Private Equity in 401(k) Plans: Policy Shift or Practical Reality?

Eric Dyson

4 months ago

On August 7, 2025, President Trump issued an Executive Order aimed at “democratizing access” to alternative assets in 401(k) plans.

The policy’s stated goal is to give plan participants broader exposure to investments such as private equity, private credit, real estate, digital assets, infrastructure, and other alternative asset classes—when fiduciaries determine they are appropriate.

The announcement made headlines, and for good reason. It signals a clear change in federal policy tone. But here’s the most important point for fiduciaries: nothing in the Executive Order requires you to add private equity to your plan, and ERISA’s prudence and loyalty standards still govern every decision you make.

What the Executive Order says

The Executive Order sets a federal policy objective that 401(k) investors should have access to diversified asset-allocation funds that may include alternative investments. It defines “alternative assets” broadly, naming private equity, private credit, real estate, digital assets, commodities, infrastructure, and even certain lifetime-income strategies.

It directs the Department of Labor to take several specific actions within 180 days:

Review past and current DOL guidance on fiduciary duties in offering asset-allocation funds with alternative assets, including whether to rescind the December 21, 2021 Supplemental Statement that discouraged private equity in 401(k)s.
Clarify the appropriate fiduciary process for evaluating alternatives, including how to weigh potentially higher expenses against long-term net return and diversification goals.
Consider proposing new rules or guidance, potentially with safe harbor provisions, and prioritize ways to reduce ERISA litigation risk.

The EO also directs the Securities and Exchange Commission, in consultation with the DOL, to explore ways to expand access—potentially by reviewing accredited investor and qualified purchaser frameworks.

What stays the same today

While the EO sets the policy direction, it does not:

• Mandate that any plan include private equity or other alternatives.
• Automatically create a safe harbor.
• Override the existing ERISA fiduciary framework.
• Change the operational realities of daily valuation and liquidity in 401(k) plans.

In short, the door may be opening wider, but nothing has changed in terms of your current obligations.

The existing DOL framework

In 2020, the Department of Labor issued an Information Letter clarifying that private equity could be included inside professionally managed, multi-asset funds such as custom target-date funds or balanced funds provided fiduciaries engaged in a rigorous due diligence process. The letter did not allow standalone private equity funds, nor did it provide a safe harbor. Fiduciaries were expected to address valuation, liquidity, cost, and participant suitability.

In 2021, the DOL issued a Supplemental Statement that effectively cooled the market by highlighting additional risks and reinforcing fiduciary liability concerns. The new Executive Order explicitly directs the DOL to revisit and potentially rescind that statement, replacing cautionary language with a more supportive framework.

Why DB plans and endowments handle PE differently

Private equity has long been common in defined benefit (DB) plans and endowments. But the structural differences between these plans and participant-directed 401(k)s are significant:

Risk Allocation: In DB plans, the employer, not individual participants, bears the investment risk. If private equity underperforms, the plan sponsor must make up the funding shortfall.
Governance: DB plans make all investment decisions at the committee level, usually with advice from sophisticated investment consultants or OCIOs.
Liquidity: DB plans do not require daily participant trading and can tolerate the illiquidity and quarterly valuations common in private equity.

In participant-directed 401(k)s, individuals bear the investment risk, daily liquidity is standard, and valuation transparency is essential.

Fiduciary discretion and the IPS

Even if federal policy becomes more favorable toward alternatives, fiduciaries retain full authority over the investment menu.

A well-written Investment Policy Statement (IPS) is one of your most important tools. Your IPS can explicitly prohibit private equity or set strict conditions for its inclusion based on your plan’s demographics, governance capacity, operational capabilities, and participant needs.

This is where documented prudence matters most. The EO does not diminish your duty to select investments solely in the interest of participants and beneficiaries.

Participant choice and the QDIA caution

Participants in a 401(k) plan can choose to avoid any option that includes private equity exposure. That flexibility is one of the strengths of a participant-directed plan.

However, most participants default into the plan’s Qualified Default Investment Alternative (QDIA). Because these participants haven’t actively chosen the investment, fiduciaries have an elevated duty to ensure its suitability.

Generally speaking, embedding private equity into a QDIA adds operational complexity and fiduciary risk. Unless your plan has significant scale, custom structures, and strong liquidity and valuation oversight, the prudent course may be to avoid private equity in default options altogether.

Demand or product push?

It is worth asking: Who is driving the conversation around private equity in 401(k) plans?

To date, there is little evidence of widespread participant demand. Most employees are not asking for private equity, and even among plan sponsors, interest has been limited.

Much of the momentum is coming from asset managers, recordkeepers, and private equity firms themselves, entities eager to tap the trillions of dollars in defined contribution plan assets. While this does not automatically make their products unsuitable, fiduciaries should recognize potential conflicts and insist on independent, participant-centered analysis.

Is the reward worth the risk?

In institutional portfolios, private equity has historically produced strong returns. But performance dispersion is wide, fees can be high, and valuations are less transparent than public markets. There is currently no large-scale, independent research demonstrating that adding private equity to 401(k) menus, especially in default investments, improves participant retirement outcomes net of costs and operational challenges.

Until such evidence emerges, committees should weigh the theoretical upside against the proven complexity, risk, and potential for participant confusion.

Practical next steps for committees

Revisit Your IPS: Clearly state your position on private equity and other alternatives.
Ask Your Providers: Request details from your recordkeeper and target-date provider on any current alternative exposures, how they are valued, liquidity management processes, and fee structures.
Prepare Participant Communication: Develop a short FAQ explaining what the EO does and does not do, your plan’s position, and how participants can choose investments aligned with their preferences.
Plan for a Review: Mark your calendar for mid-2026 to reassess after the DOL and SEC complete their 180-day review and issue any proposed guidance or rules.

Closing thought

The August 7 Executive Order marks a policy shift toward broader access to alternative assets in 401(k) plans. But it does not change the fundamental truth of ERI S A governance: Your duty is to act solely in the interest of participants and beneficiaries, with care, skill, prudence, and diligence.

That means evaluating every investment option—including private equity—not in light of headlines or political winds, but against your plan’s goals, structure, and participant needs. In most cases, a cautious, well-documented approach will serve you—and your participants—best.