Private Assets May Soon Be an Option in 401(k)s. Should You Invest?

President Donald Trump is poised to sign an executive order that would pave the way for alternative investments in workplace retirement accounts.

Takeaways

by Bloomberg AI

• President Donald Trump is reportedly poised to sign an executive order that would allow employees to invest in private assets through their 401(k) retirement plans.
• Proponents argue that this move would give ordinary retirement savers access to bigger returns in investments like private equity and debt funds, but financial experts caution that it can come with steeper fees, greater risk and less liquidity.
• According to financial advisers, including Bruce Colin, Chris Diodato, and Jason Kephart, investors should approach private assets with caution, considering the potential risks and limitations, and emphasizing the need for investor education and diversification.

President Donald Trump is reportedly poised to sign an executive order that would allow employees to invest in private assets through their 401(k) retirement plans.

While no details have been released, it’s a move the industry has long pushed, as it eyes the roughly $12.5 trillion parked in employer-sponsored accounts as a prime growth area. Proponents argue it would give ordinary retirement savers access to bigger returns in investments like private equity and debt funds that historically been aimed at wealthier investors.

But financial experts caution the potential of higher returns can come with steeper fees, greater risk and less liquidity than the publicly traded stocks and bonds that make up most defined-contribution plans.

Bloomberg News asked financial advisers how — and if — investors should incorporate private assets into their retirement portfolios.

The Background

Currently, fewer than one in 10 retirement plans offer any kind of alternative investment option, and only 2.4% make private equity available, according to an American Retirement Association survey. Private equity firms have been trying to change that by pitching the Trump administration to open up 401(k)s to private equity. It would be a massive win for the industry at a time when it’s struggling to raise money from traditional pension fund clients.

Many American workers don’t even know what private assets are, let alone whether they should invest in them, and most default to the employer’s chosen premixed portfolio when they start their jobs.

While it’s unclear exactly what Trump will propose, the industry has already been preparing. Empower plans to offer private equity, credit and real estate in some of its retirement portfolios later this year, Voya Financial and alternative asset manager Blue Owl Capital are partnering to create private markets products for defined contribution plans, and BlackRock expects to offer target-date retirement funds that incorporate private-market assets next year.

BlackRock recently estimated that adding private-market assets could bump up returns by about 50 basis points a year and lead to 15% more money in a 401(k) account over 40 years.

“Regardless of what you or I think about its merits, it’s coming,” said Bruce Colin, a wealth manager in Rancho Palos Verdes, California. “So then it’s a question of what do people do about it?”

Potential Benefits

The industry has argued that opening 401(k)s to private-market products would offer savers more investment options and greater upside. Private equity has returned 14.3% over the past 20 years compared to 8.1% for a benchmark of global developed markets, according to a 2024 report by Partners Group.

Generating higher returns is always important. But it’s arguably become more crucial as the cost of living in the US surges and people live longer. That’s prompted financial advisers to reexamine the risk-versus-reward mix in clients’ portfolios, with some emphasizing the need for greater diversification.

“Up to 10% into alternative investments for a lot of people could be a good diversifier,” said Chris Diodato, founder of WELLth Financial Planning in Palm Beach Gardens, Florida, adding that private assets should come with investor education and limitations for the everyday consumer.

Bigger Risks

Private equity’s entrance into retirement accounts could potentially push costs higher for investors. That’s after fees in 401(k) plans have come down significantly in recent decades, thanks in part to a shift to lower-cost passive index funds. A flood of lawsuits alleging that plan sponsors allowed overpriced and underperforming funds to remain in large 401(k) plans also helped focus on a spotlight on fees.

Jason Kephart, a senior principal for multi-asset manager research at Morningstar, said he expects private-market assets to show up in managed accounts in 401(k)s before they work their way into the target-date funds that serve as default investments for many participants. Savers usually must actively opt into managed accounts, which typically charge higher fees.

“Plan sponsors will have more of a safety net, since it’s an opt-in and not a default,” he said.

Another concern about private assets is that they tend to be less liquid than stocks or bonds. As it stands, Americans can take hardship withdrawals from their plans before retirement, but would face taxes, and for those under age 59 ½, potentially a 10% penalty.

But if a retirement plan has private-asset investments, this process might be more difficult for those who need to access their retirement savings quickly, according to Jeff McDermott, owner of Create Wealth Financial Planning in Florida.

“It remains to be seen how that would be handled in a retirement account,” he said.

Advisers pointed out that it’s often harder to assess and value private assets because there is less information publicly available.

There’s also less regulatory oversight, although there are signs that policymakers are stepping up scrutiny as the boom continues. And of course, the chance of bigger returns comes with the greater potential for losses. While younger investors can afford to ride out the downturns, those approaching retirement don’t have as much time.

“Private markets sounds cool, like something you want to brag about at happy hour,” Kephart said. “But the reality is we don’t really know if they’ll live up to the hype and if past returns are in any way indicative of future returns.”