Private Equity Is Knocking on the Door of Americans’ Retirement Funds. Don’t Let It In.

President Donald Trump signed an executive order Thursday that would allow private equity funds to be included in 401(k) accounts. (Dreamstime)

About the author: Joshua Hemmert was part of the team that launched JPMorgan’s first target date funds. He is an investment consultant at Christian Brothers Consulting Solutions, which advises Catholic institutions. The views expressed are his own.

President Donald Trump’s new executive order threatens to open the floodgates for private equity to infiltrate America’s primary retirement system. The order signed Thursday clears regulatory hurdles for 401(k) plans to channel worker payroll deductions into private equity funds. That move could prove disastrous for ordinary savers.

An unappreciated danger stems from the possibility that these funds could benefit from changes intended to help ensure savers make at least minimal contributions to their retirements. Employers are allowed to auto-enroll eligible employees into 401(k) plans. Though employees can opt out of enrollment or choose their own investments, in practice, nearly everyone who is auto-enrolled puts their savings into target date funds. Were those funds to include private equity, millions of workers’ savings would be channeled into one of Wall Street’s most opaque and expensive products.

Plan committees would be shielded from fiduciary liability so long as they follow Department of Labor rules for which default funds they use. Savers would effectively be conscripted into alternative investments. If private equity truly offered compelling value for retirement savers, it wouldn’t require regulatory capture and behavioral inertia to access their capital. Genuine investment opportunities sell themselves to informed buyers over time, not through default settings and liability shields.

With target date funds already managing about $4 trillion and serving two‑thirds of America’s 70 million 401(k) participants, the potential wealth transfer is staggering.

Automatic enrollment is highly effective at getting employees to contribute to their 401(k)s. Automatically enrolled employees had an overall participation rate of 94%, compared with 64% for employees in plans with voluntary enrollment, according to Vanguard data for 2024. Workers rarely adjust their default allocations, creating a captive market.

Private equity’s supporters claim the asset class can deliver superior returns. But a Harvard Business School paper drawing on data from Cambridge Associates noted that North American private equity funds had not outperformed a U.S. equity customized benchmark over the past decade after fees. Research estimates the return dilution from gross to net returns can reach 6-7%, meaning a 20% gross return becomes 13-14% net to investors. Why pay PE’s higher fees if they aren’t delivering superior performance?

As Vanguard founder John Bogle demonstrated, the drag from a 2% annual fee can erode final wealth by 63% over 50 years.

Private equity doesn’t reduce portfolio risk either. The illusion that it does stems from quarterly appraisals that artificially smooth returns. When researchers adjust to make like-for-like comparisons, private equity’s volatility reaches 17.1%, higher than the S&P 500’s 16.8%. In 2022, state pension data showed private equity marks slightly negative to flat while the S&P fell 20%. This disconnect illustrates the smoothing problem: In theory, leveraged private companies should correlate with—and fall more than—public markets during downturns, not appear magically insulated from market reality. Quarter‑end smoothing flatters the numbers, not the reality.

Not even a good fund manager in private equity can change that. They are hard to find: A paper published by the National Bureau of Economic Research found that performance persistence at the fund-family level has deteriorated into randomness. Hard‑to‑price assets also don’t often sit well within daily‑valued target date funds. Stable value funds gated transfers during the 2008 crisis, while open‑end real estate investor redemption queues topped $50 billion after Covid.

Fees on flagship index-based target date funds have fallen below 0.1% annually. A fund that added a 20% allocation to private equity and other alternatives at a median 1.75% fee could raise the blended expense four- to seven-fold. If just 10% of the $4 trillion in target date fund assets migrates to private equity allocations, that would represent $400 billion in new assets paying fees markedly higher than current levels. This windfall would come from workers’ pockets, transferred through a regulatory framework that makes individual resistance nearly impossible.

Private equity is suitable for sophisticated investors who understand its risks and illiquidity. It has no place as a default investment for teachers, firefighters and factory workers saving for retirement.

The Labor Department should reaffirm that illiquid, high-fee strategies belong only in opt-in satellite positions, not as automatic defaults. Congress should mandate transparent fee disclosure down to individual participants. Most importantly, 401(k) plan committees should remember that fiduciary prudence sometimes means saying “no” when the math fails ordinary savers.

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