The Private Equity Pivot: Navigating Risk and Reward in Retirement Accounts Under Trump's Executive Order

The proposed executive order to allow private equity, venture capital, and hedge funds in retirement accounts has ignited a fierce debate over whether this shift could redefine retirement investing—or expose Americans to unnecessary risks. For individual investors, the stakes are high: the $12.5 trillion held in 401(k) plans could soon open to a realm of investments historically reserved for institutional and ultra-high-net-worth investors. But how should ordinary savers respond?

The Regulatory Crossroads

The order, still pending finalization, would direct the Department of Labor (DOL) and Securities and Exchange Commission (SEC) to draft guidelines enabling employers to include private-market assets in retirement plans. This reverses the Biden administration's 2021 reversal of Trump-era guidance, which had already permitted such investments in certain structured products.

Critics argue that private equity's illiquidity and high fees pose threats to retirement savings, while proponents see it as a path to higher returns. The DOL's recent neutral stance on cryptocurrency (rescinded in May 2025) hints at a broader shift toward deregulation, but fiduciaries must still meet ERISA's prudence standard.

Historical Performance: Can Alternatives Deliver?

Private equity has historically outperformed public markets over long horizons. Consider this:

While these firms' stock prices reflect market perceptions of private equity's potential, their underlying fund returns often exceed public benchmarks. For instance, the Cambridge Associates Private Equity Index averaged 14.3% annual returns since 1986, versus 10.8% for the S&P 500. However, such returns come with caveats:

• Volatility: Private equity's performance is less predictable. A 2023 study by the National Bureau of Economic Research found that 30% of funds underperformed their benchmarks.
• Fees: Management fees (typically 2% of assets) and carried interest (20% of profits) can erode returns. For example, a $100,000 investment growing at 12% annually with 2% fees would yield $160,000 over 10 years—$32,000 less than a fee-free alternative.

Risks for Individual Investors

1. Liquidity Traps: Private equity often locks funds for 10+ years, making it unsuitable for retirees needing near-term access.
2. Complexity: Evaluating private funds requires expertise in due diligence, unlike traditional ETFs.
3. Fiduciary Liability: Plan administrators may face lawsuits if investments underperform, potentially deterring employers from offering these options.

The Opportunity: Diversification Beyond Stocks

For long-term investors, private equity's low correlation with public markets could reduce portfolio volatility. A 2024 study by the MFA found that adding a 10% allocation to private equity in a 60/40 stock/bond portfolio boosted returns by 1.2% annually while lowering risk.

Moreover, in a low-yield world, alternatives like real estate and venture capital offer exposure to growth sectors (e.g., tech, renewable energy) that public markets may undervalue.

Actionable Insights for Investors

1. Start Small, Stay Informed: Allocate no more than 5–10% of your retirement portfolio to alternatives until you understand fee structures, liquidity terms, and track records.
2. Beware of Fees: Use the SEC's Investment Adviser Public Disclosure database to compare fund expenses. Avoid products with combined fees exceeding 2% annually.
3. Check Plan Options: Monitor employer-sponsored plans for new offerings. Firms like Apollo and Blue Owl are already developing target-date funds with private components—ask your plan administrator for details.
4. Stay Agile: The order's fate remains uncertain. If it stalls, focus on high-quality, low-cost public alternatives (e.g., REIT ETFs or infrastructure funds).

Conclusion: Prudence Over Hype

The proposed order presents a fork in the road for retirement investing. While private equity's potential for outsize gains is undeniable, its risks—including illiquidity and hidden costs—demand sober evaluation. For most investors, a disciplined approach—allocating selectively, prioritizing transparency, and avoiding overcommitment—will be key to turning this regulatory shift into a long-term advantage.

As always, the golden rule holds: Never invest in what you don't understand.