President Donald Trump’s administration is reportedly considering an executive order to open the $9 trillion U.S. retirement market to private equity and alternative investments, a transformative shift for 401(k) plans. This directive would task the Department of Labor, Treasury, and Securities and Exchange Commission with exploring ways to integrate private funds into retirement plans, as reported by Pensions & Investments, benefiting firms like Blackstone and Apollo Global Management.
Empower, the nation’s second-largest retirement plan provider, has already partnered with Apollo, Franklin Templeton, Goldman Sachs, Neuberger Berman, PIMCO, Partners Group and Sagard to offer private market investments via collective investment trusts. In a press release, Empower President and CEO Edmund F. Murphy III said, “Empower is making a profound move on behalf of American retirement investors who should have the ability to invest in an asset class that has the potential to diversify their portfolios and offer opportunities for returns in new ways.”
The potential executive order from the White House has sparked debate. Proponents say it democratizes access to high-return assets, while critics, including many Registered Investment Advisors, warn of risks and fiduciary challenges under the Employee Retirement Income Security Act.
Implications For Plan Participants
For Empower’s 19 million participants and others in 401(k) plans, private equity offers diversification beyond stocks and bonds. Private markets traditionally have low correlation with public markets, potentially reducing volatility through diversification. CITs address liquidity issues by pooling investments, bypassing the $5 million minimums typical of private funds.
However, private equity carries risks—often in the form of higher fees and less transparency. Many 401(k) participants lack the guidance and expertise to evaluate these complex investments, risking unsuitable choices, especially for those nearing retirement and needing liquidity. Robust education is critical to prevent costly errors.
Challenges For Plan Sponsors
Plan sponsors—employers offering 401(k) plans—face heightened fiduciary risks under ERISA, which mandates prudent decision-making. Private equity’s complexity, illiquidity, and lack of daily pricing complicate fair valuations and performance monitoring. Losses could trigger a swarm of lawsuits in the already highly litigious arena.
While the 2020 DOL guidance under Trump permitted private equity in managed portfolios, Biden’s DOL urged caution in a 2021 news release, leaving uncertainty. Apollo CEO Marc Rowan has advocated for “litigation relief” to protect sponsors, as reported by Business Insider. Safe harbors defining diversification, transparency, and education requirements could help, but sponsors may need fiduciary liability insurance until regulations clarify.
Opportunities And Risks For Advisors
Plan advisors can differentiate by guiding sponsors through private equity’s complexities. However, ERISA demands rigorous vetting of funds for quality and suitability. Private equity’s opacity and high fees complicate this duty, and advisors must educate participants on risks like illiquidity. Without clear guidelines, advisors risk a whirlwind of compliance issues. Using CITs or third-party managers can mitigate risks, but diligence remains essential.
Regulatory clarity is paramount here. The DOL’s 2020 guidance was limited, so a prudent executive order should spur comprehensive safe harbors, including diversification standards, transparency requirements, and education mandates. Without these, fiduciary risks likely outweigh benefits.
Private equity in 401(k)s, a hot 401(k) industry topic following Empower’s initiative and a potential executive order, could have a sizable impact on retirement investing. With that said, regulators must balance innovation with prudence to protect stakeholders. Until clear guidelines emerge, private equity in retirement plans remains a high-stakes venture.
Securities offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC, (Kestra AS) an affiliate of Kestra IS. Beacon Financial Services is not affiliated with Kestra IS or Kestra AS. Beacon Financial Services does not provide legal or tax advice. https://www.kestrafinancial.com/disclosures
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