Emergency 401(k) Withdrawals Are Rising. Could Private Equity Slow the Flow?

It would be difficult to find a financial adviser who would recommend that a worker to use their 401(k) plan as a rainy-day fund.

After all, early withdrawals come with a stiff 10% tax penalty if the worker is younger than 59.5, and early withdrawals are taxable income. As an example, withdrawing $10,000 from a 401(k) plan before age 59.5 would mean a $1,000 penalty and an additional $2,200 in taxes if the individual were in the 22% tax bracket. (There are exceptions to the $1,000 penalty for certain withdrawals, like tuition payments or home purchases, and emergency expenses, including medical expenses or disasters.)

Yet the penalties and other costs do not keep all plan participants from withdrawing their money early.

In 2024, 4.8% of workers initiated a 401(k) hardship withdrawal, up from 3.6% in 2023, according to a Vanguard Group report. A separate Vanguard report found that nearly one-third of workers who left their jobs withdrew their 401(k) balance in a lump sum when they separated.

Vanguard also reported that participation in and contribution rates to 401(k) plans were “at all-time highs.”

Vanguard’s report comes amidst a large push by the private equity industry to make private investments more broadly adopted as investments in 401(k) plans. President Donald Trump is reported to be preparing an executive order that sources familiar with the matter say would encourage retirement investors to utilize private market investments.

Why Not PE?

Naysayers take issue with private equity for multiple reasons, including a chief concern: liquidity. For workers needing or wanting to use their 401(k) plans as rainy-day funds, having private equity investments would, in theory, limit the amount of capital they could access. Private equity investments tend to be illiquid because investors cannot immediately sell the funds if they wish to, or need to, unlike public equity or bonds, potentially making private equity investments liquidity roadblocks for plan participants.

Those in favor of the investments argue that private equity investments would comprise only a sliver of a target-date fund or a managed account, allowing access to plenty of liquidity within a retirement plan’s other assets. But for participants who cash out in a lump sum, that sliver could have an impact.

“For people who want to or have to take out all of their 401(k) funds, even having 10% or 20% in private equity is a hinderance,” says Alicia Munnell, who founded the Center for Retirement Research at Boston College and currently serves as its senior adviser.

The research center’s November 2022 study on alternative investments in public pension funds suggested that private equity did not help plans outperform traditional public equity investments between 2010 and 2022.

As the push intensifies to make private equity investments more widely available in retirement plans, those opposed to the idea have criticized the illiquidity, the high fees and the lack of transparency that come with them.

“As soon as there’s a market downturn, I would expect for there to be a lot of lawsuits with claims that this wasn’t the right kind of investment vehicle,” says Colleen Lamarre, partner in Pillsbury Winthrop Shaw Pittman LLP who advises employers on retirement plan design. “In DC plans, when there’s loss, there’s litigation.”

Despite the concern, the funds currently offered—and many being contemplated—do not offer full private equity exposure. Instead, proponents say having some allocation to private equity would help diversify portfolios and improve investment outcomes.

How Private Markets May Be Used

The SPDR SSGA IG Public & Private Credit exchange-traded fund (ticker symbol PRIV), introduced in February, includes private credit instruments sourced by Apollo Global Securities LLC that “may comprise less than 10% or more than 35% of the fund’s investment portfolio at any given time,” according to the fund’s disclosure. The fund, an actively managed fund primarily allocating to public and private investment grade credit instruments, has a gross expense ratio of 0.70%.

ETFs, which can be more tax efficient than mutual fund investments, are not often utilized in the 401(k) market. The liquidity question is one that could affect both the individual investor and retirement plan investment markets.

“All these vehicles are going to have the liquidity sleeve,” says Hal Ratner, the head of research at Morningstar. “The liquidity component of these is really substantial, to the extent that it’s hard to consider them a private market fund.”

Ratner says the SSGA Fund, for example, has significant liquidity, which does not remove the risk, but helps it be “severely minimized.”

However, some funds have even higher private equity stakes. Capital Group and KKR announced in April the launch of two funds that blend private and public investments. On July 30, the firms filed a registration statement for a new public-private equity fund, Capital Group KKR U.S. Equity+, that is expected to launch in 2026. According to the firms, a product is now contemplated for the retirement market.

According to a statement from the companies, they are “continuing to explore opportunities to work together on model portfolios, target-date funds and other areas where combining capabilities can add value to clients.”

Still, Ratner says that even the sliver of private equity is “meaningful” for investment performance, funds that include private equity investments should have few issues if workers choose to make withdrawals.

“Nobody’s going to have access to these vehicles by themselves,” Ratner says about retirement plan investments with private equity exposure. “They’re always going to be within a managed product of some sort. So in terms of individual people getting their money, as long as the liquidity sleeve is set up correctly, that probably shouldn’t be much of a problem.”