Balancing Risk, Reward, And Responsibility

Private market investments have long played a key role in institutional portfolios, helping endowments and pension funds pursue higher returns, broader diversification and reduced correlation with public markets. As defined contribution (DC) plans like 401(k)s and 403(b)s have become the primary retirement savings vehicle for most Americans, some plan sponsors are now asking whether it’s time to follow suit. The recent executive orders signed by President Trump (including the most recent, “Democratizing Access to Alternative Assets for 401(k) Investors,” released August 7, 2025), along with announcements from major recordkeepers and asset managers, have thrust the topic into the spotlight. Yet despite the growing attention, confusion and misinformation persist about what private markets actually are — and how, or if, they can fit into a 401(k) plan.

“Private markets” refer broadly to investments not traded on public exchanges, most commonly including private equity, private credit, private real estate, private infrastructure and hybrid vehicles that span multiple strategies. These investments have long been embraced by institutional investors seeking to enhance portfolio performance and reduce reliance on traditional public markets. Proponents of including private market exposure in DC plans cite several compelling benefits, such as:

• Enhanced Return Potential – With a higher risk profile, private market investments have historically delivered a return premium over public markets, creating an opportunity for long-term growth in institutional portfolios.
• Reduced Volatility – Less correlated with public market fluctuations, private markets can act as a stabilizing force within a diversified portfolio, especially during periods of public market stress.
• Strategic Flexibility – Without the constraints of public market reporting and liquidity demands, private market managers can act more nimbly, taking advantage of market dislocations and long-term opportunities.
• Deeper Diversification – Private markets offer exposure across a wide range of sectors, geographies and investment styles, which can enhance portfolio breadth and resilience.
• Expanded Market Access – Roughly 87% of U.S. companies with more than $100 million in revenue remain privately held, yet 125 million DC plan participants currently have no way to access these markets within their retirement plans. Supporters argue that expanding access is not only prudent but equitable.[1]

Because workplace retirement plans should be designed to serve participants’ best interests, plan sponsors have a fiduciary responsibility to make prudent, well-informed decisions — particularly when evaluating complex asset classes like private markets. While interest in expanding access is growing, several historical challenges have made implementation in DC plans more difficult, including:

• Fiduciary Risk – Plan sponsors and other fiduciaries must weigh the investment risk and potential legal and operational implications of adding private markets, including heightened scrutiny if investments underperform or present liquidity constraints that limit participant access to funds.
• Liquidity Limitations – Private market investments typically involve long holding periods — sometimes lasting a decade or more — making them less flexible than mutual funds. This illiquidity can complicate both participant access and plan administration.
• Elevated Risk and Complexity – While private market investments are perceived to carry higher risk than public market investments, historical performance data says the opposite.[2] However, longer time horizons, reduced regulatory oversight and more opaque structures introduce challenges related to valuation, performance tracking and tax reporting.
• Higher Fees – Compared to traditional mutual funds typically used in DC plans, private market vehicles often carry steeper management costs, performance-based fees and additional service charges, all of which must be carefully evaluated for cost-benefit alignment.
• Transparency Challenges – Disclosures around pricing, performance and underlying holdings can be limited, creating barriers to fully assessing risk and suitability — especially when compared to public market investments.

Despite the challenges, momentum is building as more plan sponsors explore how private market investments could enhance their DC plans. Several structural and market-driven trends are fueling this shift, such as:

• Shrinking Public Markets – The number of publicly listed companies in the U.S. has declined by more than 40%, from roughly 7,300 in 1996 to just 4,300 in 2024.[3] As companies stay private longer and delay IPOs until later stages of growth, DC participants are missing out on critical phases of value creation that institutional investors have historically captured through private markets. As Mike Arone, the Chief Investment Strategist at State Street Global Advisors, explained on the 401(k) Roundtable Podcast: “Back in 1996, there were more than 8,000 U.S.-listed public companies. Today, that number is about 4,300 — cut in half. At the same time, the number of companies working with a private equity partner has grown from about 1,900 to more than 12,000.”
• Greater Economic Exposure and Return Diversification – The 2008 global financial crisis revealed that public market assets were far more correlated than many investors realized. Private market investments, which often respond to different economic forces, offer exposure to broader segments of the economy and may help improve risk-adjusted returns through enhanced diversification.
• Democratization of Private Assets – There’s growing demand from both plan sponsors and individual investors to access investment strategies traditionally reserved for institutions and ultra-high-net-worth individuals. Advocates argue expanding access through well-structured solutions is not only feasible but also fair, aligning 401(k) savers more closely with the opportunities available to pension funds and endowments.

If a plan sponsor concludes that private market investments align with the goals of their workplace retirement plan, the next consideration is how to implement them responsibly. Current Department of Labor (DOL) guidance[4]

doesn’t support offering private markets as a stand-alone investment option, meaning participants are unlikely to see a private equity or private credit fund listed alongside core menu options like an S&P 500 index or small-cap fund. However, the DOL has consistently indicated that private markets may be included as part of a diversified, professionally managed investment vehicle. As a result, private market allocations are gaining traction within target date funds and managed account programs — structures that have long been used in DC plans and are familiar to both fiduciaries and participants.

Contrary to some of the more sensationalized rhetoric, private equity is not poised to “take over” retirement accounts. In practice, private market investments are being introduced as a complementary diversifier within broader public market-based strategies. Even in plans that adopt an asset allocation solution with private market exposure, it’s hard to imagine that participants would see more than one-third of their portfolio invested in private assets — and in many cases, the allocation will be significantly lower. The goal isn’t wholesale replacement of traditional investments but rather thoughtful inclusion to improve long-term outcomes.

Interest in private market access within workplace retirement plans may soon accelerate. President Trump recently released an executive order aimed at expanding their availability. While the proverbial ball is now in the hands of the DOL, the broader conversation around the role of private markets in 401(k) plans will continue to gain momentum. Ultimately, it will be up to plan sponsors to assess whether incorporating private markets — typically through diversified strategies like target date funds or managed accounts — aligns with their fiduciary responsibilities and plan objectives. As regulatory guidance evolves and investment structures continue to mature, plan sponsors will play a critical role in determining whether and how to bring these historically institutional opportunities to the participants they serve.

This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/ client relationship. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Past investment performance is no guarantee of future performance.