Private Equity in 401(k) Plans: Is It Risky?

Last month, President Donald Trump signed Executive Order #14330, “Democratizing Access to Alternative Assets for 401(k) Investors.” The order seeks to open up 401(k) plans to a variety of investments that are not available in conventional stock or bond funds, such as private loans, crypto, real estate and private equity.

You may have heard of private equity before — but what exactly is it, and is investing your 401(k) in it a good idea? Here’s our breakdown.

Private equity means shares of companies that are not publicly traded. Just as stocks represent fractional ownership of companies that trade on a stock exchange, private equity represents fractional ownership of private companies, often too small or too new to be exchange-traded. These may be anything from early-stage tech startups to family-owned HVAC repair businesses.

PE investors make money in much the same way as stock market investors. They aim to eventually sell their shares for a higher price than they paid for them. Another similarity with stocks: Many PE investors buy into a diversified pool of companies via a professionally-managed private equity fund.

Historically, PE funds have only been available to high-net-worth and institutional investors, not retail investors, and they haven’t been available in retirement accounts. Private equity is not to be confused with private credit, which refers to non-publicly-traded loans to companies rather than ownership shares of private companies.

When might private equity actually become available in 401(k) plans?

It’s important to note that the recent executive order is just the beginning of a potentially yearslong process of bringing more alternative asset choices to 401(k) investors.

The order does not call for the launching of 401(k) private equity funds by a certain date. Rather, it instructs various executive branch agencies, such as the Department of Labor and the Securities and Exchange Commission, to start rewriting the regulations around alternative assets, which would include rules on private equity in 401(k) plans^[0]

History suggests that these kinds of regulatory changes can take a long time to actually show up in peoples’ retirement accounts. For example, Congress authorized the creation of Roth 401(k) plans in the Economic Growth and Tax Relief Reconciliation Act of 2001, but the first Roth 401(k) plans didn’t actually appear until 2006.

It’s hard to say how long it’ll be before investors can actually put 401(k) money into PE funds, but there’s a good chance that day is still multiple years away.

Should private equity be part of your retirement portfolio?

The main appeal of private equity is its track record of solid long-term returns. According to a 2024 report by investment management firm Neuberger Berman, the average private equity fund has handily outperformed public stock market indexes such as the MSCI World index over the last five, 10, 15 and 20 years^[0]

But it can take a long time to cash in those returns. Private equity isn’t publicly traded, which means there isn’t a constant flow of buy and sell orders like you’d find in the stock market. That means PE investors aren’t free to sell whenever they want, like mutual fund or ETF investors are. The report notes that PE funds often have lockup periods of eight to 14 years.

Priya Malani, the CEO of registered investment advisor Stash Wealth, pointed out in an email interview that retirement investors often have decades-long time horizons, which can make the illiquidity of private equity investments less of a problem.

“Assuming your finances are structured properly and you’ve built sufficient liquidity outside your retirement accounts, you shouldn’t need to tap them early, making illiquid investments more palatable. So while illiquidity is often raised as a downside of PE, it’s arguably less of a concern in a 401(k), where long-term time horizons are already built in,” Malani said.

However, Malani doesn’t think private equity is a must-have for a typical 401(k) portfolio. “For most investors, it’s an unnecessary layer of complexity and risk that rarely moves the needle on an already diversified strategy,” she said.

Marguerita Cheng, a certified financial planner and the CEO of registered investment advisor Blue Ocean Global Wealth, said in an email interview that private equity may provide 401(k) investors with better returns and more diversification.

However, Cheng noted that PE funds charge high fees (we found that’s typically a 2% management fee, and 20% of the fund’s profits), and that retail investors may not be well-informed about how these funds work.

“Investor education is a concern, as we don’t want people to approach 401(k) investing with a short-term view,” she said.

Can you invest in private equity right now?

Private equity isn’t available in 401(k) plans yet. It’s also generally only available to accredited investors (people who have a net worth of at least $1 million excluding their primary residence, an annual individual income of at least $200,000, or certain financial professional licenses).

But if you’re interested in taking private equity for a “test drive” before it becomes available in 401(k) plans, there are already some workarounds to the accredited investor rule.

Real estate crowdfunding platforms offer retail investors similar opportunities in non-publicly-traded real estate projects. Also, some private equity firms, such as Blackstone Inc. (BX) and Brookfield Asset Management (BAM) are publicly-traded. There are also ETFs that invest in publicly-traded private equity firms, such as the Invesco Global Listed Private Equity ETF (PSP) and the ProShares Global Listed Private Equity ETF (PEX).

Some of the robo-advisor firms reviewed by NerdWallet offer some level of exposure to private equity to non-accredited clients. Titan, for example, offers an investment strategy based on the ARK Venture Fund, which invests in early-stage startups. This offering aims to allow investors to sell on a quarterly basis, although this is not guaranteed. Fidelity Go is another robo-advisor we review that offers a private equity strategy, although this particular strategy is restricted to accredited investors.