Less than a week before President Donald Trump’s second inauguration, more than 30 money managers gathered on Zoom to strategize about how to pull America’s retirement savers into investments far beyond stocks and bonds.
During the meeting attended by Blackstone, UBS Group, Neuberger Berman and others, participants assembled a manifesto articulating private equity’s rightful position in 401(k) plans, including in the default portfolios for workers who don’t select their own investments.
One way to make the point, said Charles Millard, a former top government pension regulator and now a private equity advisor, would be to present a new narrative for corporate plan gatekeepers: “You’re not a fiduciary if you don’t consider alts.”
In other words, companies would be doing workers a disservice — and possibly breaking the law — if they didn’t explore the broadest range of investments. “Obviously we need to be more diplomatic,” he added.
With Republicans in control of the White House and Congress, the industry sees an opportunity to fuel its next
golden era: There’s some $12 trillion in employer-sponsored accounts such as 401(k)s, which are one of the main ways Americans save for retirement.
As of now, the vast majority is out of reach. Fewer than one in 10 plans offer any kind of alternative investment, according to an American Retirement Association survey. Only 2.4% make private equity available.
The pitch to the 401(k) marketplace, as described by more than a dozen people with knowledge of the effort, is based on the premise that individuals are missing out on gains that buyout firms have delivered to institutions in recent decades.
To emphasize that to corporate gatekeepers, the industry wants Washington’s help.
Workers themselves aren’t clamoring for more options — many default to the employer’s chosen premixed portfolio anyway — let alone less liquid, hard-to-value assets. And employers worry that adding anything seen as expensive, complex or risky could lead to lawsuits.
Private equity hopes to make an ally of Tim Scott, chair of the Senate Banking Committee, who could potentially revive a bill that would give company plan sponsors explicit legal license to consider a wide range of alternative assets. Senator Bill Cassidy, chair of the Committee on Health, Education, Labor and Pensions, could be another supporter. Their offices have signaled they’re open to engaging on the issue. If they do,
they’d be picking up on the work of former Senator Pat Toomey, who championed the bill in his final term and has since joined the board of directors at Apollo Global Management Inc.
Private equity firms also want the Securities and Exchange Commission to raise the limits on hard-to-sell holdings in many mutual funds that also include a swath of so-called target-date funds, or pre-mixed portfolios that become more conservative as investors approach retirement age. The current cap is generally
15%, and a higher threshold would allow fund giants to add more to private equity, as well as venture capital, private loans and other illiquid — and often, higher-fee — investments.
“We’ve been thinking about how to bring private markets potentially into target-date structures,” BlackRock Chief Financial Officer Martin Small said on the firm’s fourth-quarter earnings call. The nearly $12 trillion asset management giant is “keeping connected with Washington.”
Sooner the better
For the industry, time is of the essence. After a decade of blistering growth, private equity firms are finding it harder to raise money from traditional pension fund clients. Meanwhile, higher interest rates and declining asset values have led to fewer initial public offerings and sales. Investors aren’t getting their money back, choking off the cycle of reinvestment.
The push to get into 401(k)s is part of a broader campaign to transform private investments from a roughly $25 trillion industry confined to Wall Street into an industry with seemingly endless growth driven by an aging Main Street. Firms have been building investment funds to sell to wealthy individuals and buying insurance firms that generate steady sources of cash by selling annuities. By 2032, individuals’ investments could make
up 22% of private equity assets, according to Bain & Co. research, up from about 16% in 2022.
The industry would like a good slice of that money to come from 401(k)s, named for the section of the 1978 tax code that allows workers to avoid taxes on deferred compensation. Over time, that became a tax-sheltered way for individuals to save for retirement, either in addition to a corporate pension or in the absence of one. More than 120 million people now have assets in 401(k) and other “defined contribution” plans, a number that’s steadily grown after 2006 legislation that allowed companies to automatically enroll their employees.
But the law requires companies to act in retirees’ best interest when selecting investments to offer in their 401(k) plans. That’s made companies wary of investments that are expensive, hard to price or difficult to sell. Private equity is all three.
Red meat
Over the years some employees have come to see high fees as a drag on performance and, possibly, a breach of their employers’ fiduciary responsibility.
In 2015, Intel workers sued the company, alleging that its pension managers inappropriately added hedge funds and private equity into premixed default portfolios, putting workers in “unreasonably costly and risky” investments that underperformed in the post-2008 market rally. After seven years of legal wrangling, including a trip to the U.S. Supreme Court, the case was dismissed. Intel declined to comment.
Still the long, expensive fight tamped any appetite companies may have had for more exotic investments. “Some plan sponsors are concerned about whether the plaintiffs bar will view private equity investments in 401(k)s as red meat for litigation,” said Mark Iwry, a former Treasury Department official who oversaw retirement policy in the Clinton and Obama administrations.
The Department of Labor, which oversees retirement plans, hasn’t done much to ease those fears.
In 2020, the Trump DOL issued a letter saying a plan sponsor wouldn’t be violating their fiduciary duties if they included private equity as a component of a professionally managed portfolio. A year later, under Biden’s leadership, it issued more guidance, this time urging caution.
“Plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives in individual account plans,” it wrote.
More guidance may be forthcoming. Some corporate plan administrators now expect the Department of Labor, again under Trump, to issue a new letter reaffirming the 2020 position that private assets have a place in 401(k)s.
Complexity and cost
Private equity investments can’t be evaluated by the same criteria as traditional funds, the industry argues. Yes, it’s more costly, but in exchange, it can deliver higher returns and protection from the whims of the market.
What’s more, private assets have been used in defined-benefit plans for years. And like private assets, retirement accounts are designed as long-term investments, making daily liquidity less relevant.
That’s made some industry executives optimistic that they can score some wins.
“We are at the very beginning, approaching a $12 trillion market,” Marc Rowan, Apollo’s chief executive officer and one of the biggest proponents of alternative investments in 401(k)s, said in a fourth-quarter earnings call.
He has previously argued that investments earmarked for years or even decades in the future don’t require the liquidity of public markets, and that private assets can provide needed diversification away from, for example, the seven big tech stocks that dominate the S&P 500.
But the industry has yet to satisfy employers’ concerns about the complexity, cost and composition of its offerings, said Will Hansen, chief government affairs officer at the American Retirement Association, which has more than 40,000 industry members.
As of now, there’s nothing to prevent 401(k) plans from adding private equity investments if they feel the
benefits outweigh the risks.
Some have been fighting for years. Partners Group and Pantheon, first movers in selling private investments to
individuals and advocates for private equity in 401(k)s during the first Trump administration, developed offerings for defined contribution plans that promise daily asset pricing and allow investors to move in and out everyday.
Today Partners has about $100 million in assets under management from defined contribution plans, a tiny fraction of the firm’s $152 billion in total assets. The Pantheon offering has also remained small.
“Sometimes you’re too early,” said Pantheon partner Susan Long McAndrews. “We needed a bigger mandate for change from a public policy perspective.”
At least one company has decided to lean in. Lockheed Martin added private equity into its 401(k) in July, working with Neuberger Berman and AllianceBernstein. Doing so “has the potential to improve long-term investment returns for our plan participants, while also potentially enhancing investment diversification and reducing volatility,” a Lockheed spokesperson said.
With BlackRock, Partners is developing model portfolios for private assets that the firms say would provide broad exposure and manage risk. Some private equity executives acknowledge that the ability to sell assets quickly isn’t as easy of a puzzle to solve as some like to say it is.
Another challenge for plan sponsors: Fund performance varies wildly across managers. Unlike most big stock and bond funds, which can be reasonably expected to perform within the range of the broader markets, private equity returns can be all over the map. Investments are typically valued each quarter, and firms have a lot of discretion in which benchmarks they use for comparison.
Private equity has returned 14.3% over the past 20 years compared to 8.1% for a benchmark of global developed markets, according to a 2024 report from Partners Group. But across a decade of private equity funds, the difference in annual returns between a fund in the top quartile of peers and a bottom-quartile one was 15 percentage points, McKinsey & Co. said in a report last year.
The advocacy group Defined Contribution Alternatives Association, which counts both traditional and alternative asset managers as members, reconvened the industry’s advocates in March to continue their work on what one called a “constitution.” During the meeting, attended by Prudential Financial, Ares Management, AllianceBernstein and others, participants said it was important to reinforce one point: So-called alternative investments aren’t as niche as they’ve been made out to be.
