Private equity wants in on your 401(k). What you need to know before

CNN
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Chances are very good that your 401(k) does not currently offer you access to private equity investments, which, as the name implies, are investments in companies that are not publicly traded.

The question is, will that change in the next few years? And, if it does, is it worth it for you to invest?

Large company pension plans and university endowments — both of which have very long time horizons — have invested for years in private equity and private debt funds. But 401(k)s typically haven’t offered those options to plan participants. In November 2024, only 2.4% of 401(k) sponsors said they added a private equity investment option to their plan, according to a weekly poll question from the Plan Sponsor Council of America.

That may be because employers are afraid of potential lawsuits if they include those options, which typically charge investors more than investment funds in public companies. And under the Employment Retirement Security Act (ERISA), employers have a fiduciary duty to ensure that investment options in your 401(k) are prudent and have reasonable fees, said Jerry Schlichter, founding partner of Schlichter Bogard, who pioneered lawsuits against plan sponsors for charging excess 401(k) fees.

It also may be because private assets are riskier to invest in and information about them is opaque, since they’re private. So there is less of a requirement to be transparent with investors about how a fund is doing on a regular basis.

In addition, private capital options are considered illiquid investments because you can’t take your money out whenever you want. And that may prove too constraining for retirement plan participants, who may need access to their 401(k) money for any number of reasons — including changing or losing a job, Schlichter said.

There has been an increasing push to provide more private capital investment opportunities for retail investors and participants in workplace retirement plans like 401(k)s and 403(b)s.

On the regulatory front, according to Jaret Seiberg, a financial services policy analyst at TD Cowen Washington Research Group, the Trump administration is likely to make it easier to access so-called alternative investments, which include private equity, private real estate and hedge funds.

That could result in an executive order from the president requiring government agencies to expand access to such investments as well as rulemaking or guidance from the Department of Labor — which enforces ERISA — “to expand the ability of individuals to invest in 401(k) and IRA accounts in alternative investments,” Seiberg said in a daily research note.

The case for and against investing in private equity

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