Private equity in 401(k)s: quick headlines, long timelines, hidden risks
- Robin Powell
- Aug 22
- 6 min read
President Trump’s order to open retirement plans to private equity, crypto and other alternatives created headlines around the world. But beneath the fanfare lies a slower, riskier reality.
It's now two weeks since President Donald Trump signed an executive order titled Democratizing Access to Alternative Assets for 401(k) Investors. It promised to open up America’s $12 trillion retirement market to private equity, hedge funds, private credit, real estate, infrastructure and even cryptocurrency.
For Wall Street, the order represented a historic opportunity. For 90 million savers relying on 401(k) plans, it raised a more sobering question: who really stands to benefit?
The early story was one of speed. The Department of Labor (DOL) rescinded Biden-era guidance on 12 August, clearing the way for plan sponsors to consider alternatives. The headlines suggested a decisive break with the past. The reality is more complex. Policy can move quickly, but the mechanics of retirement saving move slowly.
Policy timeline: fast politics, slow law
The DOL’s reversal came just five days after Trump signed the order. Officials described previous rules as “stifling” and argued that fiduciaries, not “Washington bureaucrats,” should decide what is best for workers. The administration also pointed back to its earlier repeal of guidance discouraging cryptocurrency options in defined contribution plans.
But an executive order is not a law. Fiduciaries remain bound by ERISA’s standards of prudence and loyalty. As Phyllis Borzi, former head of the Employee Benefits Security Administration, put it, “an Executive Order has no legal standing.” New rules and safe harbours are promised, with a deadline of February 2026, but until then fiduciaries face the same litigation risks as before.
That tension is crucial. Politically, the change was dramatic. Legally, it alters little.
Industry timeline: enthusiasm meets complexity
Asset managers welcomed the order with enthusiasm. BlackRock said adding a sleeve of private assets to target-date funds could add 50 basis points to annual returns, boosting retirement savings by 15% over a lifetime. Vanguard, long a sceptic of private markets, announced plans with Blackstone and Wellington to blend public and private exposures. Other providers are exploring collective investment trusts and semi-liquid structures.
The likely path is through multi-asset products such as target-date funds, with private equity or credit capped at perhaps 5–10%. That model allows daily liquidity while tucking away less liquid holdings inside.
Yet building these products is not straightforward. Daily valuations are a requirement in 401(k) plans, but private equity assets are priced quarterly and often by internal models. Developing “mark-to-model” methodologies that can withstand scrutiny is complex and open to challenge.
The industry knows it has only a short window to position itself, but the practical hurdles mean new products will take time.
Investor timeline: the longest road
For ordinary savers, the timeline is slower still. The order does not compel employers to add alternatives to their retirement menus. Fiduciaries remain cautious, not least because of the steady flow of class-action lawsuits over “excessive fees.”
Plan sponsors would need to rewrite investment policies, train committees, and conduct due diligence before offering private market exposure. Even with supportive guidance, these steps take months, if not years.
Surveys suggest appetite. One study found 79% of participants believe they should have the same access as institutions, and a third would allocate 10–15% to alternatives. But enthusiasm is not the same as understanding. Financial literacy, liquidity needs and risk tolerance vary widely. As one adviser observed, “sometimes, the most democratic outcome is steady access to time-tested basics.”
The most important point: retail investors will not see private equity in their 401(k) menus overnight.
Lessons from history: hype, mortality, and Yale
History offers caution. Morningstar’s Jeffrey Ptak analysed the fate of alternative mutual funds launched in the past decade. Of 1,345 funds that existed in 2015, only 341 survived—a mortality rate of 75%.
Ptak drew three lessons: the more glowing the pitch, the more sceptical the investor should be; the more frenzied the product launches, the poorer the outcomes; and the more enticing the promised payoff, the deeper the due diligence required.
The record of institutions is equally mixed. Cliffwater found public pensions’ large allocations to alternatives lifted returns modestly. But the New York City Comptroller reported private assets cost its funds $2.6 billion versus benchmarks. A study of 54 public pension plans between 2008 and 2023 showed that doubling private equity allocations did not produce the expected gains.
Even the Yale Endowment, long seen as the model for private market investing, underlines the difficulty. Yale returned 9.5% and 10.3% annually over 10- and 20-year horizons, beating a 70/30 mix by 3.8%. Yet in 2024 it lagged peers, dragged down by heavy private allocations during a period of strong public market performance. Yale has the scale, expertise and horizon to tolerate this. Retail investors do not.
The lesson: success stories are rare, hard to replicate, and often dependent on unique conditions.
The crypto question: risk squared
The order did not stop at private equity. It explicitly covered digital assets. Trump’s administration wants to give 401(k) participants access to cryptocurrencies.
For critics, this takes an already risky idea and doubles down. Crypto markets are volatile, prone to fraud, and notoriously hard to regulate. Allowing workers to put retirement savings into coins alongside stocks and bonds risks turning pensions into speculative experiments.
The FT’s Swamp Notes podcast captured the unease. Duke professor Elisabeth de Fontenay argued that private markets are already under strain, with institutional investors dissatisfied and unable to exit illiquid holdings. Retail inflows now, she warned, would simply bail out existing investors. On crypto, she and others were blunter still: this is “the worst time” for retirement savers to step in.
Even private equity executives worry that crypto exposure could taint their industry if another crash hits.
The hidden risks of private equity in 401(k)s
The rhetoric of “democratisation” glosses over structural risks.
Fees: Private equity’s “2 and 20” model, layered with custody, consultant and administration costs, dwarfs the 0.1–0.5% typical of index funds. Studies show fees can absorb the majority of gross returns.
Illiquidity: Lock-up periods and withdrawal limits sit uneasily with the liquidity needs of 401(k) savers, especially those near retirement.
Transparency: Unlike publicly traded securities, private assets are valued infrequently and by models. Warren Buffett once described this as “marking to myth.” Apparent stability often masks delayed recognition of losses.
Correlation: Alternatives are marketed as diversifiers, but history shows correlations rise in crises. In 2008 and again in 2020, supposedly uncorrelated assets sank alongside equities.
For sophisticated endowments, these risks are manageable. For retail investors, they are far harder to bear.
Economic and political claims
Supporters say alternatives will boost returns and diversify risk. BlackRock projects 50 basis points of extra annual return. The Council of Economic Advisors estimates account balances could rise 0.5–2.5%.
Critics see another motive. The American Federation of Teachers accused Trump of “bailing out private equity funds and the billionaires who run them at the expense of working Americans.” The private equity industry, facing fundraising pressures, views 401(k)s as its last great growth market.
The timing is telling. Institutions are pulling back, liquidity is scarce, and exits are hard. Retail capital could solve private equity’s problems — whether or not it solves workers’ retirement needs.
Conclusion: speed, delay, and danger
The executive order was dramatic. Regulators acted within days. Asset managers rushed to announce new products. But for savers, reality will unfold slowly, with complexity, litigation and high costs along the way.
History points to disappointment. Most alternative funds fail. Public pensions have struggled. Even Yale lags at times. Adding crypto into the mix only heightens the risks.
For retirement savers, the promise of private equity in 401(k)s may prove illusory. Complexity and cost rarely work in the investor’s favour. Low-cost index funds remain the evidence-based foundation for retirement security.
The question is not whether private equity can be democratised. It is whether it should be — and whether the real beneficiaries will be American workers, or the managers lining up to take their fees.
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