President Trump signed an executive order on August 7, 2025 directing federal agencies to allow private equity investments in 401(k) plans. This opens the door for alternative investments to enter $12.2 trillion in defined contribution retirement accounts. Wall Street giants like BlackRock and Apollo will see massive new opportunities. The White House calls it a win for everyday Americans who deserve the same investment options as the wealthy.
But sophisticated investors should take pause. The risks hiding beneath this transformation deserve careful examination before this fundamental shift in retirement saving takes effect.
The private equity opportunity for higher returns
Private equity has delivered impressive results over time. The asset class returned 13.1% annually over the past 25 years. Public markets returned just 8.6% during the same period. This 450 basis point premium attracts institutional investors worldwide.
The opportunity set dwarfs public markets. Only 2,790 U.S. companies with revenues exceeding $100 million are publicly traded. Over 19,000 private companies of similar size exist. Private equity funds can invest in nearly seven times more businesses than traditional stock funds.
Daily volatility can disappear in private markets. Private equity funds often value portfolios quarterly rather than continuously, so market sentiment swings don’t affect valuations minute by minute. This smoothing effect could appeal to retirement savers who worry about volatility.
Professional managers add operational value beyond capital. Private equity firms install new management teams. They streamline operations and cut costs. They identify strategic acquisitions and execute them efficiently. These capabilities theoretically justify higher fees and illiquidity.
Portfolio diversification improves with alternative assets as private equity returns show lower correlation to stock markets during normal periods. Different economic factors drive performance and revenue growth matters more than Federal Reserve policy in many private companies.
Institutional investors have enjoyed these benefits for decades. U.S. public pension funds allocate 9% of assets to private equity on average. University endowments often exceed 30% allocations. Now 401k participants might access similar strategies.
Risk #1: The supply trap
Too much money chasing too few deals
Private equity firms held $2.4 trillion in uninvested capital last year. This “dry powder” already struggles to find quality investments. Competition for deals has pushed purchase multiples to historic highs.
What happens when $12.2 trillion in new money enters this market? Even a modest 5% allocation from 401(k) plans adds $600 billion in demand. Quality deals won’t materialize to absorb this capital.
Too much money chasing too few opportunities compresses returns. New funds will form specifically to capture 401(k) dollars and these funds might well accept lower-quality deals to deploy capital quickly. In this case, marketing would emphasize access over returns and fee structures would favor asset gathering over performance.
The best private equity firms will continue serving institutional clients. KKR and Blackstone won’t suddenly prioritize 401(k) investors. Their existing limited partners provide stable capital without regulatory complications. Retail investors might well get second-tier and third-tier opportunities.
Risk #2: Diversification benefits may vanish in a crisis
Private equity marketing emphasizes low correlation to public markets. The data supports this claim during calm periods but correlations change dramatically during crises.
Research on the 2008 financial crisis shows that correlations across all asset classes increased substantially when markets came under stress. Previously uncorrelated assets suddenly moved in tandem, eliminating diversification benefits exactly when investors needed them most.
Private equity couldn’t escape this correlation surge. According to Bain & Company’s analysis, global buyout deal values dropped 90% between 2006 and 2009. While valuations remained artificially stable through mark-to-model accounting, the underlying businesses faced the same economic pressures as public companies.
Leverage amplifies these problems. Private equity funds typically use debt to finance 65% or more of their acquisitions. This leverage boosts returns during expansions. But when credit markets freeze, highly leveraged companies face acute distress. Between 2007 and 2009, leveraged loan volumes shrank by 85%, leaving PE-backed companies unable to refinance.
Mark-to-model valuations create artificial stability that masks real volatility. Because private equity funds don’t trade daily, quarterly valuations rely on models and assumptions rather than market prices. This smoothing effect disappears when funds must actually sell assets. The volatility was always there, just hidden from view until the moment of truth arrives.
Risk #3: Rebalancing doesn’t work with locked up assets
Target-date funds dominate 401(k) investments. These funds automatically rebalance between stocks and bonds. Adding private equity breaks this mechanism completely. Not to mention, target date funds already have serious hidden risks.
Periodic valuations include inherent delays. An investor targeting 10% private equity might actually hold 15% or 5% between valuations. The true allocation remains unknowable in real-time.
Lock-up periods prevent adjustments. Private equity funds often restrict redemptions for 7-10 years. Investors cannot reduce exposure even when circumstances change. Early withdrawal penalties can exceed 20% of invested capital.
The denominator effect can create dangerous imbalances. Imagine public markets drop 30% while private equity valuations lag. A 10% private equity allocation suddenly becomes 14% of the portfolio. But the investor cannot rebalance because private equity won’t allow redemptions.
Risk #4: 401(k) plans might get the leftovers
Institutional investors, such as university endowments and sovereign wealth funds, tend to see the best deals first. Because they can commit billions and accept 10-year lock-ups, private equity firms reward this loyalty with premium opportunities. 401(k) plans could get stuck with downstream opportunities. After institutions pass on deals, private equity firms need other buyers. This effect can already be seen with retail platforms.
Take, for example, Yieldstreet, an alternative investment platform targeting retail investors. A significant portion of its real estate offerings have underperformed. Of the 30 real estate deals the company has publicly disclosed, four have been written off entirely, over 75% are on a performance “watchlist.” These investments, often structured as short-term loans to real estate developers, have been hurt by rising interest rates and falling property valuations, leading to delayed or failed projects.
Yieldstreet’s real estate returns dropped sharply, from 9.4% in 2023 to just 2% in its most recent annual performance. The company has since paused new real estate investments and closed a non-traded REIT after its value fell by nearly half, underscoring the volatility of private credit and real estate exposure for non-institutional investors.
Risk #5: Who is accountable for losses?
ERISA law strictly governs 401(k) investments. Fiduciaries must act prudently and diversify investments but private equity introduces unprecedented liability questions.
Safe harbors don’t exist for alternative investments. The Department of Labor provides clear guidance for mutual funds yet no equivalent framework exists for private equity. Plan sponsors will have to navigate uncharted legal territory.
Liability remains unclear when losses occur. If a private equity fund loses 50%, who bears responsibility? The plan sponsor selected the investment option and the private equity firm made the actual investment decisions. Participants who suffer losses lack clear recourse.
Plan sponsors may lack expertise to evaluate private equity. HR departments choose 401(k) options typically. They understand mutual fund fees and performance but private equity requires analyzing complex partnership agreements and performance manipulation.
Participants cannot sue private equity managers directly. ERISA lawsuits target plan sponsors, not investment managers. Private equity firms enjoy protection through multiple legal structures leaving investors with little recourse when fraud or mismanagement occurs.
Recent litigation trends suggest increased lawsuit risk. Participants sue plan sponsors over excessive fees regularly and private equity fees dwarf traditional investment costs. A wave of litigation seems inevitable should losses mount.
What This Means for Investors
The executive order directs agencies to update their guidance within 180 days, but full implementation could take years. Most 401(k) participants will have no control over whether their plans add private equity. Many investors cannot opt out of their target-date fund’s PE allocation or negotiate with the plan administrator. Their only real choices are changing risk settings, switching to self-directed options if available, or reducing 401k contributions.
But sophisticated investors can take five concrete actions to prepare:
1. Document everything now. Save your current 401(k) fund options, fee disclosures, and investment policy statements. Screenshot your account balances and allocation choices. This baseline becomes critical if losses occur years later.
2. Calculate your true liquidity needs. Map out cash requirements for the next 10 years including emergency funds, major purchases, and potential job changes. If 10% of your 401(k) becomes illiquid, you need that liquidity elsewhere.
3. Maximize alternative retirement accounts. IRAs offer more control than 401k plans. HSAs provide triple tax benefits with full investment flexibility. Taxable accounts maintain complete liquidity. Consider utilizing these instead if your 401(k) ventures into too deeply into alternatives.
4. Review your total portfolio allocation. Private equity changes your risk profile across all accounts. For example, you might need more bonds in other accounts to offset PE volatility. Consider reducing other alternative investments to avoid over-concentration.
5. Assess your specific situation. Business owners must evaluate fiduciary liability for company plans. Near-retirees cannot afford 10-year lock-ups. High earners should model tax implications of PE gains. Your circumstances determine appropriate responses.
Professional analysis becomes essential for understanding these interactions. How do illiquid 401(k) assets affect your retirement timeline? What tax strategies offset concentrated PE gains? How should your other investments adjust to maintain appropriate risk? These questions require sophisticated modeling beyond basic retirement calculators.
The Bottom Line
Private equity in 401(k) plans represents a fundamental shift in American retirement saving. The promises sound compelling: institutional returns for everyday investors; diversification beyond public markets; and access to the growth economy happening in private companies.
But the risks hide in structural complexity. Many participants won’t understand leverage, lock-ups, or adverse selection until losses arrive. They’ll discover illiquidity when they need withdrawals and learn about the denominator effect during the next down market.
Plan sponsors face difficult decisions. Adding private equity might improve returns or trigger lawsuits. Avoiding it might seem prudent or breach fiduciary duty. The executive order provides political cover but not legal clarity.
Sophisticated investors should prepare now. Document current conditions. Adjust other assets proactively. Build flexibility outside your 401k. Most importantly, understand what you can and cannot control. The democratization of private equity isn’t inherently harmful, but its complexity demands professional guidance.
Need help analyzing how private equity in your 401k affects your overall retirement strategy? Start here with our 4-question assessment to see if we’re the right fit for your planning needs.
