Last year, President Donald Trump signed an executive order to make it easier for 401(k)s and other employer-sponsored retirement plans to offer private-market assets, including private equity, credit, and real estate. Private equity and credit have traditionally been available only to institutional investors and the wealthy. Proponents of this initiative believe including private-market assets in retirement plans would democratize access and potentially lead to better long-term returns for more Americans.
U.S. private-equity firms are eager to access the $12 trillion in assets sitting in 401(k)s and similar retirement plans. Given that these firms had about $3.1 trillion under management as of last fall, according to S&P Global, tapping into this new market could drive industry growth for years. As these managers push to add their products to plan menus, advisors and plan sponsors must tread carefully and be sure to understand how these investments differ from traditional ETFs and mutual funds. The following should be considered before including private-market investments in a plan lineup:
1. Dispersion of returns increases the importance of manager selection
Private equity can generate strong, long-term returns and potentially outperform some public benchmarks. However, according to Cambridge Associates, the US PE index has had mixed results against public markets over the last five years, equally or underperforming large-cap indexes. Even when private equity does outperform, the performance of individual funds varies widely around the category average, much more so than with index funds or even actively managed stock funds. For example, for the ten-year period ending November 2022, top quartile Private Equity (Buyout) funds returned 21.8% vs only 7.3% for bottom quartile funds (CAIS). Similarly, a 2022 Bain & Company Report found that while top-quartile private equity funds outperformed public equities, the average PE fund did not. As such, investors and plan sponsors will need to choose managers wisely and have a rigorous due diligence process, which could add to complexity and costs.
10-Year Annualized IRR Global Buyouts
2. Impact of fees
According to BlackRock’s marketing materials, including private market opportunities in your 401(k) can result in a 15% increase in savings over 40 years. But, within the fine print, they disclose that these projected returns do not consider the impact of fees. While it isn’t yet clear what these offerings will charge, private equity investments are known to have high management fees, typically charging an annual management fee, plus an incentive fee if a fund’s returns reach a certain “hurdle” (the hurdle rate is the lowest rate of return a project or investment must achieve before a manager or investor deems it acceptable to can assess their carry fee).These higher fees could have a devastating impact on long-term investment growth. Over 25 years, a 2% fee could wipe out nearly 40% of your final account value. For example, a $100,000 investment earning 6% annually would grow to $430,000 with no fees but only $260,000 with a 2% fee.
3. Lack of transparency and liquidity could lead to more complexity
Private assets are less liquid than public ones and traditionally have a lock-up period. Though 401(k) investments are meant to be long-term, participants need to be able to access their money when needed. To address this issue, these products will likely need a large liquidity sleeve to meet client redemptions, which will erode returns. Funds may also impose redemption gates, limiting how much and how often investors can pull out money.
Similarly, given that private investments are not traded regularly, they are often valued monthly or even quarterly. This could create issues for investors redeeming between valuation periods – as the investment will likely be over or under-valued.
Investors should be aware of these challenges and how illiquid and hard-to-value private equity holdings may ultimately complicate retirement planning events such as portfolio rebalancing, Roth conversions, and required minimum distributions.
The complexity of these structures means fiduciaries must make extra effort to provide clear, plain-language disclosures. Standard legal jargon may satisfy technical requirements, but participants cannot make informed decisions without straightforward explanations of fees, risks, lock-up periods, and valuation practices. Translating these issues into simple terms not only supports better decision-making but also strengthens fiduciary protection.
Takeaway
It is unlikely that stand-alone PE funds will be an available option on a 401(k) menu anytime soon. Instead, asset managers are beginning to roll out target-date funds and other multi-manager vehicles that will allocate a small percentage to private investments. As these products become available, plan sponsors and their advisors will need to fully understand their mechanics and fees to determine if the complexities, risks and liability are worth the potential for higher returns.
Equally important, fiduciaries must ensure that participants receive clear, plain-language disclosures that go beyond technical fine print. Helping employees understand costs, risks, and liquidity limits is not just good practice—it is central to fulfilling fiduciary duty and protecting long-term retirement outcomes.
Sources:
https://www.caisgroup.com/articles/assessing-the-persistence-of-private-equity-performance
https://www.cambridgeassociates.com/private-investment-benchmarks/
RiversEdge Advisors, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.