Some 401(k) plans are beginning to explore private market investment options following recent policy developments. On the surface, this may seem like an exciting opportunity to add diversification or pursue higher returns. But private investments come with a fundamentally different risk profile, a very different level of transparency, and far more complexity than traditional funds.
Before allocating retirement savings to any private vehicle, it is important to understand what you are actually buying and whether it belongs inside a 401(k) in the first place.
Why Private Investments Are So Different
Private equity and other non-public vehicles are not inherently bad or excessively risky. They are simply a different type of investment. Unlike public stocks, their values are not marked to market. There is no daily price, no live quote, and no objective way to know the investment’s true value until assets are sold.
It is more similar to estimating the value of your home. You may have a general sense of what it is worth, but no one knows with certainty until it actually sells.
This creates challenges if private investments are included inside a 401(k):
- How should the plan report the value on your quarterly statement?
- How should performance be measured when it cannot be verified?
- How do you evaluate fees, liquidity, or risk when disclosures are limited?
All of this becomes even more confusing for plan participants who are not accustomed to analyzing these structures.
Why 401(k) Providers Are Hesitant
Although the executive order opened the door for private investments to appear in retirement plans, fiduciary responsibilities have not changed. A plan sponsor must still determine whether:
- the risk is appropriate,
- the fees are justified,
- the structure is suitable for the full workforce,
- and the investment belongs in a retirement menu at all.
Given the lack of guidance from regulators and the complexity of private markets, many providers are reluctant to add these options. They understand the practical challenge: 401(k)s serve everyone.
Historically, private investments have been limited to accredited investors because of their analytical difficulty and lack of transparency. Net worth thresholds are an imperfect measure of sophistication, but they at least set a minimum bar. In a 401(k), that bar disappears.
Behavioral Risks Are Real
Most plan participants do not read prospectuses. Studies consistently show that people choose investments based on the name of the fund or divide evenly across the options offered.
If choosing between index funds is hard, choosing between private market strategies is far harder. Names like “High Growth Private Opportunities Fund” can easily attract uninformed inflows, even if the structure locks up capital for 10 to 20 years or carries risks that investors do not fully understand.
Once inside a 401(k), these behavioral traps are magnified.
Why Caution Is Warranted
Even if private investments become more accessible in 401(k)s, the case for allocating retirement savings to them is weak. For most families, private market exposure — if used at all — belongs outside the 401(k), in a brokerage account, and only after building a strong foundation.
That foundation includes:
- adequate liquidity,
- a fully funded core portfolio,
- high confidence in long-term retirement readiness,
- and discretionary capital beyond what is needed for future goals.
At that point, allocating 10% to 15% to private markets may make sense. But using a 401(k) as the entry point introduces unnecessary risk with limited upside relative to traditional retirement vehicles.
A Better Framework
Think of your 401(k) as the place for your most reliable, transparent, and liquid investments — the ones designed to fund decades of retirement spending. If you want to explore private markets, use the accounts that offer flexibility and transparency, not the one designed to be your financial safety net.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on private markets, retirement plans, and evaluating complex investment options, listen to the full episode here.