Private Credit’s Quiet Entry Into the 401(k): Why It Matters
An Executive Order issued by the Trump Administration in August 2025 is paving the way for retirement savers to take advantage of a broader range of investment opportunities.
The order, which is titled “Democratizing Access to Alternative Assets for 401(k) Investors,” reports that Americans participating in employer-sponsored contribution plans typically don’t have access to categories of alternative assets that public pension plans utilize to their benefit. It calls for a shift in policies that would make it easier for 401(k) plans to include alternative assets and consequently “provide an appropriate opportunity for plan participants and beneficiaries to enhance the net risk-adjusted returns on their retirement assets.”
The recent Executive Order provides a broad definition of alternative assets that President Trump would like to see made available to 401(k) plans, covering everything from private market investments to real estate to funds investing in digital assets. One category that is attracting some special attention is private credit, an alternative that 401(k) plans have traditionally avoided.
If the changes mapped out in the Executive Order move forward, investors could soon have access to the high yields that private credit offers. In anticipation of that change, investors should familiarize themselves with the unique risks and challenges private credit presents.
Private credit addresses emerging problems with diversification
Diversification is a core component of retirement investing. To establish the type of diversification needed to offset market volatility, investors typically looked to a proven mix of stocks and bonds. However, bonds have become less suited for the task in recent years as they have developed a positive correlation with stocks.
Private credit is an asset class that can play the role in diversification strategies that bonds once did. It involves non-bank financial institutions, such as alternative asset managers or private equity firms, lending directly to businesses that face challenges in securing traditional bank loans.
Because the performance of private credit investments is tied to the health of the borrowing company, it is an asset class that is insulated from the factors influencing stocks and bonds. As a result, private credit opens doors to higher yields.
Alternative assets like private credit introduce a number of factors to retirement savings that investors have traditionally sought to avoid. Together, those factors add up to higher risks.
In the past, the yields available from private credit weren’t sufficient to offset the asset’s enhanced risk. Recently, however, market shifts have increased private credit yields in a manner that has made investors more willing to overlook the risks.
The 2008 financial crisis contributed significantly to the increase in private credit yields. The crisis triggered more regulation in the banking sector, raising the bar for companies seeking loans. As access to fast capital dried up in the traditional banking sector, companies began looking to private credit to finance their operations. Companies providing private credit were able to leverage the new need to increase their yields.
As Americans struggle with what media reports are calling a “retirement crisis,” investment options that offer higher yields have become increasingly attractive. Many retirees are finding themselves behind in their retirement planning and looking for ways to speed up the growth of their accounts. Reports indicate that the average 401(k) provides yields ranging from 5 to 8 percent, while private credit yields average 10 percent.
Retirement investors also gain a hedge against inflation when placing private credit in their portfolio. The loans that private credit facilitates are typically saddled with a floating interest rate that increases with inflation, which buoys buying power for retirees.
Challenges with transparency and liquidity
A lack of transparency significantly contributes to the risks of private credit. Lending transactions occur outside of public exchanges, which means fewer checks and balances. Additionally, loans are typically made to emerging companies that have less performance data to offer for analysis.
The recent Executive Order on alternative assets directs the Secretary of Labor to explore what controls may be needed to address the lack of transparency in the private credit market. It calls for “proposed rules, regulations, or guidance” on the efforts required of fiduciaries before including alternative assets in 401(k) plans.
Private credit also introduces illiquidity to the mix. Whereas traditional 401(k) investing makes drawing funds in emergency situations quick and straightforward, private credit generally locks investors into a longer timeframe.
The inherent illiquidity also makes it more difficult to pivot when economic conditions have a negative impact on the private credit market. The commitment required for private credit could leave an investor locked in to losses with no easy exit if interest rates spike and trigger a rise in private credit defaults.
The movement to include private credit and other alternative assets in 401(k) plans presents some exciting new opportunities for retirement investors, particularly those struggling to reach their investment goals. But it also introduces new complications. The challenge for investors and the fiduciaries serving them will be striking a balance between the potential returns and the associated risks.
SEE ALSO:
• 8 Must-Answer Questions Before Your Clients Add Private Equity to Their QDIA
• Private Equity in 401(k) Plans: Policy Shift or Practical Reality?
• Trump’s Private Equity 401(k) Push: 12 Legal Views
Aaron Cirksena is the Founder and CEO of MDRN Capital, and has devoted his entire career to financial planning, distribution planning, and managing client money. He first worked with multiple $1 billion teams at Morgan Stanley and independent firms, and eventually created his own independent services firm in MDRN Capital, which provides a comprehensive range of retirement planning services, including income planning, investment management, tax planning, healthcare, and estate planning. As a fully digital firm, MDRN prioritizes efficiency and convenience by providing remote consultations and opening a digital account. He is a 2011 graduate of the University of Maryland, College Park, where he studied economics.
