Here are 3 simple reasons to avoid private equity in your 401(k).
Private equity is all the rage now. I should clarify that. It is all the rage about having private equity offered to all the Average Joe’s through their 401(k) plans at work.
Wait, what?
Yes, it is possible you may be given the ‘opportunity’ to invest in alternative investments in your 401(k) plan soon.
Why is this?
President Trump issued an Executive Order allowing companies to offer alternative investments in 401(k) plans. These investments include:
- Private equity
- Private credit
- Real estate
- Digital assets, including cryptocurrency
In my opinion, this order essentially directed the Department of Labor to try and minimize the lawsuits employers face from employees thinking they are getting the short end of the deal in their 401(k) plan. This order was the exact opposite of the prior administration. While the 2021 order did not ban having alternative investments in 401(k) plans, they were strongly discouraged through the regulatory regime.
Fees
The private equity model is simple. They charge a management fee and take a percentage of the profit.
In my opinion, it is difficult to justify paying these fees as there are other alternatives.
I’m not making a recommendation, but I found an excellent source about private equity, Two and Twenty by Sachin Khajuria.
Illiquid Investments
Private equity investments are illiquid. This means that they can’t be sold on the stock exchange during trading hours and quickly converted into cash. This is not a mere inconvenience. The holding period, how long you will be locked into these investments for varies, but the median holding period has doubled over the last decade from 3.5 year to 7 years. 1)
Despite the recent Initial Public Offering (IPO) Frenzy, according to Barron’s, there are significantly less publicly traded companies. In 1996 there were approximately 8,000 publicly traded companies. Due to mergers and acquisitions, increasing regulation and more companies electing to stay private, there are approximately 4,000 publicly traded companies at the end of 2024. Private equity companies, well, took many of these companies private. 2) 3)
When rates were near zero, which they were for over a decade before 2020, it was rock and roll time. With the cost of capital being free so cheap, it was easy to buy companies and leverage them up with debt. Then, eventually, sell some of their holdings for a tidy profit.
Then what happened? The Covid-19 pandemic hit and then interest rates rose. Then it became more challenging for buyers of these businesses as interest rates were no longer ‘free.’
Additionally, many institutional investors do not appear to have the appetite they once had for private equity. This is due to the high fees and illiquid investments mentioned above.
Yale University Endowment Fund
The poster child for investing in private equity was the Yale University Endowment Fund. This fund was run for over thirty years by David Swenson until his passing in 2021. The fund returned over 13% per year under his stewardship. These returns earned the funds moniker to be the “Yale Model.” 4)
The allocation to alternative investments has changed over the years. However, it was not uncommon for this fund to have at least half of its funds in alternative investments.
That is a very large percentage.
Likely a percentage that most 401(k) plan investors should not even begin to consider.
Why is the private equity crowd so interested in having alternative investments in 401(k) plans? That is like asking Jessie James why he robbed banks.
“Because that is where the money is.”
True that.
Defined Contribution Plans
Defined contribution (DC) plans, which include 401(k) plans, had $13 trillion (with a T) invested as of June 2025. 5)
Private equity, as mentioned above, has lost a ton of publicly traded customers over the last 30 years to be banging on their door. Access to the 401(k)-plan market would go a long way to their bottom lines.
Why are employers hesitant to allow alternative investments in their 401(k) plans? One word:
Litigation.
The law requires employers with 401(k) plans to act in their employees’ best interests. This is a somewhat nebulous mandate. Therefore, it has resulted in lawsuits against employers for not complying with this.
Potential litigation will give employers more than a reason to pause and go forward with allowing alternative investments in their 401(k) plan. Companies don’t want to spend time and resources on litigation that can be avoided.
But don’t worry. The lawyers are already making their plans for even more lawsuits against employers that offer alternative investments in 401(k) plans. According to the Wall Street Journal, an average of 57 cases has been filed annually since 2016 against employers for excessive fees in 401(k) plans. 6)
Evidently, the lawyers also know why Jessie James robbed banks.
Currently the thinking is the alternative investments would be tucked inside the target date funds on the menu in the 401(k) plan. These target date funds are popular among employers and many younger employees. 7)
Target date fund’s objective is to provide diversified portfolio with professional management. These funds adjust the holdings over time. They attempt to match your risk tolerance with your anticipated retirement. Some funds offer a target date fund that is 45 years from now. This roughly takes someone entering the workforce at age 20 to age 65.
Typically, a target date fund will start out at nearly 100% invested in equities. As time goes on, the equity exposure will be decreased, and the fixed income exposure will increase.
Exhibit A for garnering the 401(k)-asset marketplace for alternative investments is the recent investment made by Goldman Sachs. They agreed to invest up to $1 billion (with a B) in T. Rowe Price. And, you guessed it, T. Rowe Price ranks third in target date funds and assets. 8)
Practical Matters
Here are some practical matters to consider.
If your employer’s 401(k) does not offer alternative investments, then you don’t need to worry about this.
As was mentioned above, if you have some ownership interest in a small to medium size business you already have some exposure to private equity. Similarly, if you have ownership interests in real estate, you also have exposure here.
Under either of these ventures you have WAY more control over the outcomes than investing in alternative investments, especially in your 401(k) plan.
As equally important, there is no additional fee you would be paying like you would with alternative investments in your 401(k).
If you want to own digital assets, including cryptocurrencies, gosh knows there are enough outlets to buy these too.
Finally, there are income taxes to consider. Distributions from traditional IRA’s are subject to ordinary income taxes. Also, any losses realized in a 401(k) plan are not income tax deductible.
Contrast this with investing in a taxable brokerage account. Any long-term gains on the sale of investable assets in this account would be subject to the preferred long-term capital gains tax rates. The long-term capital gains rates are 0% for low-income taxpayers, 15% for middle income and 20% for higher income taxpayers.
Also, any losses that are incurred can be offset against capital gains. If the losses exceed the gains, you can deduct up to $3,000 annually. Any losses above this amount can be carried forward and deducted in future years.
This means there is a massive income tax difference when investing in a taxable brokerage account and a 401(k).
Conclusion
If your employer’s 401(k) plan will be offering alternative investments, tread very lightly.
If you need help with 3 Simple Reasons to Avoid Private Equity in Your 401(k) plan, call Thomas Scanlon, CPA, CFP® at (860) 645-1515 or email Thomas.scanlon@raymondjames.com.
This is original content written by Manchester, Connecticut Financial Advisor Thomas F. Scanlon, CPA, CFP®.
1) Blog.privateequitylist.com – March 12, 2024
2) Barrons – September 22, 2025
3) Cambria – February 2025
4) Forbes.com – February 3, 2025
5) Asspa-net.org – September 24, 2025
6) Wall Street Journal – July 21, 2025
7) Ebri.org – August 28, 2025
8) Plansponsor.com – February 14, 2024
Alternative investments Involve substantial risks that may be greater than those associated with traditional investments and are not suitable for all investors. They may be offered only to clients who meet specific suitability requirements, including minimum-net-worth tests. These risks include, but are not limited to, limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. Investors should only invest in alternative investments if they do not require a liquid investment in canned bear the risk of substantial losses. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided. Investors should carefully review any offering materials or prospectuses prior to investing. Information presented on alternative investments is not intended as an offer to sell or, or the solicitation of an offer to purchase, any security. This information is provided for informational and discussion purposes only. Any offering will be made only by means of a confidential private placement memorandum or prospectus.
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