President Donald Trump’s reported plan to allow 401(k) retirement accounts to include private equity and other alternative assets is generating significant debate. While the proposal promises broader investment choices, financial experts warn of major risks for ordinary savers.
This potential change is not expected to take effect immediately. It would require new Department of Labor (DOL) regulations and careful oversight from employers and plan administrators, raising questions about whether the average investor would truly benefit from such a shift.
New Opportunities – And Higher Risks
Allowing private equity in 401(k) plans could, in theory, expand access to investments previously reserved for wealthy individuals. According to Chad D. Cummings, CEO of Cummings & Cummings Law, “everyday workers might be able to invest in private companies and other assets not traded on public exchanges. The average 401(k) investor could potentially see higher returns.”
Yet this potential comes with clear trade-offs. Private equity investments are inherently riskier, less transparent and often illiquid, sometimes locking investors’ funds for up to ten years. According to Bill Harris, former CEO of TurboTax and founder of Personal Capital, “private equity funds do not belong in the 401(k) of an ordinary investor.”
He highlighted that most retirement plans have been moving from high-fee mutual funds to lower-cost ETFs, while private equity would add significant management costs at a time when investors are increasingly seeking efficiency.
Harris also noted that holding such assets in a tax-deferred account can reduce their advantages. Gains that would normally be taxed as long-term capital gains at 20% become subject to ordinary income tax rates, which can reach 37%. This combination of high fees, tax implications and illiquidity raises concerns about whether the reform would serve the best interests of typical retirement savers.
Employer Oversight and the Need for Expert Advice
Even if permitted, private equity options would not automatically appear in all retirement plans. According to Cummings, the DOL will still require employers and plan administrators to act in the best interest of participants. This means carefully evaluating costs, risks and suitability before making such investments available.
Employers have a fiduciary duty to ensure that these investment choices align with long-term retirement objectives. Financial advisors also caution that while private equity may be appropriate for experienced investors with longer horizons, most retirement savers should focus on stable, low-risk options.
Cummings stressed that individuals considering private equity should first “understand the differences among existing investment options in their plans such as the difference between stocks and bonds and understanding that riskier investments could result in big swings in their asset value and even complete loss of investment.” For many, consulting a qualified financial advisor may be the safest step before making any decision in this evolving landscape.
