In a move that could dramatically expand access to private-market investing, a newly signed executive order from the Trump administration aims to lower restrictions on adding private assets like private equity in defined-contribution retirement plans such as 401(k)s. While this could open new opportunities for millions of American investors, Bilge Yilmaz and Burcu Esmer, academic directors of Wharton’s Harris Family Alternative Investments Program, note the important questions this raises about access, investing expertise, and how to plan for the long run.
“Public pension plans are the largest contributors of capital to the broadly defined private equity asset class,” explains Yilmaz. “This makes sense from several points of view. These are long-term investments by design and allow public employees to have access to the illiquidity premium. It provides higher and differentiated returns that allow a better portfolio construction.”
Defined-contribution plans like 401(k)s, by contrast, have traditionally limited participants to publicly traded stocks and bonds. These assets offer liquidity and transparency, but as Yilmaz points out, “this limitation reduces portfolio diversification as well as expected returns — and precludes access to the illiquidity premium.”
Would broadening access to private markets improve outcomes for individual retirement savers?
In theory, expanding access to private markets could improve retirement outcomes by diversifying portfolios and enhancing returns. But Yilmaz emphasizes that success depends on how investing strategies are implemented.
“Constructing a well-diversified private equity portfolio requires significant expertise in the asset class as well as resources for due diligence in the manager selection process,” he explains.
Individual investors often lack this level of expertise, so they’d rely on other stakeholders: investment professionals who bring the necessary experience but add cost and introduce potential issues of agency.
“At a time when exits are becoming more challenging and continuation funds are becoming more and more common, the unsophisticated defined-contribution plan members may end up paying large fees without the benefits of superior returns.”
Yilmaz’s insights highlight both the potential and the complexity of opening up private markets to everyday investors.
Can private equity be made accessible to individual retirement savers — responsibly?
Esmer sees promise in opening up private equity to retirement savers if accompanied by the appropriate guidance.
“It’s worth acknowledging both the promise and the complexity. Much of the value creation in today’s economy is happening in private markets, yet retail retirement savers are largely excluded,” Esmer explains.
She continues, “Opening avenues to private equity can significantly enhance the investment universe available to long-term savers, potentially improving returns and diversification. But this shift must be approached with care.”
She points to challenges such as higher fees, lack of transparency, and the complexity of manager selection, but also notes these complexities are manageable.
“These challenges can be mitigated through investor education and thoughtful plan design: professionally managed vehicles, multi-manager funds, and target-date structures can balance opportunity with risk mitigation,” Esmer explains. “We should not expect individuals to navigate private equity alone, but nor should we assume they must be excluded entirely. With the appropriate oversight, education, and carefully designed investment structures, private equity can become a meaningful and responsible addition to the retirement investment landscape.”
As this conversation evolves, Yilmaz and Esmer highlight both the potential benefits and concerns around making private equity available for retirement accounts. With the right structures in place, private equity could become a valuable part of the future of retirement savings.
The following article was originally published by Finance at Wharton.
