The gateway for private equity to enter workplace retirement plans was notably widened by the first Trump administration. Nowadays, private equity firms are eager to expand their reach into individuals’ investment portfolios—a move presenting a mix of potential risks and benefits, according to industry specialists.
“It’s a train that’s been gaining steam, and people are beginning to board,” remarked Jonathan Epstein, president of the Defined Contribution Alternatives Association. This group champions the inclusion of non-traditional investments in employer-sponsored retirement plans.
Private equity falls under the wide umbrella of alternative investments, which may also include real estate funds and stakes in private companies that aren’t publicly traded. Pioneering investors in this sector traditionally include pension funds, insurance companies, sovereign wealth funds, and affluent individuals.
Private equity firms advocate for these investments in workplace retirement plans, suggesting they could provide retail investors with diversification away from public markets and potentially higher returns. However, the flipside of such investments is their illiquidity and associated risks, experts caution.
"It’s usually not easy to quickly liquidate these assets," explained Olivia Mitchell, a University of Pennsylvania professor and the executive director of the Pension Research Council. "This could present a significant hurdle for 401(k) participants needing quick access to their funds or wishing to adjust their portfolios as they approach retirement."
When it comes to retirement assets, private equity still has a significantly small footprint—less than 1%, to be precise. Defined contribution plans, which encompass employer-sponsored accounts like 401(k)s and 403(b)s, collectively boast an estimated $12.5 trillion in assets as of late 2024, per the Investment Company Institute. A minority of large-scale retirement plans offer private equity options as alternative investment paths within target-date funds or model portfolios.
Firms like Apollo Global Management, Blackstone, and KKR are proactively seeking ways to integrate with defined contribution plans through innovative products. Apollo has communicated to its investors that it spots vast potential for private markets within retirement plans, highlighting that they are merely at the starting line.
Adding private investments to retirement solutions transforms outcomes significantly—by 50% to 100% better, noted Marc Rowan, Apollo’s co-founder and CEO, during a February earnings call. "Plan sponsors are recognizing this," he said.
MissionSquare Investments, for instance, is actively incorporating private equity into retirement plans it manages for public service employees. "We’re seeing a shift with outflows in public stock and bond markets, and inflows into private markets," noted Douglas Cote, Senior Vice President and Chief Investment Officer at MissionSquare Investments and MissionSquare Retirement. However, many participants remain unable to tap into these private markets.
Over the past two decades, privately backed companies have seen dramatic growth as publicly traded companies have dwindled. According to the Partners Group, approximately 87% of U.S. companies earning over $100 million annually remain private.
A major legal framework governing 401(k) plans mandates plan sponsors to act as fiduciaries, making decisions in investors’ best interests by weighing both the risks and rewards. During President Trump’s term, the Labor Department encouraged plan fiduciaries to consider private equity as part of a prudent investment mix for professionally managed asset allocation within 401(k) plans. Contrastingly, the Biden administration has sounded a note of caution, suggesting these investments might not generally suit typical 401(k) plans.
"There’s a considerable resistance from some plan sponsors against the initiative to make direct private equity investments available through defined contribution plans," observed Bridget Bearden from the Employee Benefit Research Institute. "They perceive it as too illiquid and risky, lacking sufficient returns."
This conservative stance is fueled by four primary concerns:
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Complexity and Opacity: Private equity investments often lack transparency compared to publicly traded assets. Obtaining basic information like the firms involved in a fund or their financial metrics can be taxing. Chris Noble from the Private Equity Stakeholder Project insists that if retirement funds are being tapped, such investments should face similar regulations to those of public companies.
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Liquidity and Valuation: Private equity commitments are long-term, limiting the ability for timely cash-outs. The absence of open markets complicates fund valuation.
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Exorbitant Fees: Managers need justifiable grounds for the steeper and intricate fees private equity commands. While mutual and exchange-traded funds levy management fees, private equity also entails performance fees.
- Litigation Risks: Fear of lawsuits deters employers from private equity investments, wary of the liability tied to exposing employees to potential financial pitfalls. Attorney Jerry Schlichter notes their apprehension about not fully grasping underlying investments—a key fiduciary responsibility.
Despite these concerns, advocates of private equity assert that steering clear of private assets could result in fewer returns and greater public asset concentration for plan participants. Epstein from DCALTA highlights the robust long-term performance of private markets, which often exceeds benchmarks even after accounting for fees. "There’s a looming possibility of litigation against plan sponsors for excluding alternative investments due to their track records," he remarked.
