Ahead of Executive Order, What to Know About Private Equity in 401(k) Plans

Private equity wants to occupy a greater share of 401(k) plans—and soon it might.

President Donald Trump is expected to issue an executive order in the coming weeks that would encourage more of both private equity and other private market investments in defined contribution plans, according to at least three sources familiar with the matter. 

Although the specific content of the order is uncertain, the president lacks the authority to mandate an increased take-up of the investments, which are already available in retirement plans. Still, the directive is expected to encourage the investments, as recent Department of Labor guidance allowed the growth of cryptocurrency investments in 401(k) plans.

The expectation, therefore, is that private equity could soon gain a greater stake in the $12.2 trillion defined contribution sector.

Experts Split on PE in 401(k) Plans

Retirement experts are split on the benefits and risks of including private equity investments in 401(k) plans. Supporters say it would allow individual investors the chance to enjoy higher returns generated by the “illiquidity premium” private equity offers, while naysayers stress that the asset class is volatile and illiquid, making it an especially risky investment in 401(k) plans.

One concern is that since private assets tend to be less liquid than stocks or bonds, it could make taking hardship withdrawals more difficult when a participant loses their job, needs money immediately or has a retirement decumulation strategy that requires liquidity.

Alternative investments also tend to carry higher fees, which experts say would leave employers open to Employee Retirement Income Security Act litigation in the case of private equity.

“It’s a square peg in a round hole,” says Jerry Schlichter, founder and managing partner of the Schlichter Bogard law firm. “Sponsors who decide to put private equity into their plans should be prepared for a whole lot more diligence. It’s a much greater responsibility, a much greater duty and much greater risk.”

Meanwhile, Kevin Walsh, an attorney at Groom Law Group who advises clients on fiduciary issues, says the threat of litigation is already significant.

“The 401(k) marketplace is already haunted by litigation, so it’s not as though adding alts is the thing that’s going to make this a litigious area,” Walsh says.

Last year, for example, excessive fee litigation nearly hit a record.

PE already exists in 401(k) Plans But Few Offer It

To be sure, despite the concerns, private equity is currently offered in 401(k) plans, although only 2.2% of plan sponsors said they offer any alternative investments in their 401(k) plans, according to the 2024 DC PLANSPONSOR Benchmarking Report.

There has been recent movement to expand access to private market investments in 401(k) plans.

In May, Empower announced it would offer private investments in 401(k) plans, and Blue Owl Capital Inc. and Voya Financial Inc. announced earlier this week that they will develop private market investment products for defined contribution plans.

In a recent white paper, BlackRock estimated that adding private assets to 401(k) plans could boost returns by about 50 basis points per year and increase the amount of money in a 401(k) by 15% over 40 years.

Private equity net returns were 14.3% over the past 20 years, compared with 8.1% for the MSCI World Index, a benchmark index of developed-market large- and mid-cap stocks, according to a 2024 report by Partners Group.

That growth is why supporters argue private equity should play a larger role in 401(k) investments, even if it comes with higher fees, thereby requiring even higher returns than an equity investment to provide a net gain.

“It’s better to take a higher-fee option if it was going to get a better outcome, instead of a lower-fee option that’s going to lead to a worse outcome,” Walsh says.

Recent PE Challenges

However, much of the gain in private equity, especially since the global financial crisis of 2008 and 2009, benefited from historically low interest rates. Rates have been elevated since 2022, and it has been more challenging for private equity to yield sizable returns.

In fact, since interest rates have risen, private equity returns have fallen behind public markets. From the second quarter of 2022 through Q2 2024, annualized private equity returns were 6.8%, while the S&P 500 returned 12%, according to the Pension Research Council at the Wharton School of the University of Pennsylvania.

“If interest rates are dropping, that means my costs are dropping, and a private equity firm could buy a company for 10 times cash flow and sell it for 12 [times cash flow]. That’s over,” says Ken Wiles, a finance professor at the University of Texas at Austin who heads the college’s center of private equity research. “Now what’s happened is that bottom part of the income statement—the cost of capital—has gone up. That’s putting a lot of pressure on income-generating cash flows.”

Interest rates and other macro conditions have also slowed the exits that drive private equity returns and distributions. Private equity firms are no longer able to buy and sell cheap debt and they are also experiencing a slowdown in traditional exits like initial public offerings, leading to an increased interest in the secondaries market, as limited partners have sought ways to liquidate stakes in venture capital funds and shares in private startups.

Fiduciary Challenge

Beyond the benefits and risks of adding private equity, or any alternative investment, to 401(k) plans, retirement plan fiduciaries also have to ensure that the investments serve the best interests of their plan participants.

In order to meet their fiduciary duty, experts say plan sponsors will need to ensure that the investments are transparent, that the fees are understandable, that they could provide proof that the investments’ performance is comparable or outperforms traditional equities and that it has the ability to provide liquidity.

“Any fiduciary that wants to go into alternative investments … has more work to do, and that’s inherent to the idea of an alternative,” says Kevin Hanney, a freelance fiduciary and professional pension trustee and the former senior director of pension investments at RTX Corp. “Most [participants] don’t spend a lot of time under the hood, and they shouldn’t have to. That’s the job of the fiduciary.”