Private equity in your 401(k) raises red flags
Following an August 2025 executive order from President Donald Trump, the Department of Labor proposed a rule on March 30, 2026, creating a safe harbor for plan fiduciaries who add private equity, private credit, and other alternative assets to 401(k) lineups. The change could affect more ...
Overview
Following an August 2025 executive order from President Donald Trump, the Department of Labor proposed a rule on March 30, 2026, creating a safe harbor for plan fiduciaries who add private equity, private credit, and other alternative assets to 401(k) lineups.
The change could affect more than 90 million Americans in defined-contribution plans, the agency confirmed.
The real exposure is likely to arrive in target-date funds, the all-in-one portfolios that automatically shift your asset mix as you age, and a slice of your paycheck could flow into opaque, illiquid holdings without you making a single active choice.
Private equity returns have trailed the S&P 500 across multiple time horizons
The central argument for adding private equity to retirement accounts is that it delivers superior long-term returns that justify its higher costs.
Recent data from Pestakeholder, however, challenge that premise with private market funds returning roughly 7.08% in 2024 compared with 25.02% for the S&P 500.
Over the period from 2022 through the third quarter of 2025, an MSCI index of U.S. private equity funds delivered an annualized return of just 5.8%, compared with 11.6% for the S&P 500.
Alicia Munnell, founding director and current senior adviser at the Center for Retirement Research at Boston College, warns private equity's opacity introduces avoidable risk into retirement portfolios.
Private equity is not a transparent investment…It adds unnecessary risk to retirement saving
Researchers at the Center for Retirement Research at Boston College examined whether private equity allocations improved outcomes for state and local pension plans between 2001 and 2022.
Those plans produced a long-term annualized return of roughly 6%, nearly identical to a simple 60-40 stock-and-bond portfolio, the center's 2024 study concluded.
Fees that could quietly erode your 401(k) balance
The average expense ratio for equity mutual funds stood at 0.40% at the end of 2025, while index equity exchange-traded funds averaged 0.14%, according to the Investment Company Institute.
Retail-oriented private equity evergreen funds charged a median expense ratio of 3.76%, excluding sales charges that can add an additional 5%, the Private Equity Stakeholder Project found.
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That figure is 130 times higher than a Vanguard S&P 500 ETF charging 0.03% annually, the organization noted. Over a 30-year career, even a one-percentage-point increase in annual fees can reduce a retirement balance by six figures.
One academic study estimated that investors pay between $0.05 and $0.26 in fees for every dollar committed to a private market fund, producing an annualized fee drag of 5% to 8% of gross returns, the Financial Analysts Journal reported.
Illiquidity and opaque valuations add layers of risk for workers
Private equity investments typically lock up capital for five to seven years, according to Pitchbook data.
More than a third of workers have taken a loan or early withdrawal from a 401(k) or similar plan, Transamerica Institute's 2025 survey found, and private equity holdings could create complications that do not exist with publicly traded funds.
Details
Unlike publicly traded stocks priced continuously through real transactions, private equity holdings are valued periodically based on fund manager estimates.
That system can mask true losses for months, creating a portfolio that appears stable on paper while its underlying holdings deteriorate.
Robert Morris, founder of private equity firm Olympus Partners, warned that allowing 401(k) plans to invest in private markets "bodes to be the successor to the 2008 mortgage crisis," cautioning that retail investors would assume substantial risk for returns unlikely to exceed a basic equity index fund.
Why the private equity industry wants access to your retirement account
The industry is sitting on a backlog of roughly 32,000 unsold portfolio companies valued at about $3.8 trillion, according to Bain & Co.'s 2026 Global Private Equity Report.
Global fundraising fell by 35% in the first quarter of 2025, Bloomberg reported, and major university endowments, including Yale and Harvard, explored selling private equity stakes at discounts to net asset value.
"The push for private assets into retirement plans is entirely supply-driven," George Webb, chief executive of Pension & Wealth Management Advisors, told Bloomberg.
Americans for Financial Reform described the effort as a search for new capital to replace institutional investors that the industry is steadily losing.
Workers' defined contribution accounts represent a $14 trillion pool that grows automatically with every paycheck, according to Investment Company Institute data.
For an industry facing declining fundraising and growing skepticism, that captive stream offers a lifeline no voluntary investor pool can replicate.
What the proposed DOL safe harbor means for 401(k) savers
Jessica Sclafani, global retirement strategist at T. Rowe Price, cautioned during the firm's 2026 outlook briefing that "any private asset allocation must earn its place in the portfolio by offering unique net-of-fee investment benefits."
The DOL's proposed rule, however, would shield employers from liability even if they select the most expensive option considered, Americans for Financial Reform warned.
Almost half of American households have no retirement account savings at all, and the median balance for those in the bottom three income groups was under $40,000 in 2022, Federal Reserve data showed.
Munnell and Americans for Financial Reform argue that lower-balance savers are least equipped to absorb higher fees or the multi-year lockups that come with private-market holdings. Adding private equity to 401(k) plans without stronger evidence of net-of-fee benefits, they contend, could compound the challenges those workers already face.
Related: How to Tap Your 401(k) at 55 Without a Penalty
Source
Originally published at www.thestreet.com.