Key Takeaways
- • The Center for Retirement Research argues workers lack a compelling case for private equity in 401(k) plans, citing illiquidity, high fees, and lack of performance evidence from state and local pension plans that have adopted these investments.
- • A recent executive order directs the Department of Labor to expand alternative investment options—including private equity and private credit—in 401(k) plans, with potential allocations capped at 10-20% of target-date funds, though broader expansion remains possible.
- • DOL guidance issued in June 2020 (in response to applications from Pantheon Ventures and Partners Group) acknowledged private equity's complexity, longer time horizons, illiquidity, and higher fee structures but did not prohibit fiduciaries from offering private equity components.
- • Research on state and local pension plans shows that adding private equity has not increased returns or reduced volatility, undermining the primary argument advanced by the private equity industry for 401(k) expansion.
- • The private equity industry is identified as the principal constituency pushing for 401(k) access, with no corresponding evidence of worker demand for these investments.
Summary
A policy debate has surfaced regarding the appropriateness of private equity allocations in 401(k) retirement plans following an executive order directing the Department of Labor to expand access to alternative investments. The Center for Retirement Research has published analysis arguing that workers do not benefit from such expansion, citing structural incompatibilities between private equity characteristics and 401(k) plan objectives.
The primary concern centers on three fundamental attributes of private equity investments: illiquidity, elevated fee structures, and demonstrated performance gaps. According to the Center's research on state and local pension plans—which have substantial private equity exposure—the addition of private equity holdings has failed to deliver either enhanced returns or reduced portfolio volatility. This empirical finding contradicts the performance justifications advanced by proponents of 401(k) expansion.
The Department of Labor has taken a cautious regulatory approach. In June 2020, responding to applications submitted on behalf of Pantheon Ventures and Partners Group, the DOL issued guidance acknowledging that private equity investments exhibit greater complexity, extended investment horizons, reduced liquidity, and higher fees relative to traditional investments. However, the agency concluded that ERISA fiduciaries would not violate their statutory duties solely by offering funds with private equity components. One year later, concerned the guidance could be broadly interpreted as endorsement, the DOL issued a clarifying statement reiterating that private market investments are not restricted from 401(k) plans but emphasizing fiduciary obligations.
Current policy discussions contemplate allocating 10-20% of target-date funds—the default investment vehicle in most 401(k) plans—to alternative assets including private equity and private credit. The Center's analysis suggests this expansion serves primarily private equity industry interests rather than worker retirement security objectives, particularly given the absence of performance justification derived from pension plan experience.
The primary concern centers on three fundamental attributes of private equity investments: illiquidity, elevated fee structures, and demonstrated performance gaps. According to the Center's research on state and local pension plans—which have substantial private equity exposure—the addition of private equity holdings has failed to deliver either enhanced returns or reduced portfolio volatility. This empirical finding contradicts the performance justifications advanced by proponents of 401(k) expansion.
The Department of Labor has taken a cautious regulatory approach. In June 2020, responding to applications submitted on behalf of Pantheon Ventures and Partners Group, the DOL issued guidance acknowledging that private equity investments exhibit greater complexity, extended investment horizons, reduced liquidity, and higher fees relative to traditional investments. However, the agency concluded that ERISA fiduciaries would not violate their statutory duties solely by offering funds with private equity components. One year later, concerned the guidance could be broadly interpreted as endorsement, the DOL issued a clarifying statement reiterating that private market investments are not restricted from 401(k) plans but emphasizing fiduciary obligations.
Current policy discussions contemplate allocating 10-20% of target-date funds—the default investment vehicle in most 401(k) plans—to alternative assets including private equity and private credit. The Center's analysis suggests this expansion serves primarily private equity industry interests rather than worker retirement security objectives, particularly given the absence of performance justification derived from pension plan experience.
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