401(k)s Not the Place for Private Equity, Says Johns Hopkins Study

A new study from the Johns Hopkins Carey Business School questions whether leveraged buyout private equity funds are suitable for workplace retirement plans, at a time when private equity firms are seeking to tap the defined contribution market, which is viewed as a largely untapped pool of capital. The report, authored by Jeffrey Hooke, an adjunct professor at the school, argues that private equity funds, which invest in privately held companies with "little to no public reporting," do not fit the relative safety and transparency that 401(k) participants expect from plans that typically hold public securities.

Hooke's analysis covers 59 prominent funds with collective commitments of $498 billion, using Preqin data reflecting private equity reporting lags as of April 2024. The study focuses on 19 of the 25 largest U.S. private equity-leveraged buyout families, ranked by LBO assets under management. Hooke's findings include a median of 2.5 years for a typical fund to invest 60% of its commitments. Only 20 of the 59 funds had returned more than 90% of paid-in value in cash, and the youngest of those was vintage 2012. Several funds aged eight to 12 years had not reached the 90% threshold. Hooke, whose article is slated for the Spring 2025 issue of the Journal of Alternative Investments, cites high fees, failure to frequently beat the stock market, and lack of liquidity as reasons the products are unsuitable for many defined contribution plans. He also criticized limited partners and the consultants who advise institutional investors for committing to successor funds without clear knowledge of prior fund returns, and reported that some LPs told him they wanted to "give [the funds] another chance."

Regulatory context is also addressed. The Department of Labor's June 2020 guidance, issued under the first Trump administration, allowed certain private equity exposure in professionally managed vehicles such as target-date funds. The Biden administration did not act on the issue from 2021 through 2024, and according to the report, many expect private equity-related rules to loosen further now that Trump is back in office.

Bradley Fay, a partner in the ERISA and employee benefits group at Seward and Kissel LLP, notes that private equity is more commonly offered as a component of a larger pool, such as a target-date fund. He cited Lockheed Martin Investment Management Co., which last year began offering a private equity co-investment sleeve in the target-date funds of its defined contribution plans. Fay says plan fiduciaries must weigh liquidity needs, since a 10-year lockup could create problems if a departing employee seeks to move assets, and must address participant disclosure, investment policy statement treatment, and fee appropriateness. He also said participant demand for private markets access is rising, driven largely by diversification opportunities as the number of public companies has declined and major indexes have become concentrated.