, the allure is clear. Proponents argue that private equity's lower correlation with public equities and its ability to generate stable cash flows from real-world assets (e.g., real estate, infrastructure, and private companies) make it an attractive diversifier.

The Trump administration's anticipated executive order, expected to reduce legal risks for employers offering private equity in 401(k)s, has accelerated this trend. By reviving a 2020 Department of Labor guideline that permitted limited private equity exposure, the policy shift signals a green light for asset managers to tap into the $12.5 trillion 401(k) market. Firms like BlackRock, Apollo, and Goldman Sachs are already rolling out products such as target-date funds with private equity components, while Empower and Voya Financial are introducing professionally managed private market options.

Participant demand is equally compelling. A 2024 Empower study found that 31% of Americans would allocate 10–15% of their retirement savings to private investments, and 74% believe such access could help workers build wealth in ways previously reserved for the elite. Millennials, in particular, see private equity as a modern, competitive tool for retirement planning. For a generation raised on the idea of “disruption,” the prospect of investing in private companies or real estate projects feels less like a gamble and more like a strategic advantage.

The Risks: Liquidity, Fees, and Fiduciary Liability

Yet the path to democratization is fraught with pitfalls. Private equity is inherently illiquid. Unlike public stocks, which can be sold instantly, private assets often require years to mature and exit. This creates a mismatch with the daily contribution and withdrawal structure of 401(k)s. In 2024, 4.8% of workers initiated hardship withdrawals—a 33% increase from 2023—highlighting the fragility of liquidity in retirement accounts. If a participant allocates 10% of their savings to an illiquid private equity fund, they could face a liquidity crisis during an emergency.

Fees are another concern. Private equity typically charges a 2% management fee and a 20% performance fee, significantly higher than the 0.5% average for public equity funds. While these fees are justified in institutional contexts, they raise questions about cost-effectiveness for individual investors. A 2024 BlackRock analysis estimated that private equity could boost 401(k) returns by 50 basis points annually, but this assumes consistent outperformance—a dubious proposition in the post-2022 high-interest-rate environment. From Q2 2022 to Q2 2024, private equity returns averaged 6.8%, lagging the S&P 500's 12%.

Fiduciary liability looms large. The Employee Retirement Income Security Act (ERISA) holds plan sponsors accountable for investment choices. If a private equity fund underperforms or misvalues assets, fiduciaries could face lawsuits. The Ninth Circuit's recent ruling in Anderson v. Intel affirmed that private equity is not inherently imprudent, but it also emphasized the need for robust disclosures and risk assessments. For HR-led 401(k) committees lacking investment expertise, this creates a Catch-22: They must evaluate complex assets they may not fully understand.

The Regulatory Tightrope: Balancing Innovation and Protection

Regulators are walking a tightrope. The SEC's Office of the Investor Advocate (OIAD) has prioritized private market access in retirement plans, but it lacks rulemaking authority. Instead, it relies on the Department of Labor and the SEC to craft guidelines that balance innovation with investor protection. The Trump administration's executive order is expected to clarify how private equity can be integrated into 401(k)s without violating the SEC's 15% illiquidity limit for mutual funds.

Meanwhile, industry groups like the Defined Contribution Alternatives Association (DCALTA) are developing frameworks to help plan sponsors assess private assets. These efforts aim to mitigate risks by promoting transparency, standardized valuations, and fiduciary guardrails. However, critics like Senator Elizabeth Warren warn that such measures may not go far enough. “Private equity's opaque fees and lack of transparency make it a poor fit for retirement accounts,” she argued in a letter to Empower's CEO.

Investment Advice: Proceed with Caution

For individual investors, the key takeaway is clear: Private equity in 401(k)s is not a one-size-fits-all solution. If you're considering allocating to private assets, ask:
1. Liquidity Needs: Can you afford to lock away a portion of your savings for 5–10 years?
2. Fee Transparency: Are the fees justified by the fund's track record and diversification benefits?
3. Fiduciary Oversight: Does your plan sponsor have the expertise to evaluate private equity risks?

For those who meet these criteria, a small allocation (e.g., 5–10%) to a professionally managed private equity fund could enhance long-term returns. However, it's crucial to diversify across asset classes and maintain a core portfolio of low-cost public equities and bonds. As with any high-risk investment, private equity should be a satellite, not the core, of your retirement strategy.

Conclusion: A New Era with Old Lessons

The inclusion of private equity in 401(k)s marks a historic shift in retirement investing. It democratizes access to assets that once defined the portfolios of the wealthy, offering everyday savers a chance to participate in the growth of private companies and real-world assets. Yet this shift also underscores the enduring tension between innovation and prudence. As regulators, asset managers, and plan sponsors navigate this new frontier, the ultimate test will be whether they can balance the promise of private equity with the need to protect retirement security. For now, the message is clear: Opportunity abounds—but with it comes the responsibility to understand the risks.