The Indicator from Planet Money - The risk of private equity in your 401(k)

Episode Date: July 30, 2025

Private equity is a risky business. There are high-highs and low-lows. A retirement plan, on the other hand, is meant to be a reliable beast. But President Trump believes your 401(k) can handle it! On today's show, the president's expected executive order could help offer some legal cover for fund managers who include private equity in your retirement portfolio. What are the risks and benefits?Related episodes:The Prudent Man Rule (Apple / Spotify)Carried interest wormhole (Apple / Spotify)Let's party like it's NVIDIA earnings report day! (Apple / Spotify)For sponsor-free episodes of The Indicator from Planet Money, subscribe to Planet Money+ via Apple Podcasts or at plus.npr.org.Fact-checking by Sierra Juarez. Music by Drop Electric. Find us: TikTok, Instagram, Facebook, Newsletter. See pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

NPR. This is the indicator from Planet Money on Darien Woods. And I'm Patty Hirsch. Private equity. To some people, private equity funds are sober agents of efficiency and corporate optimization. To others, they're a horde of asset stripping barbarians. Intent on draining every penny of value out of vulnerable enterprises like, I don't know, local newspapers and Little League. Yeah, the phrase private equity brings a lot of emotion.

And whichever side of the fence you're on, the point is, they are private. They're mysterious, risky and expensive. Not the kind of thing your average investor should be sticking their nose into you, might think. Except, that's not what the president thinks. It appears Mr. Trump thinks we can handle private equity. Which is why he's reportedly on the point of issuing an executive order that could allow investment plans like your 401k, Darien, to include a private equity option. On today's show, we'll look at the potential risks and benefits of 401K investments in private equity. why the president might be issuing an executive order to make it happen,

and whether he even really needs to. That's all coming up after the break. Investment plans offered by companies to workers, like 401Ks, typically only invest in highly regulated, publicly traded securities. Stock traded on a public exchange like the New York Stock Exchange or the NASDAQ, or bonds regulated by the Securities and Exchange Commission. The reason, ERISA. So it stands for the Employee Retirement Income Security Act.

This is Anita Mukerjee. She's an associate professor in the Department of Risk and Insurance at the Wisconsin School of Business. ERISA is really important. It's the foundation of a lot of what protects our 401K investments for workers today. ERISA doesn't say investment plan providers can't invest in the racier end of the market. If it wanted to, NPR could give you, Daryan, the option to put your money into private equity. If you can't beat him, join him. That's what I do.

They could even give you an option to invest in venture capital, even crypto, but only if it met certain conditions. Employers and plan administrators must act solely in the interest of participants and manage plans prudently. Ah, yes, the prudent man rule. Indicator listeners know this one. We've got the episode in the show notes. Yeah, so prudence, really it's about, it's a difficult one, right? Because it's just doing what's right for the employee. Doing what's right for the employee. Hmm. Could that include letting me roll the dice on private equity? Well, come on, Darien.

There could be value there for certain types of investors. This might be more appropriate for young people. Anna Maria Lusardi is a senior fellow at the Stanford Institute for Economic Policy Research. She says younger workers who might wish to be more aggressive with their investments, perhaps you, Darien, might welcome the chance to have a wee flutter in the private market. You know, to own a piece of a fund that's invested. not in Google or Apple or whatever, but the next Google or the next Apple to indirectly hold a stake in those companies before they co-public and before they go to the moon. And this is why also the private equity has offered, by the way, this higher return, we are always going after the higher return, but this higher return comes with a higher risk.

And I think something that the investor has to be aware of. Right, some cold water on my dreams of higher returns with no risk. Anna Maria says private equity funds are inherently risky because of the kinds of companies these funds invest in. We are talking about firms that are not public, are not traded in the markets. And these can be smaller firms and they could also be firm that are more likely potentially to fail. Private companies aren't subject to the same kind of regulation as public firms. They're less transparent. So investors don't have the same ability to assess what their prospects are compared to public companies.

Yeah, and then the rule of the risks associated with the private equity funds themselves. You know, these are not like your friendly, easy-to-trade open-book mutual funds. No, sir. It's not as liquid as other mutual funds. Normally private equity, you know, require investment to stay from, seven to 10 years. Yes, you heard that right. Private equity firms lock up your money for years. And most importantly, the fees are much higher. Two percent for the management fee and 20 percent of the profit. It's these risks and restrictions and fees, not any laws against private equity

that have kept employers and plan managers from offering private equity as an investment option to their workers. It just hasn't been prudent in their eyes. And of course, there is the risk that if workers lost a lot of money because a private equity investment went south, they might sue. Yeah, and Anita says private equity funds have been lobbying for years to tweak ERISA and nudge the prudence calculation in their favor. Why? Well, because retirement accounts are where all of the money is. Retirement assets in general are just massive, right? Two-thirds of all employer-based savings are in 401K plans. And there's $8.7 trillion dollars in 401K plans. And I think if some of that can be invested in private equity,

certainly that would be good for private equity to be able to take on more risks and see if they can get those returns. Yeah, two funds in particular have led the charge to get their sticky digits on your 401k money. The US branches of Pantheon ventures, based in the UK,

and of Partners Group based in Switzerland. Back during the first Trump administration, these two funds made their case to the Department of Labor, which oversees investment plans. And in 2020, the department wrote a letter back, effectively saying, sure, we don't see why a plan manager shouldn't invest in private equity so long as they followed ERISA guidelines. And he just says this letter acted as an easing of the

restrictions on what plan managers could offer. The Trump administration made it easier for plan sponsors and employers to invest in private equity without necessarily facing consequences if those investments didn't pan out. The letter gave plan managers some legal cover if something went wrong and an investor sued, in other words. But for the most part, 401K plans didn't take the bait. Especially once the Biden administration later clarified that it didn't think investing in private equity was generally appropriate for a 401k. And this was kind of a bummer for private equity. And they had a pretty lean couple of years in 2022 and 23. And they really, really, really, really wanted that 401k money, which is where the Trump executive order comes in.

The intention is to really encourage plans to take a step forward in this direction. We don't know what's in the expected executive order yet, but the general opinion seems to be that it will formalize what the Department of Labor said in that 2020 letter, a kind of presidential nod, if you will, that would give even more cover to companies that might want to offer a private equity investment option to workers. And it is true that some workers might appreciate the opportunity to diversify away from public markets. I mean, since 2000, the number of companies that are publicly traded on the main exchanges has shrunk by 35%. Meanwhile, the private equity market has grown 400%.

What's more, says Anna Maria Loussardi, many 401k investors have gotten a lot more sophisticated as their retirement assets have grown. As you move along in your career, and if you contribute monthly and yearly, you're starting to get a sizable amount of wealth, right? So we all are becoming in a sense, you know, potential good investor. Some of these investors may well want to take private equity risks, and private equity sure as heck wants their money. Oh my guess, a match made in heaven.

Well, maybe, but both Anna Maria and Anita agree that private equity isn't ever going to be a big part of the universe of 401K offerings. It just doesn't really fit that well with the core purpose of a retirement account. It feels like putting private equity in 401K plans might be like putting a Ferrari engine in like a minivan, right? It's sort of, it's not intended to be a way to grow your investments in a wild way to retirement. It's intended to be sort of a steady way to save a reasonable amount for retirement. In other words, even if you're one of the roughly 56% of 401k investors that actually does check your 401k allocations, don't expect to see a private equity investment option in your plan the moment the executive order is signed. Both Anita and Anna Maria say it'll take time for plan managers and employers to figure right just what they can offer and to whom and how much legal protection and executive order

might give them. The guidelines in ERISA may have been softened around the edges, but they haven't been eradicated. Prudence will still be required. This episode was produced by Cooper Gass McKim with engineering by Robert Ovidriguez, who's fact-checked by Sierra Juarez. Keik Cannon is our editor. The Indicator is a production of NPR.