Private Equity Will Never Be the Same. 401(k)s Are the Golden Goose.

Apollo CEO Mark Rowan. His firm is developing financial products that are easier for savers to buy and sell than traditional private-equity offerings. (Yuki Iwamura/Bloomberg)

A $12 trillion market for retirement savings is the golden goose for asset managers, but for private-equity funds it has been pretty much untouchable. That is about to change.

President Donald Trump this month signed an executive order meant to open up 401(k)s and similar 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 & Co., Carlyle Group , and Blackstone . For retirement savers, access to private markets would be among the biggest changes since the invention of the target-date fund decades ago.

Private-equity managers have been itching to meaningfully break into the 401(k) market for years. No government rule has barred retirement plans from including private assets among their offerings, but as a practical matter, companies have kept them out for fear of being sued by employees over the funds’ relatively high fees.

That’s happened despite a sharp shift in favor of companies staying private. Since peaking at 8,090 in 1996, the number of publicly listed U.S. companies has declined steadily, hitting 4,010 last year, according to the World Bank. Driving the shift are more compliance costs for publicly listed companies and the sheer size of capital managed by sovereign-wealth funds, venture-capital firms, and other institutional investors. Companies can raise billions of dollars in funding without having to tap the public market.

In recent years, however, private-equity firms have had an increasingly difficult time raising money. Part of the problem is higher interest rates, which make deals that rely on leverage harder to pencil out. Existing funds have also struggled to find exits for investors—like an initial public offering or company sale—locking up cash that could otherwise be reinvested in new funds.

On a company earnings call in February, Apollo 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.”

This month, Trump took the handcuffs off. He directed the Labor Department 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 a lawsuit for violating their duty as “fiduciaries” of the plans. 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.”

Shares of KKR & Co. are up about 3.7% from a month ago, when news outlets first reported Trump was considering such an order. Shares of Carlyle Group have risen 11%, while Blackstone Group is up 7.4%. Shares of Apollo rose after the initial reports but have fallen 4.3% over the past month after an earnings report that missed expectations.

Created with Highcharts 9.0.1Source: FactSet

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“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.

Part of what makes private-equity executives eager is the market’s sheer size. U.S. private-equity firms had around $3.1 trillion under management as of last fall, according to S&P Global, meaning that even a sliver of the $12 trillion in assets sitting in 401(k)s and similar retirement plans could drive industry growth for years.

“While we don’t expect drastic changes in the coming months or even quarters, this remains a significant long-term tailwind,” wrote analysts for Piper Sandler in a research note, noting individual investors’ small allocation to alternative assets currently.

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

The Trump administration believes that by issuing guidance or rules clarifying how companies should consider private assets for their plans, it can kneecap future litigation and make employers more amenable to opening up their plans. “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,” said Taylor Rogers, a White House spokeswoman.

The Labor Department 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 penstroke.

Success for private-equity firms, according to some of their executives, might have individuals’ 401(k) allocations to private assets resemble many companies’ traditional pension plans. Those plans 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 holding private equity, private credit, and other assets. Toomey said that his firm is already in conversations to offer potential funds that 401(k) investors could access. Some of the most likely first customers are firms whose pension plans, also called defined-benefit plans, have their own allocations to private equity and have been pleased with the returns, he said.

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

It isn’t yet clear what 401(k) private asset offerings will charge, but existing private funds can charge both an annual management fee and an incentive fee once a fund’s returns reach a certain hurdle. So-called interval funds, which give smaller investors access to private assets but limit withdrawals, are one potential comparison. Those funds have expense ratios of around 2.5% on average, according to Morningstar, well above the 0.3% average fee on target-date funds holding public stocks and bonds.

BlackRock , one of the largest target-date fund providers, in a June paper 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 help manage liquidity concerns.

“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.

Private-equity executives are cognizant of the industry 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. A focus on investing in indexes of publicly traded companies has left retirees overly reliant on the returns of just a handful of companies, Rowan has said, while daily liquidity isn’t necessarily an advantage for investment accounts geared toward retirements potentially decades away.

Apollo and other companies have developed products that allow investors greater liquidity and “perpetual” funds that don’t have a fixed end date like traditional funds have. Many private-asset firms say one successful example is the Australian national retirement savings plan, which already allows access to private assets.

Many private-equity executives expect target-date funds to be the first place where private assets show up, and the most important. Such funds hold around 40% of 401(k) plan assets, according to the Investment Company Institute. Depending on how quickly the Labor Department implements new rules, private assets could start appearing in more target-date funds in fewer than three years, said 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 said.

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.

The move to include private assets in retirement plans has had false starts before. The first Trump administration began a similar effort in 2020 that was halted after former President Joe Biden took over.

Changes to companies’ 401(k) plans also won’t happen right away. Trump’s order gave the Labor Department six months to clarify what responsibilities plan sponsors have in offering private assets. As part of that, the department could quickly issue guidance or 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, said John Hunt, a partner with law firm Sullivan & Worcester whose clients include private-equity funds. Hunt noted employers can burn more than $2 million in legal expenses in the event of an employee lawsuit, even before accounting for potential damages.

Until the new rules are proven to protect companies from litigation, Hunt said, “you may not have a lot of smaller employers willing to take that chance.”

Write to Joe Light at joe.light@barrons.com