Private Equity's Push into 401(k)s: Risk, Reward, and the Role of Regulation

The inclusion of private equity in 401(k) retirement plans has ignited a fierce debate over the future of retirement investing. Proponents argue that this shift democratizes access to alternative assets, offering diversification and long-term outperformance. Critics, however, warn of high fees, illiquidity, and a lack of transparency that could undermine the very savings they aim to grow. As regulatory momentum builds—driven by the Trump administration's push and the SEC's 2026 policy focus—the stakes for investors, fiduciaries, and policymakers are higher than ever.

The Regulatory Landscape: A Pendulum of Priorities

The Department of Labor's 2020 guidance, which allowed 401(k) plans to include private equity in professionally managed funds, was reversed under Biden in 2021. The current administration's renewed efforts to reintroduce this policy reflect a strategic push to unlock the $12.5 trillion 401(k) market for private equity firms. Apollo Global Management, Blackstone, and KKR have already launched tailored products, such as Apollo's 2025 partnership with State Street, which permits 10% allocations to private markets.

Yet regulatory uncertainty remains. The DOL's Employee Benefits Security Administration has cautioned that private equity is “inappropriate for most 401(k) plans,” citing the complexity of valuations and the fiduciary challenges faced by administrators. Meanwhile, the SEC's Office of the Investor Advocate has labeled private equity inclusion a “2026 policy priority,” signaling broader regulatory support. This tug-of-war between innovation and caution defines the current landscape.

The Case for Private Equity: Diversification and Outperformance

Proponents highlight private equity's historical outperformance. Apollo's flagship fund, for instance, delivered 16% annual returns over 15 years, outpacing public market benchmarks. Private equity's low correlation with public markets also reduces portfolio volatility, particularly for younger investors with longer time horizons.

Moreover, the decline of public companies—down 50% since 2020—has made private assets increasingly attractive. Firms like KKR are innovating with interval funds to address liquidity constraints, allowing structured redemptions for retirees. These products aim to bridge the gap between illiquid private assets and the cash-on-demand needs of retirement savers.

The Risks: Fees, Illiquidity, and Fiduciary Failures

Critics, however, emphasize the structural risks. Private equity's “2 and 20” fee model—2% management fees and 20% performance fees—can erode returns. For example, a $100,000 investment could lose $2,000 annually to management fees, with 20% of gains taken as performance fees. Over a decade, this could reduce a $1 million return to just $640,000.

Illiquidity is another major concern. Private equity investments are typically locked for 10+ years, conflicting with the need for retirees to access savings during market downturns. The DOL has warned that small plans lack the expertise to monitor and value these assets, raising fears of fiduciary failures.

Elizabeth Warren's Stance: A Cautionary Voice

Senator Elizabeth Warren has been a vocal critic of this trend. In June 2025, she challenged Empower's decision to offer private equity in 401(k)s, citing studies showing private markets underperform public indices while charging 20 times higher fees. Warren's letters to Empower and other firms demand transparency on fee structures, liability, and safeguards. She argues that private equity's risks—high costs, weak liquidity, and opaque valuations—disproportionately burden retirees.

Empower defended its approach by drawing parallels to the 401(k)'s original purpose: democratizing public markets. However, Warren remains unconvinced, insisting that private assets should only be included if they demonstrably benefit savers, not private fund managers.

The Path Forward: Balancing Innovation and Protection

The debate hinges on regulatory frameworks that balance innovation with investor protection. For private equity to thrive in 401(k)s, several conditions must be met:
1. Fee Transparency: Mandate clear disclosures on management and performance fees, and their impact on long-term returns.
2. Liquidity Safeguards: Expand interval funds and structured redemption mechanisms to mitigate cash-flow risks.
3. Fiduciary Education: Provide training for plan administrators to assess and monitor private equity valuations.
4. Performance Benchmarks: Require comparative analyses of private equity returns against public market indices.

Investors should approach private equity in 401(k)s with caution. While diversification is valuable, allocations should be limited (5–10%) and paired with high-quality public market investments. Younger investors with longer horizons may benefit most, but retirees should avoid locking up savings in illiquid assets.

Conclusion: A High-Stakes Experiment

Private equity's inclusion in 401(k)s represents a bold but risky experiment. While the potential for enhanced returns and diversification is significant, the costs—both financial and regulatory—cannot be ignored. As the SEC and DOL finalize rules in 2026, investors must demand transparency, independent valuations, and fiduciary accountability. The future of retirement investing depends on striking a balance between innovation and protection, ensuring that the next generation of savers is not left holding the bag for a Wall Street-driven gamble.