The Dumbest Idea I’ve Heard in Nearly 30 Years of Finance: How Private Equity Investments May Find Their Way Into Your 401(k)

The private equity (PE) industry is circling America’s retirement accounts like a predator eyeing a new food source. With $12.2 trillion in 401(k)s and related plans, even a sliver could mean billions in new fees for fund managers.

The sales pitch? “Access to investments usually reserved for the wealthy.” The reality? Ordinary savers may be taking on higher risk, higher fees, and lower transparency — at precisely the moment when institutional investors are heading for the exits.

The state of private equity

According to CEPR (Appelbaum, 2025), the PE industry is in trouble. Deal activity, exits, and fundraising are all down sharply from 2021 highs. Many portfolio companies are overvalued, making sales difficult. Institutional investors — pensions, endowments — are selling stakes at a discount to raise cash, in some cases after waiting 13–15 years for funds to liquidate. When sophisticated investors are reducing exposure, why invite the same assets into retirement accounts for everyday workers?

How 401(k) savers could pay the price

Research from the Johns Hopkins Carey Business School warns that private equity’s structural risks make it ill-suited for most defined-contribution plans (Hooke, 2025). High management and performance fees erode returns. Illiquidity can lock up money for a decade or more, conflicting with the flexibility most retirees need. And unlike public companies, private firms disclose little, making valuation and risk assessment challenging.

Brown et al. (2022) acknowledge that private equity has historically produced higher returns for some periods, but these returns vary widely, are accompanied by higher risk, and depend heavily on accessing top-tier funds — which retail investors are unlikely to get.

Who really wins?

Let’s be clear: this opportunity will absolutely work for the companies offering these private funds. They will collect fees regardless of outcomes. But in my nearly 30 years in financial management, I can say the odds of this working out well for the typical 401(k) investor are low. That’s why this idea should be highly discouraged. In fact, it may be one of the dumbest investment policy changes I’ve ever seen proposed.

Maybe the industry, observers, and regulators should spend more time requiring the fiduciary standard for all financial service providers. If that were the case, the only way these products could be sold is if they were truly the best option for the investor — and I’m certain these investments would not meet that high bar. If they’re not good enough under a true fiduciary standard, why should they be considered good for the hard-earned retirement dollars of the 401(k) investor?

The Locked Safe Analogy

Investing in private equity through your 401(k) is like handing over a pile of your cash to someone who locks it in a safe and says, “Trust me, I’ll open it in 10 years — and I’ll charge you rent for keeping it here.” You don’t get to see what’s inside, you can’t take it back early, and when the safe is finally opened, you just hope the contents are worth more than you started with. Meanwhile, the safe’s owner has been profiting the entire time.

Bottom line

Your 401(k) is meant to provide stable, long-term growth for retirement. Adding complex, high-risk, and illiquid assets — particularly at a moment when the industry is under stress — serves the interests of private equity managers far more than everyday savers. As history with past “can’t miss” investments like 1990s tech and health care funds shows, what looks like a sure bet today can become tomorrow’s regret.

References

Appelbaum, E. (2025, June 3). Private equity is in trouble. It wants your retirement nest egg as a bailout. Center for Economic and Policy Research.

Brown, G., Crouch, K., Ghent, A., Harris, B., Hochberg, Y., Jenkinson, T., Kaplan, S., Maxwell, R., & Robinson, D. (2022). Should defined contribution plans include private equity investments? Financial Analysts Journal, 78(3), 1–29.

Hooke, J. (2025, March 24). Five reasons to rethink how your retirement is invested. Johns Hopkins Carey Business School.