Private Equity in 401(k)'s: Too risky for your retirement?
A (very) brief history of private equity
Private equity’s lineage runs through post-war investing, when a handful of partnerships began buying controlling stakes in companies outside public markets. By the late 1970s and 1980s, firms like KKR, Warburg Pincus, and Blackstone popularized the leveraged buyout (LBO): borrow heavily, acquire a company, restructure, and aim to sell or go public at a higher valuation.
From the start, private equity raised money from institutions (pensions, endowments, insurers) and a narrow slice of wealthy families. U.S. securities rules limited most “private offerings” to accredited investors, individuals with high income or net worth. The general thinking for this approach is that wealthier people could bear the losses and volatility of private offerings without the protection that public markets provide. That basic framework remains the backbone of who is eligible to invest directly in private funds today.
Why private equity has not been available in employer retirement accounts
Employer retirement accounts such as especially 401(k)s were engineered for liquidity, simplicity, and low cost. ERISA (the federal law governing workplace plans) imposes a fiduciary duty on plan sponsors. They must choose “prudent” investments and keep fees reasonable. Historically, there are three reasons private equity (PE) doesn’t qualify:
Illiquidity and valuation
PE funds often lock up money for years, and valuations are reported quarterly using private appraisal methods rather than live market prices. That clashes with the daily dealing and pricing of typical 401(k) menus.Operational complexity
The complex distributions, fees, and lock-up periods don’t mesh well with employer payroll deduction systems that expect employee’s money to be invested shortly after deposit into their account.Higher fees
PE funds have extremely high costs for investors, such as a 2% annual fee plus 20% of all investment gains. Even lower cost PE funds are still much more expensive than a normal index fund in a retirement account.
In June 2020, the Department of Labor (DOL) said plan fiduciaries could include indirect PE exposure as part of a diversified fund. The guidance didn’t approve standalone PE funds on a 401(k) menu.
On August 7, 2025, the Trump administration issued an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” The order publicly directs agencies (such as the Department of Labor) to ease regulatory barriers and reduce litigation risk so defined contribution plans can offer exposure to private equity, real estate, and digital assets inside professionally managed options. Within days, the Department of Labor removed their cautionary notes about PE, signaling a friendlier posture toward these funds in 401(k) plans.
What makes private equity so much riskier?
Compared with public stocks and bonds, PE brings a distinct mix of risks:
Illiquidity: You can’t redeem at will; funds draw and return capital on their schedule.
Leverage: Using debt boosts returns in good times and worsens losses during poor performance or when debt is expensive. More overall volatility.
Opacity: Limited public reporting; investors rely on manager provided valuations that can lag reality.
Concentration: Even large PE funds hold dozens instead of thousands of companies. One company going out of business could negatively impact an entire retirement account.
Massive Fees: Multiple layers of complex fees (management fees, carry, transaction/monitoring fees) can drag on net returns.
Public investments, by contrast, offer daily liquidity, continuous price discovery, and lower, more transparent fees, and are highly regulated in terms of accounting methods and how performance is disclosed to investors.
What does this mean for your retirement account?
Target-date or balanced funds that allocate a small sleeve (say, 5–15%) to private assets.
Registered private funds designed to provide periodic liquidity and manufactured daily market values, even if the underlying positions are illiquid.
Manager-of-managers structures that diversify across multiple private strategies (buyout, growth, private credit) to be more stable.
In all cases, the plan sponsor still must select and monitor the product under ERISA’s prudence standard. So, it is likely that investment companies will make these products less volatile by design.
Regular investors bear most of the risk
Regular investors (participants)
Liquidity mismatch: Even if a target-date fund offers daily trading, periods of stress can force the manager to gate redemptions in the private sleeve or rely on lines of credit.
Fee drag: Stacking fees on fees can reduce net returns. Small differences compound over decades.
Valuation opacity: The “true value” of your assets might remain invisible for years.
Behavioral risk: PE strategies in a retirement plan may lead participants (and HR committees) to overestimate their safety.
Plan sponsors and fiduciaries
Litigation: An executive order doesn’t make fiduciaries immune to lawsuits. Sponsors will still need rigorous due diligence, fee benchmarking, and participant disclosure around liquidity and valuation.
Administration: Recordkeeping, participant communications, and vendor oversight all get harder when a fund’s liquidity is manufactured by the PE companies (i.e., “not real”).
Will this benefit retirees or private equity fund owners?
If PE access routes through low-cost, well-diversified, reasonable strategies with clear liquidity management and fee caps, then a modest allocation could improve diversification and potentially help returns.
If access flows into high-fee, capacity-hungry products relying on engineered liquidity and manufactured pricing, the value to ordinary savers is murkier, especially after fees and taxes.
Meanwhile, PE managers stand to gain immediately from new inflows into their companies. The Financial Times have already noted that retail entry sometimes coincides with periods when large institutions are trimming or rebalancing, raising the risk that 401(k) money becomes a liquidity provider at less-than-ideal times. In other words, PE managers can use people’s retirement accounts to sell their own exposure to PE and leave regular people with overpriced funds that are almost certainly going to lose value.
How to protect yourself
Limit Exposure: Treat private markets as a supplement, not a core investment for your retirement.
Understand Fees: Demand fee transparency at the total plan level.
Scrutinize liquidity: Understand how the fund prices change daily, what lock-up periods are being enforced, and how rebalancing works in stressed markets.
Communicate with plan sponsors: Participants should receive jargon free explanations of risks, fees, liquidity, and valuations.
I’m concerned about the possibility of investors being used by PE markets to sell overpriced funds with little oversight. However, diversity is a very important part of investing, and more diversity is never a bad thing. If plan sponsors, regulators, and managers keep the allocation small, the fees tight, the liquidity honest, private markets could earn a place in retirement portfolios. If not, workers may end up paying private-market prices for worse performance and more risk.