Private investments in 401(k) plans

Private investments refer to capital deployed into assets or companies that are not publicly traded. Key categories include:

• Private equity: Ownership stakes in private companies.
• Private credit: Loans made to businesses or projects outside the traditional banking system, often with higher yields.
• Direct real estate: Equity ownership in physical property, such as commercial real estate.
• Infrastructure: Long-term investments in public assets like toll roads, energy grids, and airports.

These investments are typically illiquid, long-term, and more difficult to value than public investments. Unlike public securities, private investments are typically offered through private placements and are not available to the general public. Because of their complexity and risk, access is generally restricted to individuals or institutions that the SEC categorizes as qualified purchasers. Qualified purchasers are those individuals or institutions who meet certain asset or income thresholds as set by the SEC. 

Most individual participants in 401(k) plans are not qualified purchasers, so clear regulatory guidance is likely required before private investments are more broadly utilized within 401(k) plans.

Institutional investors have long allocated to private markets in an effort to enhance returns and increase diversification. This contrasts sharply with 401(k) plans, where reportedly only 2.2% of plan sponsors offer any type of alternative investment.¹

Bringing private markets into 401(k) plans is seen by proponents as a way to:

• Boost diversification
• Capture potentially higher long-term returns
• Provide access to growth sectors

Despite these potential benefits, significant hurdles remain.

Generally, private markets are less transparent and offer fewer investor protections than public markets. Moreover, specific aspects of private investments make it difficult to incorporate into 401(k) plans, including:

• Liquidity mismatch: Participants in 401(k) plans expect daily valuation and liquidity, while many private investments have multi-year lock-up periods.
• Complexity and transparency: Private asset pricing often requires complex valuation models, which complicates performance tracking.
• Fee structures: Private investments usually come with higher management fees and additional performance-based fees.
• Operational challenges: Recordkeepers must adapt to handle valuation, reporting and participant transactions in non-public assets.

In 2020, the U.S. Department of Labor (DOL) issued an Information Letter² responding to a specific plan sponsor’s inquiry about adding a private equity option to their 401(k) plan. The DOL clarified that:

• Private market investments are not restricted from 401(k) plans.
• Fiduciaries would not be in violation of ERISA solely on the basis of including professionally managed allocations with private equity exposure.

Importantly, this letter did not endorse this idea and made the point that any consideration of private investments is subject to strict standards of fiduciary responsibility under ERISA. The DOL followed up with a second letter in 2021³ to further emphasize this point. However, this letter was just recently rescinded by the DOL.

Also, President Trump signed an executive order on August 7, 2025 relating to access to private investments in defined contribution plans. The order directs the DOL and the SEC to create a regulatory framework to ease the adoption of these investments in 401(k) plans.⁴ While this is a significant development, it is only the first step of what will likely be an extensive process to craft and implement specific regulations or publish DOL and SEC guidance.

There is currently debate among politicians on this topic, and time will tell whether there will be regulatory clarity. As a result of the Executive Order, we should expect changes in this arena after the publication of this article.

Reacting to potential demand for their investment funds, alternative asset managers have been working to adapt their solutions to the 401(k) market. A commonly used innovation is to engage with trust companies to create Collective Investment Trusts (CITs) of their strategies.

Alternative asset managers are generally setting up their CITs using the following framework:

• The funds blend an asset manager’s private investment strategies with a 20% sleeve invested in index funds and/or money market funds to mitigate liquidity challenges around redemptions.
• The trust’s participation agreements stipulate that the CITs can only be used as a component of a professionally managed asset allocation, such as a target date fund or managed account program, and cannot be used as standalone investments in a plan menu. The agreements also set parameters around the maximum percentage these funds can represent in a given asset allocation strategy.

It remains to be seen if these CITs are widely adopted. To platform these CITs, recordkeepers will likely need to make significant investments to adapt their systems to handle the unique operational challenges associated with private investments, even despite their being wrapped within the commonly used CIT investment vehicle structure.

Beyond issuing CITs, in the past year, there have been announcements of alternative asset managers entering into joint initiatives with traditional asset managers as a means to build products like target date funds for the 401(k) plan market.⁵ It is increasingly clear that alternative asset managers see the 401(k) market as a new area of strategic focus.