Private Equity as a 401(k) Investment

For the first time, you may soon have access to private equity investments in your 401(k) plan. Should you get excited about this new investment option?

To start, you may want to consider whether private equity will grow your savings. Alicia Munnell, of the Center for Retirement Research at Boston College, writes:

“It is not apparent that private equity produces outstanding returns in retirement plans.

While one study concluded that increasing private equity holdings in 401(k)s would have boosted returns by a small amount, that analysis ended in 2020, before the run-up in the stock market. And the results of our 2022 study showed that holding more private equity would not have increased returns for state and local pension plans over the period 2001-2022.

Yes, private equity helped before the financial crisis, but it has not had a statistically significant effect since then. And given that the exercise may not have fully accounted for fees in private equity and that the stock market has soared since 2022, private equity may have even had a dampening effect on overall portfolio returns, relative to traditional equity.”

“Consumer groups, lawmakers, and some investment advisers” argue that private equity will harm 401(k) plan participants.

That potential certainly exists. Imagine an employee who feels desperate to grow their savings quickly. They may invest too much of their total savings in private equity. Without understanding the risks in doing so, they could lose much or all of their money.

A responsible approach is also possible, though. Especially if a small investment in private equity might benefit consumers over the long term.

Many 401(k) plan participants already don’t understand the investments available to them. And that’s not always their fault, given the poor state of financial education in this country. But that’s not a reason to ban an investment that may help to further diversify our portfolios.

We should have that choice.

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About the author: Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennial women like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennials. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your friends and family. And then when you’re ready, please send me your thoughts & questions!