Beware, Wall Street’s private equity, private credit and “alternative asset” (including cryptocurrencies and other digital “assets”) managers are more determined than ever to get a cut of the trillions stashed away in America’s 401(k) plans. President Trump’s recent executive order has thrown open that door, setting off a lobbying blitz and a swirl of debate—over returns, risk, and, most importantly, who stands to benefit.
America’s 401(k) system controls over $12 trillion in retirement assets, the single largest reservoir of investable long-term money on the planet. Historically, only pension funds, endowments and the ultra-rich (i.e. “accredited investors” deemed sophisticated enough to fend for themselves) were allowed access to high-fee, high-status private equity, real estate, and private credit funds.
But with traditional institutional investors maxed-out on their target allocations to private deals, how can private fund managers keep assets growing and the management fee train running? They need to unlock new sources of capital and see 401(k) accounts as a vast reservoir filled by a steady stream of dollars coming in every payday from millions of Americans,
They’ve found their new “Golden Goose.”
Private funds charge notoriously high fees: 2% in management fees and 20% of the gain (“Two and Twenty”) are the norm, far exceeding the costs of index funds (0% to 0.03%) that dominate most 401(k) menus today. Opening 401(k)s to these products could mean hundreds of billions in additional fees, especially since retirement savers often leave their money untouched for decades. The sales pitch is dressed up in the language of ”democratization”—letting average Americans access “exclusive” and “higher-yield” investments previously reserved for institutions and the wealthy. But with most things in life, you can “follow the money” to uncover the true motivations.
Private funds’ steep fees add up over years and decades. While fund managers argue that higher returns justify the costs, data shows that net-of-fee returns often fail to beat simple, cheaper public funds—not to mention the wide dispersion between top and bottom performers.
Unlike ETFs, mutual funds, or even regular stocks and bonds, private investment funds are illiquid. 401(k) participants might discover, at the worst possible moment (job loss, recession, personal emergency), a big chunk of their account is locked up and can’t be sold—or can only be redeemed at a steep discount, and/or during tiny, controlled windows. The outcome of recent redemption rushes from non-public funds is a cautionary tale: some investors have had to wait months or years to sell their investments.
Public markets offer continuous pricing, SEC-required disclosures and robust oversight from the SEC. In other words, there is transparency. By contrast, private investments are valued infrequently, typically using “manager marks” (prices determined by the manager) rather than actual market prices. This lets managers falsely claim smoother returns than public markets—a phenomenon dubbed “volatility laundering.”
That might soothe nerves until a crisis strikes and real values are revealed, often with a nasty surprise. For 401(k) fiduciaries, this lack of transparency creates monitoring nightmares (and legal exposure).
Private equity and credit funds are complex, often using significant leverage (borrowing), illiquid securities, and intricate contracts. Even institutional investment committees with highly paid consultants struggle to fully grasp the risks—let alone the average 401(k) saver trying to plan for retirement. This complexity also tilts the playing field for sponsors: it’s all too easy to hide fees, risk levels and conflicts of interest in the fine print.
If 401(k) money floods into semi-liquid private funds, it could create the temptation or even necessity for sponsors to cut corners, lower underwriting standards, or push stale, hard-to-sell assets to new investors. In a downturn, mass redemption requests could force fire-sales, or prompt funds to restrict withdrawals, damaging confidence and potentially accelerating the next financial crisis.
The industry’s “democratization” claims are seductive, but whenever Wall Street’s sharpest operators are desperate for your business, it pays to ask why. High fees, low transparency and poor liquidity aren’t gifts to the saver— they’re sources of profit for the fund managers.
Investors often succumb to the “siren song” of exotic “black boxes” they don’t understand, in the false belief complex, expensive investments must be superior to simple, cheaper options. David Swensen, as Yale’s chief investment officer from 1985 until his death in 2021, pioneered the use of private investments by large institutional investors. While it’s true in the early years Yale (and Swensen’s many copycats) earned superior returns for owning illiquid, opaque investments. However, as night follows day, as money flooded in chasing past performance, private funds competed fiercely for portfolio investments, driving down future returns.
There’s an old investment adage; “What the wise man does in the beginning, the fool does in the end.” When it comes to 401(k), participants, private investments will be a boon for Wall Street, not Main Street.
Mickey Kim is the chief operating officer and chief compliance officer for Columbus-based investment adviser Kirr Marbach & Co. Kim also writes for the Indianapolis Business Journal. He can be reached at 812-376-9444 or mickey@kirrmar.com.
