With a stroke of the pen, President Donald Trump could pave the way for private market investments once reserved for wealthy Americans and institutions to join 401(k) plans.
There's talk that Trump will sign an executive order to allow investments in private companies and private credit in employer-sponsored retirement plans. If that happens, 401(k) fund investors could buy companies not listed on public stock exchanges. They could also own private fixed-income investments, or loans between a borrower and a nonbank lender.
Proponents of adding private investments to workplace retirement plans say it's the next step in the democratization of investing. Privately held companies outnumber publicly traded stocks 25-to-1, according to Hal Ratner, head of research at Morningstar Investment Management.
The number of publicly traded companies in the U.S. peaked at 7,300 in 1996 but it's now down to around 4,300, according to EQT, a global investment firm.
In contrast, since 2000, the number of private companies backed by private equity firms has climbed from about 2,000 U.S. companies to more than 11,500, a 400%-plus increase, according to Citizens Bank.
"The biggest issue historically has been the lack of access to these types of investments (for individual investors)," said Frank Burke, chief investment officer at PPB Capital Partners, a firm that specializes in alternative investments.
Adding Private Market Investments
Does adding privately held companies to 401(k)s enhance portfolio diversification? It allows 401(k) plan participants to invest in a new asset class. "It opens up more of the investment landscape for retirement investors," said Ratner.
Private investment vehicles would only be available via so-called managed accounts, such as target-date funds, which are managed by professionals, adds Ratner.
Critics say only pension funds, endowments and ultrarich investors should own private investments. They say such investments are not suitable for mom-and-pop investors. The reason? They say these so-called alternative investments lack the transparency of publicly traded investments, charge higher fees, and tend to be illiquid, or difficult to sell in a heartbeat like a share of Apple.
Private Market Investments Go Mainstream?
Still, there are growing signs that investments in privately held companies and credit from nontraditional lenders are coming to a mainstream 401(k) near you.
Big Wall Street firms are already creating products that open private investments to individual investors saving for retirement.
Goldman Sachs, for example, introduced a fundlike investment this week that brings institutional-grade private credit to everyday savers in retirement plans. Last month, BlackRock, the world's largest asset manager, said it plans to offer a target-date fund — an age-based retirement investment that combines stocks, bonds, and other assets — with allocations to private equity and private credit in the first half of 2026. Similarly, investment manager Empower in May announced a program that would include private market investments in workplace retirement plans.
"American retirement investors ... 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," Empower president and CEO Edmund Murphy said.
Resistance To Idea
Not everyone agrees. U.S. Sen. Elizabeth Warren (D-Mass.), a ranking member of the Senate Banking, Housing, and Urban Affairs Committee, blasted the proposal to include private market investments in 401(k)s.
In a recent letter to Empower's CEO, Warren wrote, "Studies suggest that private market investments have consistently underperformed as compared to publicly traded indices. Despite these underwhelming results, private funds often charge up to 20 times as much in fees as mutual funds. At the same time, private funds have weak transparency, liquidity, and compliance requirements and lack investor protections."
If there's a silver lining to Warren's criticism it is that 401(k) plan sponsors and asset managers are aware of the risks. And, as a result, these key players are sure to take necessary steps to avoid mistakes adding private investments to 401(k) plans.
"They're going to do what they need to do to mitigate risks that could completely destroy the entire proposition," said Ratner.
Is More Choice Good?
Wall Street firms, however, see blending public and private investments to offer retirement investors more choices in meeting their retirement savings goals.
Private investments give retirement savers and investors access to businesses they might not otherwise be able to invest in, experts say. And that means investors can look beyond the Magnificent Seven stocks and broaden their holdings away from the highly concentrated U.S. equity market dominated by a handful of mega-cap stocks.
Large asset managers and private equity firms (companies who buy, manage, and later sell private companies) are looking to tap the massive defined contribution market. The market totaled $12.2 trillion in assets at the end of the first quarter, according to the Investment Company Institute.
In a recent research paper, BlackRock outlines how incorporating private market investments into a target-date retirement fund can add 50 basis points in portfolio returns annually over the full lifecycle of a target-date fund. That return boost compounded over 40 years can translate into about 15% more money for a retiree, according to BlackRock.
Historically, private investments have generated higher returns than their public counterparts, according to fund-giant Vanguard.
In the 10-year period ending Dec. 31, 2023, for example, annualized returns of private investments outpaced public ones in the following assets classes: equities, debt, real estate, natural resources and infrastructure, says Vanguard.
Worries Remain About Private Market Investments
Still, not all financial advisors offer glowing endorsements of adding private investments to American workers' retirement savings accounts.
"It's not the best idea," said Mark McCarron, partner and chief investment officer at Wescott Financial Advisory.
A few things about the inclusion of private equity give McCarron pause. For one, since private investments are illiquid, some long-term investments are not priced daily like a publicly traded security. That means there's a risk that during a market sell-off when investors are running for the exits, 401(k) plan participants could have trouble accessing their funds.
"If individual investors can't get their money out when they want to get out, that is a problem," said McCarron.
And while plan advisors and asset managers stress that so-called "liquidity management" will be built into these private investments, there's no guarantee these buffers will work, says McCarron. "It has not been tested in down markets," said McCarron.
What If Investors Want Out
Morningstar's Ratner, citing experience with clients in Morningstar's managed accounts program, says despite the fear of a mass exodus out of funds in severe down markets, fewer investors jump ship than you might think. "The attrition rate is actually pretty small," said Ratner.
And Burke of PPB Capital Partners counters that the long time horizon of private equity investments are in line with retirement savers who save for decades, not months. If there were a major stock event that resulted in mass withdrawals from a target-date fund with private investment exposure, the fund would likely sell more liquid public investments to meet redemptions, says Burke.
Another drawback is many retirement plan participants might not have a full understanding of how these private investments work. "When we are advising clients on private investments, we go through a rigorous suitability and appropriateness determination to see if the investment is right for them," said McCarron.
Plan sponsors, such as employers, also usually walk a fine line when it comes to financial advice. They offer more in the way of education than opinions on a particular investment.
To solve for this issue, Empower requires that plan participants can only access private market investments through them if their employers offer them. What's more, employers must work with an advisor to offer these investments through a managed account platform, such as a target-date fund, created in conjunction with Empower.
Going Beyond 60/40 Portfolios
Despite concerns about the suitability of private investments in retirement portfolios, BlackRock sees the traditional 60% stocks and 40% bonds balanced portfolio morphing into a more diverse asset allocation that also includes alternative investments like private equity and private credit in the future. BlackRock envisions a "portfolio of the future" made up of 50% publicly traded stocks, 30% public fixed income, and 20% private market investments.
American workers appear open to adding private investments to their retirement accounts, according to a recent Empower survey. Eight of 10 (79%) or respondents think retail investors should have access to "the same investment products as institutional investors." Three-fourths (73%) believe having professionally managed private investments in retirement plans "helps level the playing field for everyday investors." And 72% said diversifying their 401(k) with some private market exposure "could improve their long-term retirement outcomes."
Like any actively managed fund, the performance of private investment funds can hinge on the expertise of the money manager buying the businesses, adding value, and ultimately selling the companies off at a higher price, notes McCarron.
"The savvy of the money management team is key," said McCarron. "A good manager can identify a fast-growing successful company before it becomes public."
Picking Top Private Market Investments
Private equity outperformance is also a result of investment teams "that have actual skin in the game," said Burke. Private equity firms buy entire businesses, which give them control over the business and the way it's managed. These firms also get influential seats on the board of directors, says Burke.
What's more, private equity enables investors to gain access to upstart companies at lower valuations, and which are then sold at higher valuations to another private equity firm, or the company goes public.
There are, of course, many private equity managers that have "performed phenomenally well," but also "a lot of funds that have performed poorly and haven't done much better than the market as a whole," said Ratner.
If Trump gives the green light to private equity exposure in 401(k)s, it will be up to typically conservative plan sponsors to decide if adding these higher-fee, less-liquid investments and run the risk of facing litigation risk, says McCarron. "They don't want to be held accountable if anything goes wrong," said McCarron.
Nvidia Slides As AI Giant Touts Blackwell Momentum, But Margin Worries Hit Stock
Tesla Stock Keeps Falling. Last-Ditch Support Nears.
Forget Nvidia. The Real Magnificent Seven Drama Is With Tesla.
