Why Private Market Investments in 401(k) Plans Are a Dangerous Gamble with Your Retirement

The Private Markets Push: What's Really Happening

Empower Retirement, the industry's second-largest recordkeeper, recently announced its intention to offer private equity and private credit investments to retirement plan participants. This move has sparked serious concerns from lawmakers, including Senator Elizabeth Warren, who has rightfully questioned whether these complex, high-risk investments belong in the retirement accounts of working Americans.

The timing is particularly troubling. With discussions of potential executive orders to mandate private equity access in the $9 trillion 401(k) market, we're seeing a coordinated effort to open retirement savings to Wall Street's most profitable, and riskiest, investment vehicles.

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Why Private Markets Are Wrong for 401(k) Participants

1. Excessive Fees Erode Retirement Savings

Private market investments are notorious for their high fee structures. Unlike traditional mutual funds with expense ratios typically under 1%, private equity and private credit investments often carry management fees of 2% plus performance fees of 20% or more. For retirement savers who have decades until retirement, these excessive fees compound over time, potentially costing participants hundreds of thousands of dollars in lost retirement income.

2. Liquidity Risk When You Need Money Most

Private market investments are inherently illiquid. Unlike publicly traded stocks and bonds that can be sold daily, private investments often lock up capital for years. During market downturns or personal financial emergencies, precisely when participants need access to their money, these investments may be impossible to liquidate. Senator Warren accurately noted that "during a crisis or even momentary panic in the broader markets, private credit is more likely to experience liquidity freezes."

3. Lack of Transparency Creates Blind Spots

Public market investments provide daily pricing, regulatory oversight, and transparent reporting. Private markets operate in the shadows, with limited disclosure requirements and infrequent valuations. Participants investing in these vehicles often have no clear understanding of what they own, how it's performing, or what risks they're taking with their retirement savings.

4. Complexity Beyond Most Participants' Understanding

The average 401(k) participant struggles with basic investment concepts like asset allocation and expense ratios. Private market investments involve complex structures, leverage, and risk factors that even sophisticated institutional investors find challenging to evaluate. Asking individual participants to make informed decisions about private equity and private credit investments is unrealistic and potentially harmful.

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The "Democratization" Myth

Proponents of private market access, including BlackRock's Larry Fink, frame this push as "democratizing" investing to help Americans build wealth. This narrative is misleading. True democratization would involve making low-cost, diversified, liquid investments more accessible; not exposing everyday workers to the high-fee, high-risk investment strategies previously reserved for the ultra-wealthy.

The wealthy can afford to take additional risks with the potential to lose money on speculative investments because they have diversified portfolios and multiple income sources. The typical 401(k) participant cannot afford such risks with their retirement savings.

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Fiduciary Concerns for Plan Sponsors

Plan sponsors have a fiduciary duty to act in the best interests of their participants. Adding private market options to 401(k) menus creates several fiduciary risks:

• Due diligence challenges: Evaluating private market investments requires specialized expertise most plan committees lack
• Ongoing monitoring difficulties: Private investments provide limited transparency, making oversight nearly impossible
• Participant education burden: Plan sponsors must somehow explain complex investment structures to participants
• Potential liability: If participants lose money in inappropriate private market investments, plan sponsors may face lawsuits

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Better Alternatives Exist

The retirement industry already offers excellent solutions for participants seeking diversification:

• Target-date funds with built-in diversification across asset classes
• Low-cost index funds covering domestic and international markets
• Balanced funds offering professional management at reasonable fees
• Real estate investment trusts (REITs) for real estate exposure with daily liquidity

These options provide diversification benefits without the excessive fees, liquidity constraints, and complexity of private market investments.

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The Real Winners: Wall Street, Not Workers

The push for private market access isn't about helping workers, it's about accessing the massive pool of 401(k) assets to generate fees for investment managers. Private equity firms and their partners stand to earn billions in management and performance fees from retirement plan assets, while participants bear all the risks.

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What Plan Sponsors and Participants Should Do

For Plan Sponsors:

• Focus on low-cost, diversified investment options
• Prioritize participant education on existing investment choices
• Resist pressure from recordkeepers to add complex private market options
• Consult with independent fiduciary advisors before considering alternative investments

For Participants:

• Stick to simple, low-cost investment options
• Focus on consistent savings and appropriate asset allocation
• Be skeptical of complex investment products promising superior returns
• Remember that boring, diversified portfolios often outperform exotic alternatives

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Conclusion: Protecting Participants Should Come First

The movement to introduce private market investments into 401(k) plans represents a concerning shift away from the core principles of retirement security: simplicity, low costs, diversification, and liquidity.

While these investments may generate substantial profits for Wall Street, they're likely to leave participants worse off.

As a Retirement Plan Advisor and a Fiduciary, my primary obligation is to protect participants' long-term financial security. That means advocating for investment options that are transparent, affordable, and appropriate for long-term retirement savings, not complex, expensive alternatives that primarily benefit private equity firms, their partners, and the recordkeepers who stand to make money by offering these options in 401(k) plans.

The retirement security of millions of American workers is too important to gamble on Wall Street's latest profit-generating scheme. Plan sponsors and policymakers should reject the private markets’ push and instead focus on proven strategies that actually help participants achieve secure retirements.

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