Private Equity for Retirement Savers? Change is Coming to 401(k) Plans

The path for retirement plans to add private investments may be about to become easier.

President Donald Trump is expected to sign an executive order aimed at opening 401(k) and other retirement plans to private investments, according to The Wall Street Journal. The order would mandate the Labor Department and Securities and Exchange Commission to provide guidelines to employers and plan administrators around private investments.

These guidelines could assuage plan managers’ concerns about legal liabilities around private investments, which have higher fees than many other kinds of investments that currently populate 401(k) plans. In addition, these investments general have restrictions on investors withdrawing money.

This development could be a boon to the private fund industry, which sees individual investor wealth as an untapped pool of capital worth trillions of dollars. Managers are already making inroads with high-net-worth clients by launching a new generation of fund vehicles that were customized to be accessible to small but affluent investors.

Semi-liquid, wealth-focused evergreen funds now manage some $427 billion, according to PitchBook’s 2029 Private Market Horizons forecast. They’ve aggressively raised capital in large part by promising low minimums, attractive returns, and flexible liquidity options. But the industry’s growth strategy won’t rely on the assets of wealthy people alone. Up for grabs are everyday Americans’ retirement savings—a vast asset pile estimated to be as high as $14 trillion.

A loose coalition of alternative asset firms, broker-dealers, mutual fund platforms, and financial advisers envisions a future in which 401(k) accounts and other employer-sponsored retirement plans offer private-market investment products alongside standard public market mutual funds.

Few such plans exist today in corporate America. That’s why advocates for the public-private retirement savings model are enlisting help from lawmakers and other government officials to hasten the expansion of private equity into Main Street investors’ tax-deferred, defined-contribution savings plans. With fund innovation in high gear and Republicans in control of Washington, many industry advocates sense that the stars have aligned for bolstering their agenda.

The SEC has various levers it can pull to ease the general public’s access to illiquid asset classes like private equity, private credit, real estate, and infrastructure. Mutual funds generally have a 15% cap on illiquid holdings, but many industry groups are itching for regulators to raise that maximum to some degree.

Opening the Floodgates

“If that’s raised, that opens up the private markets to retail, target-date funds—you name it—to all investors,” said Jonathan Epstein, president and founder of the Defined Contribution Alternatives Association, which represents asset managers. “That opens the floodgates.”

It’s far from clear whether PE investment products will be commonplace in 401(k) plans any time soon, or that such offerings will even catch on with mainstream retirement savers, who have little to no experience in the vagaries of the private market.

“Administrators of larger plans want these features and capabilities, and eventually it makes its way down market to the smaller employers,” said researcher Wallace Blankenbaker of Retirement Leadership Forum, an independent group that works with asset managers and plan advisory firms.

Investment firms that manage savings plans for employers have long been reluctant to package PE into retirement products, citing the complexity of managing liquidity risk in alternative investments and the potential of lawsuits stemming from underperformance or excessive fees.

Now some industry groups, such as the Institute for Portfolio Alternatives, are actively pushing Congress and the Trump administration to explicitly endorse portfolio diversification with private assets. Getting some kind of “safe harbor” provision is seen as a way to lessen litigation risk by making it harder to sue employers or plan administrators. Meanwhile, the potential for private assets to produce much upside is limited within a typical employer-sponsored retirement account, which would remain heavily weighted in its exposure to public assets.

Expanding PE to Target Date Funds

Expanding PE options in retirement plans seems most likely to occur within the context of so-called target date mutual funds, which are preset, diversified portfolios built to match a saver’s time horizon for retirement. According to Morningstar data, investors today have roughly $4 trillion parked in target date funds. A big reason for the growth of these assets is that since 2007, the Department of Labor has allowed plan administrators to use them as default investments for workers who don’t pick a specific option in their defined contribution offerings.

“Target date funds are the right chassis to incorporate private markets, not just because a lot of client sponsors offer them and a lot of participants use them, but also given their multi-asset design,” said Brendan Curran, who heads State Street‘s retirement and defined contribution strategy. Target date funds account for over 80% of defined contribution plans, according to State Street.

These funds limit how much upside of alternatives they can capture. A mutual fund containing some private market exposure can only deliver so much risk-adjusted return after factoring in the dilution created by the public market assets held in the same vehicle.

A newly launched target date fund from State Street, featuring a blend of 90% public and 10% private-index-based holdings managed by Apollo Global Management, targets the defined contribution market.

Pension Plans

Some industry leaders have cast the issue of private market access as a question of fairness in diversifying investments. According to this argument, pension plans have had decades of experience investing on behalf of unionized workers and public employees in the private markets, and there’s therefore more impetus to open the asset class to the rest of Americans as the profile of the private markets rises.

“We started down this path two-plus years ago because we felt the direction of travel in capital markets—in terms of assets increasingly existing outside the domain of public markets—was going to persist,” says Curran. “And we need to start bringing solutions to the market that address that and provide the breadth that investors expect, frankly.”

Administrators of 401(k) plans are generally permitted to include private market investment products, subject to some limits, under the Employee Retirement Income Security Act (the landmark 1974 law that set standards for the nation’s retirement and health benefit programs). Not all employer-sponsored plans are in favor of adding private market alternatives to their offerings, citing longstanding concerns about volatility risk and the relative lack of sophistication among everyday investors.

Plan administrators, also concerned about litigation exposure, are again looking to the Labor Department for guidance on adding PE components to defined contribution plans. During President Donald Trump’s first term, Labor officials signalled broad support for a PE option in professionally managed plans. But under President Joe Biden, the department took a more cautious view, and in December 2021, it urged careful evaluation by professional fiduciaries in any retirement plan. Labor officials also warned that the previous guidance could be misrepresented to promote the PE industry’s marketing efforts.

Another way regulators could change the equation for who gets access to riskier, more sophisticated investment opportunities would be expanding the criteria to meet “accredited investor” eligibility. The SEC has been reevaluating wealth minimums, like a net worth of $1 million or having professional financial competency, according to people now in talks with regulators.