Private equity in 401(k)s: benefits, risks and duties

Everyone in the US and in the UK seems to be talking about private equity in 401(k) plans right now.

Just as Ivy League universities are liquidating private equity from their endowment portfolios, there’s talk of adding this asset class to 401(k) investment menus. But what is the impact?

Let’s first look at the benefits of adding private equity to 401(k) investment menus. Private equity can boost returns and help diversify investment portfolio, but must be prudent, transparent and fairly structured under ERISA.

Fiduciaries will need to assess manager track record against peers, fee structure, transparency, liquidity and explore ERISA-aligned structure if they want to evaluate private equity funds for 401(k) plans.

But how do the higher fees and risks of private equity compare to traditional 401(k) investments like index funds? Well, private equity asset class is often associated with high cost and opaque risks which need to be weighed against the promise of higher returns. Index funds are, at the same time, bear low cost and offer transparency of investment allocations. Fiduciaries must therefore be careful to review these investments into the asset classes and be able to justify trade-off.

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