Private Equity in Retirement Portfolios: Why It's a Misfit and What to Do Instead

The inclusion of private equity in retirement portfolios—particularly through 401(k) plans—has become a contentious topic in 2025. Proponents argue that these investments offer diversification and access to high-growth opportunities, but the reality is far more complex. Private equity's illiquidity, opaque fee structures, and performance volatility create a fundamental misalignment with the core objectives of retirement savings: preserving capital, ensuring liquidity, and generating predictable income.

The Liquidity Time Bomb

Private equity investments are designed for the long haul. Lockup periods of five to ten years are standard, with redemptions often restricted or penalized if initiated early. This clashes directly with the expectations of 401(k) participants, who typically assume their assets can be accessed on demand. For example, if a target-date fund includes private equity and an investor reaches their retirement date only to find the underlying assets still in a lockup period, they face a stark dilemma: wait for returns or sell at a discount.

Matthew Chancey, a certified financial planner, notes that even “semi-liquid” private equity funds—those holding a portion of cash or Treasury bonds—cannot fully mitigate this risk. “Retirees need to know where their next paycheck is coming from,” he says. “Private equity's delayed returns and infrequent valuations make it a poor fit for portfolios that require regular withdrawals.”

The problem is compounded by the fee structure. Private equity funds typically charge 2% management fees and 20% performance fees, which can erode returns over time. A 2025 study by Wharton academics found that after fees, many private equity funds underperformed public market indices over a 10-year horizon. For retirees already grappling with inflation and rising healthcare costs, these hidden costs are a luxury they cannot afford.

Strategic Asset Allocation: A Better Path

The solution lies in aligning investment vehicles with retirement timelines. Instead of chasing the allure of private equity, investors should prioritize liquidity and diversification through smarter alternatives.

1. Balanced ETFs: The Goldilocks Portfolio
Balanced ETFs, which maintain a fixed or semi-fixed allocation of stocks and bonds (e.g., 60/40), offer a compelling alternative. These funds historically outperform all-stock portfolios during market downturns while still capturing growth in bull markets. In 2025, global balanced ETFs have outperformed their U.S.-only counterparts, reflecting the benefits of geographic diversification.

For retirees, the 60/40 model provides a buffer against volatility while maintaining upside potential. Active fixed-income ETFs, which adjust duration and credit exposure based on market conditions, further enhance this strategy. These funds thrive in a higher interest rate environment, offering yield and capital preservation—a critical need for income-focused investors.

2. Tactical Alternatives: Hedging the Unknown
Tactical alternatives, such as options-driven ETFs and defined-outcome products, offer another layer of protection. Buffer ETFs, for instance, use derivatives to cap downside risk while retaining upside potential. A 2025 analysis by Morningstar found that buffer ETFs reduced portfolio drawdowns by 30–50% during periods of market stress.

These strategies are particularly valuable for near-retirees who cannot afford significant losses. By incorporating tactical alternatives, investors can maintain liquidity while hedging against macroeconomic risks like inflation or geopolitical shocks.

3. Digital Assets: A New Frontier
The rise of spot Bitcoin and Ethereum ETFs in 2025 has opened a new chapter for retirement portfolios. While digital assets remain volatile, their low correlation to traditional markets makes them a useful diversifier. For investors with a longer time horizon, a small allocation to crypto ETFs can enhance growth potential without sacrificing liquidity.

The Bottom Line: Liquidity Over Hype

Private equity's promise of outsized returns is often overshadowed by its structural flaws. For retirement portfolios, the priority must be liquidity, transparency, and risk management. While the Trump administration's 2025 executive order aims to expand access to alternative assets, investors must remain cautious. As Marcos Segrera, a financial adviser, warns: “Many retirees will regret their private equity bets when they realize they can't access their money when they need it most.”

Instead of chasing the private equity dream, retirees should build portfolios that align with their liquidity needs. Balanced ETFs, tactical alternatives, and digital assets offer a smarter path—one that balances growth with the ability to meet essential expenses. In retirement, the goal isn't to outperform the market; it's to outlast it. And for that, liquidity is king.