Private Equity Is Headed for Your 401(k). The Industry Is Celebrating. Should You? -- Barrons.com

Dow Jones
Aug 23

By Joe Light and Bill Alpert

For the elite firms that manage private assets, it looks like an unqualified win: A $12 trillion market for retirement savings is opening up. For savers, it will mean a fresh menu of investments, and some new challenges.

President Donald Trump earlier this month signed an executive order meant to open up 401(k)s and other employer-sponsored retirement plans to private-market assets, including private equity, credit, and real estate. The change could be a boon to giant private-asset firms, including Apollo Global Management, KKR, Carlyle Group, and Blackstone, whose traditional endowment and pension-fund clients have slowed their commitments lately. Those firms are preparing new products fit for retirement accounts, as are private-credit specialists such as Ares Management and Blue Owl Capital.

For retirement savers, access to private markets could be one of the biggest changes since the invention of the target-date fund, decades ago. When private funds do appear on 401(k) menus in coming years, savers will surely be told how such alternative assets offer diversification from stocks and bonds, and how they have earned higher average returns than the S&P 500 index. But the performance of individual funds varies widely around the category average, much more so than with index funds. So, investors will need to choose managers wisely, if they decide to partake at all.

So far, Trump's order has done little for the industry. Shares of KKR are flat from a month ago, when news outlets first reported that Trump was considering the move. Shares of Carlyle have risen 8%, while Blackstone is up 3%. Apollo stock rose after the initial reports but fell 10% over the past month after second-quarter earnings missed expectations.

But private-asset managers can be counted on to accelerate after Washington's green light; they've been itching to break into the 401(k) market for years. While no government rule explicitly bars retirement plans from including private assets among their offerings, companies have kept them out, for fear of being sued by employees over the funds' relatively high fees.

Retirement savers now face a shrinking universe of public companies to invest in, as private-market fund managers often point out. The number of publicly listed U.S. companies has declined from 8,090 in 1996 to 4,010 last year, according to the World Bank. Driving the shift are high compliance costs for publicly listed companies, as well as capital available from sovereign-wealth funds, venture-capital firms, and other institutional investors. Companies can raise billions of dollars without having to tap the public market.

Yet over the past four years, private-equity firms have struggled to raise more money from institutional clients. Higher interest rates have made deals that rely on leverage harder to pencil out. The drought in mergers and initial public offerings also makes it hard for PE funds to exit their company holdings, which locks up investors' cash that could otherwise be recycled into a new fund. Some critics believe that PE distributions have dropped because an overcrowded industry overpaid for its buyouts.

All of this makes the vast retirement market an attractive target for private-equity fund raising. U.S. private-equity firms had about $3.1 trillion under management as of last fall, according to S&P Global, meaning that access to even a sliver of the $12 trillion in assets sitting in 401(k)s and similar retirement plans could drive industry growth for years.

About half of U.S. private-sector employees save for retirement through a 401(k) or another flavor of defined-contribution plan. That represents 70 million people.

"It will take time, but I do think there is a potentially significant opportunity here," said Blackstone CEO Stephen Schwarzman on the company's earnings call last month.

On an Apollo earnings call in February, CEO Marc Rowan called 401(k)s an opportunity for growth, but lamented that his firm and others were attempting to grow into that market "with some handcuffs on."

Trump is directing the government to take the handcuffs off. His Aug. 7 order instructed the Department of Labor and the Securities and Exchange Commission to make it easier for companies to offer private assets in their plans. A key goal, the administration said, was to limit companies' risk of losing lawsuits for violating their duty as plan fiduciaries. The White House Council of Economic Advisers issued a report that found retirement investors "would benefit from diversification, higher risk-adjusted returns, and higher retirement income."

Taylor Rogers, a White House spokeswoman, said, "The intent of this executive order is to relieve the regulatory burdens and litigation risk that impede American workers' retirement accounts from achieving competitive returns."

To ensure that retirement savers invest prudently, company 401(k) plans have more safeguards than traditional brokerage accounts. Retirement law gives plan sponsors -- typically employers -- a fiduciary duty to act in investors' best interest by offering diversified investments and minimizing costs. Employees have often sued plan sponsors after funds performed poorly or charged high fees. Private-equity funds are typically more expensive than those holding public stocks and bonds, so fear of litigation has been enough to dissuade most employers from taking the plunge.

The Department of Labor on Aug. 12 rescinded a Biden-era statement that said most companies were "not likely suited to evaluate the use of PE investments" in their 401(k) plans. Private-asset firms hope the administration will go further and propose formal rules that would be harder for a future administration to reverse with a pen stroke. That's what happened when former President Joe Biden's Department of Labor halted a private-equity initiative by the first Trump administration.

Changes to companies' 401(k) plans won't happen right away. Trump's order gave the Department of Labor six months to clarify the responsibilities of plan sponsors in offering private assets. As part of that, the department could quickly issue guidance. Or it could draft formal rules, a process that includes months of proposals, comments, and revisions.

Even after the process is complete, employers could take years to perform due diligence, says John Hunt, a partner with law firm Sullivan & Worcester whose clients include private-equity funds. Hunt notes that employers can burn more than $2 million in legal expenses on an employee lawsuit, even before accounting for potential damages.

Until the new rules have been proved to protect companies from litigation, Hunt said, "you may not have a lot of smaller employers willing to take that chance."

Critics of the Trump order say the new policy is little more than a Wall Street cash grab that puts retirement savers at risk.

"Without strong guardrails, ordinary savers will pay the price in diminished resources for retirement as they are left holding the riskiest, most expensive slices of the market, with little transparency or recourse when things go wrong," said Americans for Financial Reform, an investor advocacy group. The group has said private-equity investments are inherently inappropriate for 401(k)s and similar retirement plans.

Like any asset class, private investments won't always be attractively priced. Buyout prices in private equity have been stretched of late -- just like the price/earnings ratios of large-cap stocks in the S&P 500.

Cash flows from individual retirement savers also differ from those of large institutions -- as Blackstone learned when a swell of redemptions jammed the exits of its BREIT real estate investment trust in 2022 and 2023. Blackstone prorated redemptions in that period, but everyone got their money after a few months' delay. Other private REITs also suffered redemption crunches at the time. Private managers will need to show they can provide liquidity and valuations at faster tempos than in their traditional vehicles. Retirement plans' long horizons will offer them an opportunity to do so.

A wider world will have to get comfortable with how private funds value their portfolios. Public trading supplies prices for stocks and bonds. Private managers use estimates.

One of the first pitches that individual investors will hear is that private assets help diversify a portfolio beyond the time-honored allocation of 60% stocks and 40% bonds.

That depends on the kind of alternative asset. The returns from private equity in the past 10 years moved mostly in line with those of a 60/40 portfolio, according to recent research from J.P. Morgan Asset Management. Private credit was less correlated to those portfolios, and investments in infrastructure were even less correlated. Private real estate funds moved in opposition to the 60/40 mix.

Success for private-equity firms, according to some of their executives, might have individuals' 401(k) allocations to private assets resemble those of traditional pension plans, which put 5% to 20% of assets in private-market funds.

"If you take even the lower end of that, you're talking hundreds of billions of dollars over time," says HarbourVest CEO John Toomey, whose firm manages about $150 billion in funds investing in private equity, private credit, and other assets. Toomey says his firm is already in conversations to offer funds that 401(k) investors could access. Some of the most likely first customers are firms whose pension plans have their own allocations to private equity and have been pleased with the returns, he says.

Private market returns will have to be good enough to merit their fees, and it isn't yet clear what 401(k) private-asset offerings will charge. Existing private funds charge an annual management fee, plus an incentive fee if a fund's returns reach a certain hurdle.

Some potential guides are so-called interval funds, which give smaller investors access to private assets, while limiting withdrawals. Those funds have expense ratios of about 2.5% on average, according to Morningstar, well above the 0.3% average fee on target-date funds holding public stocks and bonds.

BlackRock is one of the largest target-date fund providers. In a June paper, it said that its proposal to allocate private assets to the funds would include flat fees and could use other parts of target-date portfolios to provide cash to meet redemptions.

Private-equity executives know their fees will draw criticism. Apollo's Rowan has argued that critics' emphasis on fees alone is unhealthy, and that the proper measurement is investors' returns net of fees, which he says argue in favor of adding an allocation.

But whether 401(k) returns from private funds will make up for their fees is far from clear. Data from BlackRock's Preqin shows that the median return among private-equity funds has trended down since 2000, as the industry swelled. The U.S. now has some 19,000 private-equity funds.

Recent performance is suffering as firms pay higher premiums for their buyouts, says Brian Chingono, who runs quantitative research at Verdad, a Cambridge, Mass.--based hedge fund firm that replicates the returns of traditional PE strategies by buying small value stocks.

"PE funds have overpaid for what they hold," Chingono says, "So, they have to hold on to their assets longer to make a profit."

The average PE fund still beat public market benchmarks for the past 10 years, with a median annual rate of return in the midteens, according to Preqin. That compares with small-cap stock returns of about 8%, and 12% for the S&P 500. But the performance of individual PE funds ranged widely around that industry median, while public market funds all delivered similar returns.

As Morningstar analyst Frank Shannon points out in a recent analysis of PE industry performance, it matters which manager you select among those 19,000 PE funds.

PE industry offerings for 401(k) plans may resemble the products that Apollo, Blackstone, and others now market to wealthy individuals through private banks and wealth advisors. These funds are more liquid than institutional funds and are perpetual, with no fixed end-date.

Alisa Wood co-leads two such "evergreen" funds that KKR launched a couple of years ago. While some alternative-asset managers have different assets in their funds for institutions and individuals, she notes that KKR funds for individuals share in the same deals that KKR finds for its institutional investors.

"You're not buying assets that we've passed on, in our flagship funds," she said. "You get a piece of everything that we do."

Private credit may be the first kind of private asset to show up in 401(k)s, says Marc Lipschultz, the co-CEO of credit specialist Blue Owl. The company and its larger rival Ares have so-called business development company funds that serve individual investors. Compared with other private assets, direct lending is relatively low risk and yields steady income. Direct lending funds averaged returns of 9% in the past 10 years, according to the researchers at Cliffwater. That compares with about 5.5% for high-yield bonds. Fixed income would get a bigger tax benefit from being in a 401(k) account than would private-equity profits.

Industry executives expect target-date funds to be the first vehicle where private assets show up. Such funds hold about 40% of 401(k) plan assets, according to the Investment Company Institute. Depending on how quickly the Department of Labor implements new rules, private assets could start appearing in target-date funds within three years, says Ari Jacobs, global head of investments for consulting firm Aon.

The timeline for private fund offerings outside of target-date funds "could be long and may not be appropriate ever," Jacobs says.

Including private assets in target-date funds "just makes sense for an individual investor, because probably the allocation to alternatives and private markets should be different for somebody who is 30, versus someone who is 70," said KKR co-CEO Scott Nuttall on the company's earnings call last month.

Whether private assets prove any better than what's already in 401(k)s, PE industry skeptic Chingono thinks the Trump administration isn't wrong to give retirees a choice.

"For people who are well informed, it is far better to have more options, rather than less," he says.

Write to Joe Light at joe.light@barrons.com and Bill Alpert at william.alpert@barrons.com

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August 22, 2025 12:13 ET (16:13 GMT)

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