Investing through a 401(k) plan has become a staple in the financial landscape for many American workers. Yet, a significant portion of these retirement accounts lacks access to private equity investments—a type of investment in companies not listed on public exchanges. This exclusivity raises the question of whether this trend might change and, if so, whether these investments would benefit average investors.
Historically, large pension plans and university endowments have accessed private equity and private debt options due to their extended time horizons. However, as of November 2024, just 2.4% of 401(k) sponsors indicated they added such options—data collected by the Plan Sponsor Council of America highlights this reluctance. Employers may hesitate to introduce these private equity investments due to the risk of potential lawsuits, particularly regarding increased fees associated with private equity compared to traditional public investment funds. According to Jerry Schlichter, founding partner at Schlichter Bogard, employers have a fiduciary duty under the Employment Retirement Security Act (ERISA) to ensure that all investments within a 401(k) plan come with reasonable fees and are prudent options for employees.
The lack of transparency surrounding private equity investments is another deterrent for employers. Investors typically have limited access to information about these investments’ performance over time. This opacity can cause complications for employees requiring liquidity or those facing life changes prompting the need for money withdrawal, which ultimately contradicts the illiquid nature of private equity investments.
Despite these challenges, there is a growing push to expand access to private capital within workplace retirement plans, such as 401(k) and 403(b) accounts. Analysts, like Jaret Seiberg from TD Cowen Washington Research Group, anticipate regulatory changes under the Trump administration that would ease access to alternative investments, including private equity and real estate. Speculations hint at potential executive orders aimed at encouraging government agencies to broaden investment options for individuals through their retirement accounts.
### The Case for and Against Investing in Private Equity
Over the past three decades, the number of publicly traded companies has declined significantly, leaving many to advocate for a blend of public and private investments in an effort to achieve a well-diversified portfolio. Robert Goldstein, Chief Operating Officer at BlackRock, highlighted a trend where publicly traded stocks and bonds exhibit increased correlation, suggesting that less correlated assets may now primarily exist in private markets. However, for the average retail investor, distinguishing between the performance of private equity versus traditional investments remains challenging due to a lack of centralized performance data.
Market advocates express concerns regarding the introduction of private equity investments in 401(k) plans due to potential risks for average investors. Benjamin Schiffrin, a public interest advocate at Better Markets, questions the motivations behind the push for private equity access, asserting it stems from private market firms struggling to secure funding rather than a genuine concern for the average worker’s investment portfolio. Exposing retirement plan participants to such high-risk assets could breach fiduciary duties, as it adds significant responsibility to plan sponsors in ensuring prudent and beneficial investment choices.
Furthermore, Moody’s analysis warns that the urgency to attract private capital into retirement investments could lead to market vulnerabilities. They caution of the potential for liquidity crises as retail investors, attracted to the prospect of greater returns, might demand immediate access to their funds, creating mismatches in liquidity expectations.
The allure of private equity lies in the potential for higher long-term returns, but data regarding performance remains contradictory and difficult to track. Studies exist, but overall results indicate mixed performance outcomes. Jason Kephart from Morningstar emphasizes that, like public companies, private firms are also influenced by broader economic forces, making them susceptible to downturns, interest rate fluctuations, and other global issues.
In summarizing the arguments, while the narrative suggests that investing in private equity could enhance returns and diversification, it is essential for investors to weigh the potential downsides, particularly regarding increased fees and opacity of investments. As Kephart asserts, “being private doesn’t shield you from the world,” and it’s crucial to approach such investment opportunities with diligence considering their risks and limitations, while also appreciating the rewards associated with traditional public markets.