Gregory Clifford is Founder and CEO of The Clifford Group.
The landscape of retirement planning may soon change profoundly. With the recent signing of an executive order aimed at allowing 401(k) plans to include alternative investments such as private equity, private credit, real estate and cryptocurrency, more American workers could gain access to investment vehicles that were once off-limits to most retirement savers. This has been described as “democratizing” investing, but as with all things investing, the reality is more nuanced.
As someone who works with investors navigating both public and private markets, I see both the potential and the pitfalls of this shift. Opening up 401(k) plans to include private placements means new complexities and new risks, as well as new responsibilities for employers and employees alike.
Why The Change?
Private market assets have grown exponentially in recent decades; in 2024, U.S. private equity assets under management hit $3.1 trillion. It’s evidence of how much investors are interested in what private assets can offer: diversification and high returns.
Private equity has historically outperformed public markets during some periods, meaning potential for higher long-term returns. That doesn’t mean it always will, but it does suggest that these asset classes can be a valuable addition to portfolios.
Including private equity, real estate or private credit in a retirement plan can also help spread risk across asset classes that don’t always move in lockstep with public markets. This can be particularly helpful during periods of market stress, when stocks and bonds start to behave similarly.
The Risks
On the other hand, private placements are not structured with retail investors in mind and don’t behave like traditional exchange-traded funds. Private investments almost always come with higher costs than traditional 401(k) offerings. That might include both a management fee and a performance fee on top. While those fees can be justified by returns in some cases, they still eat into investor gains.
Then there’s the question of liquidity. Publicly traded assets can usually be sold within a business day. That’s not the case with private investments. Some private equity or real estate vehicles require multiyear lockups. At the shorter end, you might see quarterly or monthly redemptions. But even then, those windows aren’t guaranteed. If you need that money unexpectedly, or you’re close to retirement, these lockups could affect your ability to draw down income immediately.
Proceed With Curiosity And Caution
Although the executive order has been issued, practical implementation could take months or even years. Nonetheless, I believe private placements will eventually find their way into 401(k) plans in a meaningful way, but only with careful structuring. Most participants will gain access through professionally managed vehicles like target-date funds or multi-asset portfolios that incorporate a small slice of alternatives. This model puts the burden of due diligence on professional asset managers, not individual investors.
Education and due diligence on all sides will be critical during this transition. Retirement plan sponsors and trustees are responsible for picking and overseeing investment options, and that job is about to get harder. Employers will need to implement better oversight and stricter vetting and potentially offer educational programs to help employees understand what they’re investing in.
If you’re considering allocating a portion of your 401(k) to a private placement once they become available, my advice, as always, is to talk to a financial advisor. Ask whether the fund is appropriate for your timeline and risk profile. Make sure you understand the structure, the fees, the liquidity and how it fits into your bigger retirement picture. Don’t assume that just because one private fund did great in the past, the next one will.
Expanding access to private investments in 401(k) plans could mark a turning point in how Americans build for retirement. It offers new opportunities, but more options also mean more risks and responsibilities for both investors and employers.
Private placements aren’t for everyone, and they shouldn’t necessarily become a default allocation in retirement plans. But for the right investor, in the right circumstances, with the right education and guidance, they could be a useful piece of the puzzle.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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