Private Equity in 401(k)s: Smart Move or Risky Bet?

“Democratizing investing” sounds like a good idea. Why not make all types of investments available to all investors, not just the “big guys” (pension funds, university endowments, foundations, etc.)? Until very recently, certain investments have been restricted to institutional and “qualified” or “sophisticated” investors. This was not based on a desire to prevent people from joining some exclusive club; it was intended to protect those who lack the information and expertise needed to evaluate these investments and decide whether they would be a good fit for their needs and risk tolerance.

Recently, there has been a push to allow 401(k) plans to include “alternative assets” that have not been considered suitable for individual investors up to now. Not surprisingly, alternative asset fund managers have been a significant force behind this effort. In August 2025, President Trump issued an executive order titled “Democratizing Access to Alternative Assets For 401(K) Investors.” It allows these retirement plans to include private market assets (equity, debt, and real estate) as well as cryptocurrencies, in their menus of investment options. 

While some are jumping onto the “democratization” bandwagon, we encourage people to take an objective look at this before making a decision. In our view, “democratization” may lead people to embrace investments that are opaque, volatile, and illiquid, often all at once, without sufficient financial benefits to justify taking on those risks.

The term “alternative assets” can mean just about anything other than publicly traded stocks and bonds, the mutual funds and ETFs that hold stocks or bonds, and cash-like instruments (money market funds and bank CDs). Here, we focus on the private equity and private credit subset of alternatives and whether it makes sense for individuals to hold these investments in their retirement accounts. 

What are private equity and private debt funds?

Private equity invests in companies that are not publicly held. In most cases, private debt funds lend to both private and some public companies. Investors make commitments to provide capital to these funds over time, as it takes a while for fund managers to identify opportunities to put the money to work. The goal is to access returns beyond those from publicly traded stocks and bonds. Venture capital (VC) funds, which invest in start-ups, may or may not be considered “private equity,” as some view VC investing as a distinct asset class. Hedge funds are also alternative investments, but do not hold private equity or private credit. Some specifics:

Private equity – These funds invest in companies and encourage them to grow and/or improve their operations, enabling them to go public or be sold for attractive returns. It takes 7-10 years for a fund to (1) identify companies to invest in, (2) improve them, and (3) determine the best “exit strategy” for each company. Investors’ capital is tied up for that entire time. If no attractive exit can be found for a company and the fund is nearing the end of its intended life, other steps may be taken.

If all goes well, investors realize attractive returns as exits occur, but only after the fund managers take as much as a 20% cut of those returns. Regardless of returns, investors pay a substantial annual fee—often 2%—to the fund managers every year of the fund’s life. It is very difficult for investors to withdraw their money from a private equity fund before the fund is wound down. A handful of platforms have attempted to offer ways for investors to trade shares in private equity funds, but in practice, such trading is extremely limited.

Private credit – These funds lend investors’ capital for 3-7 years, usually as an alternative to a bank loan. Private credit funds rarely lend to start-ups, but some specialize in lending to “distressed” companies, which are often high-risk but offer high interest rates on their loans. Unlike private equity funds, where shares rarely change hands, a small but growing market exists for trading private debt. This is largely because it is more straightforward to compute a reasonable value for a loan based on its interest rate, remaining time to maturity, and the borrower's credit quality. Still, liquidity for shares in private debt funds is unpredictable. While the average lifespan for these funds—typically 6-8 years—is shorter than that of private equity, it is still a considerable time for 401(k) plan participants to commit to any fund.

Why are 401(k) plans getting into private equity and private credit now?

Why haven’t private equity and private credit always been available through 401(k) retirement plans? It ultimately comes down to whether individuals are in a position to evaluate the risks and whether these types of investments are suitable for an individual’s retirement account.

Just as the U.S. government doesn't ask us, as consumers, to determine which medications are safe and effective or whether the food supply is secure (the FDA handles that), individuals are not expected to supervise the legitimacy of investments in their pensions and 401(k) plans. The Employee Retirement Income Security Act (ERISA) is designed to protect employees from fraud and mismanagement in this arena. But just as we don’t want the FDA to prevent us from eating junk food even though it’s not particularly good for us, some investors don’t want ERISA rules to prevent 401(k) plans from offering alternative assets, even if their inherent characteristics may make them less suitable for individuals than for big institutional investors. 

Arguments for and Against Private Investments in 401(k) Plans  

1. Pension funds do it. Estimates show corporate pension funds hold an average of 13%-14% of their money in private equity. Public pension funds representing government employees have less, but the percentage is increasing. Private credit, as an asset class, is significantly smaller than private equity and holds a smaller share of pension fund assets. However, it has been growing rapidly over the past two years and is expected to capture a larger share of the market going forward.  Counter-argument: Pension plans are managed by professionals who oversee and review their investments. In contrast, employees who participate in 401(k) plans often lack expert guidance. Pension plans continue to receive contributions from younger employees even as they pay out benefits to retirees (except for plans that are closed to new workers and have a set end date). However, when individuals retire, they need to be able to sell their investments in their 401(k) accounts to generate income. This isn’t possible with shares in private equity funds, which are typically illiquid.
   

2. Companies are staying private for longer. This allows individuals to benefit from their big growth. Companies are indeed staying private for longer. With so much private capital available, small companies find it easier to raise money without turning to the public market. When those companies do go public, often for billions of dollars, that huge increase in value is captured by their private investors. That leaves individual investors “out in the cold.” Counter-argument: This “private for longer” argument applies to companies that have raised multiple rounds of funding from VC firms since their start-up days. In contrast, private equity funds often invest in small companies that may have been around for years but have not been managed well, then help them to improve their operations. They also invest in solid businesses, such as medical and veterinary practices, which are stable but do not generate eye-catching returns. And although some young firms do grow from almost nothing to gigantic before going public, most start-ups that receive VC money go sideways or fail outright – just one or two deliver the huge returns needed to offset losses from the other companies in the fund. When you invest in a VC fund, you invest in all its companies. We only see the “wins” with the benefit of hindsight. That’s a high-risk/high-reward proposition.

3. Private equity returns have historically been higher than those of public equity, with lower volatility. This is true, to an extent; however, returns in recent years have not been as attractive as they were in the past. This is likely because a significant amount of money is flowing into private equity, making it harder to find compelling opportunities at favorable prices. 

   Counter-argument: Private equity returns should be higher than public equity returns, on average, because private markets are highly illiquid and lack transparency. You can access audited financial statements for public companies in a few seconds, but investors cannot see any information for the portfolio companies a fund holds. Investors should earn a premium for the significant risks they take on by giving up liquidity and transparency.

   Furthermore, private equity fund valuations are virtually impossible to verify or disprove because no one knows the value of a private company until it is sold or new money is invested in exchange for a certain percentage of the company’s shares. To satisfy quarterly performance reporting requirements, funds value their portfolio companies in various ways, including comparisons to public companies or examining what investors paid for other private companies that public buyers recently acquired. But these valuations involve a great deal of judgment, and skeptics note that private equity funds rarely report declining values for their portfolio companies before they actually sell them. Lastly, while private equity funds report performance to investors quarterly, the information is lagged by one or two periods. Private equity valuations often appear steady because the reporting is infrequent and delayed.
   

4. Private credit funds offer better yields than public bond funds. This is quite possible, mainly because private credit funds often invest in smaller, riskier companies than the average borrower in the public bond market. That’s not necessarily a bad thing, and it also offers investors some diversification opportunities. However, investors should expect to earn higher returns here because they are taking on more credit risk.

   Counter-argument: Private credit funds charge much higher fees than public bond funds, which partly offsets the higher interest rates on their loans. Additionally, if the economy falters, small borrowers in the private credit sector may default in large numbers. This market is still relatively new, so there isn’t a significant track record showing what actually happens to private credit funds during a recession. If the economy softens and investors all look to sell at the same time, prices will fall, and liquidity is likely to disappear.  The arguments in favor of adding private equity and private debt funds to 401(k) plan offerings overlook key considerations that should prompt individuals to think long and hard before investing their retirement savings in these vehicles. - They are illiquid  - They involve high fees - They are difficult to value  - There are few financial disclosures about the underlying investments 

Final Thoughts

We encourage investors to think critically about why managers of private equity and private debt funds are pushing so hard to include them in 401(k) plans' investment options. As the saying goes, just because you can do something doesn’t mean you should.

At Gold Medal Waters, we believe that serving our clients means going beyond traditional advice. We are a fee-only financial advisor dedicated to helping you reach your financial goals based on your unique needs and what you value most.  Book a free, initial consultation to learn more! Disclosure: Advisory Services are offered through Gold Medal Waters, a Registered Investment Advisor. This post and material presented are for informational and illustrative purposes only, and do not constitute investment advice and is not intended as an endorsement of any specific investment. As such, this material is not client-specific, we adjust in individual portfolios based on each client's financial plan, income needs, risk tolerance and total asset allocation. Interactive checklists are made available to you as self-help tools for your independent use and are not intended to provide investment advice. While Gold Medal Waters believes information derived from third-party sources to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability about your individual circumstances.  Investors should carefully consider the investment objectives, risks, charges, and expenses associated with any investment. The information discussed is not intended to render tax or legal advice. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.  Investing involves risk including the potential loss of principal, and unless otherwise stated, are not guaranteed. Past performance does not guarantee future results. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Consult your financial professional before making any investment decision.