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The first Trump administration opened the door to allow private equity into workplace retirement plans. Now, private equity firms are working to play a bigger role in workers’ portfolios, which experts say has potential risks and rewards for investors.
“It’s a train that’s already been gearing up, and folks are starting to hop on,” said Jonathan Epstein, president of Defined Contribution Alternatives Association, an industry group that advocates for incorporating non-traditional investments into employer-sponsored retirement plans.
Private equity is part of a broad category of alternative investments can include real estate funds, credit and equity in private, not publicly-traded, firms. Pension funds, insurance companies, sovereign wealth funds and high-net-worth individuals are traditional investors in these private markets.
The argument from the private equity industry for incorporating such investments in workplace retirement plans is that these investments could give retail investors more diversification away from public markets and a shot at bigger returns. But such investments also raise concerns about liquidity and risk, experts say.
“It’s typically not easy to cash out the assets in a hurry,” said Olivia Mitchell, a professor of business economics and public policy at the University of Pennsylvania, and executive director of the Pension Research Council. “This could be a big challenge for 401(k) plan participants who either simply want to access their money or want to readjust their portfolios as they near and enter retirement.”
Private equity is less than 1% of retirement assets
Defined contribution plans include employer-sponsored retirement savings accounts such as 401(k) plans and 403(b) plans. There are an estimated $12.5 trillion in assets held in these accounts, as of the end of the third quarter in 2024, according to Investment Company Institute.
Private equity makes up less than 1% of those assets. A small number of large employer-sponsored retirement plans offer private equity investments as an alternative investment option within target-date funds or model portfolio funds.
Now, private equity firms like Apollo Global Management, Blackstone and KKR are trying to make inroads into defined contribution plans through new products. Apollo has told its investors that it sees significant opportunities for private equity in retirement and the firm is just getting started.
When private investments are added to retirement solutions, “the results are not just a little bit better, they’re 50% to 100% better,” Marc Rowan, a co-founder and CEO of Apollo, said on the private equity firm’s Feb. 4 earnings call. “Plan sponsors understand this.”
MissionSquare Investments offers private equity investments in retirement plans that it manages for public service employees.
“What we find is there’s an outflow in the public stock and bond [markets] and there’s an inflow into the private markets, but participants can’t get access to private markets,” said Douglas Cote, senior vice president and chief investment officer for MissionSquare Investments and MissionSquare Retirement.
The number of companies backed by private equity firms has grown significantly over the last 20 years as the number of publicly traded companies has declined. About 87% of companies in the U.S. with annual revenues of more than $100 million are now private, with 13% publicly traded, according to the Partners Group, a Swiss-based global private equity firm.
‘Some plan sponsors are very much against this’
I’ve got all the paperwork here
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The law covering 401(k) plans requires plan sponsors to act as fiduciaries, or in investors’ best interest, by considering the risk of loss and potential gains of investments.
During President Donald Trump’s first term, the Labor Department issued an information letter to plan fiduciaries, telling them that private equity may be part of a “prudent investment mix” in a professionally managed asset allocation fund in a 401(k) plan. The Biden administration took a more cautious approach, warning that these investments aren’t “generally appropriate for a typical 401(k) plan.”
“Some plan sponsors are very much against this initiative to make direct investments to private equity available through the defined contribution plan,” said Bridget Bearden, research and development strategist at the Employee Benefit Research Institute. “They think that it’s pretty illiquid and very risky, and don’t really see the return for it.”
There are four main factors that have plan sponsors taking a conservative approach to private equity.
1. Complexity and lack of transparency
Unlike publicly-traded assets, basic information on private equity investments — like what firms are in a fund and what their revenues and losses are — can be challenging to obtain.
“It’s even hard for institutional investors, pension funds, endowments, depending on their capital contribution, it’s hard for them to even get information about some of the books and records,” said Chris Noble, policy director at the Private Equity Stakeholder Project, a nonprofit watchdog organization. “If you want to take advantage of retirement money, you should be subject to the same regulations that public companies are.”
2. Liquidity and valuation
Private equity investments require longer-term capital commitments, so investors can’t cash out at any time, experts say. Redemptions are limited to certain times. There aren’t open markets to determine the valuation of a fund, either.
3. High fees
Fund managers also have to justify the higher and more complex fees associated with private equity. Exchange-traded and mutual funds collect management fees, while private equity firms can collect both management and performance fees.
The average ETF carries a 0.51% annual management fee, about half the 1.01% fee of the average mutual fund, according to Morningstar data. Private equity firms typically collect a 2% management fee, plus 20% of the profit.
4. Threat of lawsuits
Employers have shied away from private equity investments, in part because of fear they could be sued.
“They are concerned about the risk of exposing their employees to downfalls,” said attorney Jerry Schlichter of Schlichter, Bogard & Denton, who pioneered lawsuits on behalf of employees over excessive fees in 401(k) plans. “They’re also concerned about their own inability to fully understand the underlying investments, which they’re required to do as fiduciaries for their employees and retirees.”
But private equity supporters are starting to make an opposing argument, suggesting that plan sponsors who don’t include private assets are harming their participants with greater concentration of public assets and lower returns.
“Lawsuits could go after plan sponsors for not including alternative investments based on their performance track record,” said Epstein of DCALTA. “Even net of fees and net of benchmark returns, private markets have done extremely well over long periods of time.”
