What HR leaders should know about 401(k) solutions incorporating private assets

A recent push to diversify the types of investments included in employer-sponsored retirement plans is prompting some employers to consider whether to invest in new solutions for their workers.

The 401(k) is the most common type of retirement plan available to US workers today, and it typically includes a mix of stocks and bonds. One common way to allocate these investments is in a “60/40” portfolio, with 60% of investments made in public stocks and the other 40% going toward bonds.

But the strength of the 60/40 portfolio is being challenged today, with some financial experts arguing that retirement plan participants would see better returns from a more diversified portfolio that includes different types of assets—including alternative investments that are considered riskier, like private equity.

Though employers have typically steered away from incorporating private equity into their 401(k) plans over fears of being sued, a recent executive order from the Trump administration seeks to change that. As federal agencies prepare guidance on how plan sponsors can offer these investment options to their workers, employers can expect to be pitched on new solutions that incorporate both public and private assets.

How the market is evolving in favor of public-private retirement solutions. Just 11% of retirement plans offered an alternative asset class as of 2024, according to a survey from the Plan Sponsor Council of America.

Historically the structure of defined-contribution plans such as 401(k)s hasn’t lent well to alternative assets such as private equity, experts told HR Brew. Private equity funds tend to have less liquidity and higher fees than public-market investments. They also don’t typically have daily valuations, a common feature of 401(k) funds.

“The structure of private assets and largely alternative assets as well…don’t operationally fit within the defined-contribution ecosystem,” said Holly Verdeyen, defined-contribution business leader with the consulting firm Mercer.

Employers that have experimented with incorporating alternative assets into their 401(k) plans have gotten into legal trouble in the past over issues like high fees and underperformance. But investment firms are now developing solutions that address some of these issues, with the expectation that federal agencies will soon provide guidance for employers who want to safely offer such solutions. Many of these newer products are target-date funds (TDFs) that incorporate both public and private assets, with cash flows that “are highly predictable,” said David O’Meara, head of defined-contribution strategy with consulting firm WTW.

Salespeople with the investment firms developing these products are now “knocking on doors and picking up phones and contacting plan sponsors” in the hopes they’ll add them to their 401(k) plans, O’Meara said. “How seriously they take any of these investments…will largely stem from the guidance that comes out of the Department of Labor,” he continued. Retirement plan fiduciaries will want to see guidance on how to evaluate these solutions, as well as legal protections associated with them, he predicted.

Goldman Sachs and BlackRock are among the firms eager to profit from inclusion in defined-contribution plans, which hold more than $12 trillion in assets.

“Private markets are not a silver bullet, but if you integrate them into a target date fund, they can meaningfully improve retirement outcomes,” Nick Nefouse, global head of retirement solutions with BlackRock, told HR Brew. BlackRock announced it was working on one such product with Great Gray Trust Company in June.

Nefouse recommended HR leaders get educated on new products coming to the market, but said he expected uptake to be gradual. “In terms of the aggregate market, I will tell you it is going to be a longer decision, and that is consistent….with everything you see with HR teams.” Adoption of 401(k) investment options incorporating private equity, he suggested, might be akin to health savings accounts, which took time to gain traction, but are now quite popular.

What HR leaders should consider. The firms that are developing these products are, naturally, bullish on their potential to boost returns for 401(k) participants. BlackRock believes integrating private markets into target date solutions could enhance participants’ retirement savings by 15% over 40 years. Goldman Sachs estimates that allocating 12% of a traditional 60/40 retirement portfolio to private assets “can lead to meaningful long-term wealth accumulation without significantly increasing overall risk.”

Over the last 20–30 years, returns from private equity buyout returns have exceeded public market returns “significantly,” said Burcu Esmer, academic co-director of the Harris Family Alternative Investments Program at University of Pennsylvania’s Wharton School of Business. Private equity returns have softened over the last couple of years, though, she said. She noted that older investors could potentially bear more risk from incorporating alternatives into their portfolios, given they don’t have as many years to realize positive returns.

The potential to help employees improve their savings at a time when many worry they’re not putting away enough to retire may certainly be appealing for employers, but HR leaders should proceed with caution, experts told us. While the Trump administration has given the green light to encourage private equity in defined-contribution plans, fiduciaries’ obligations under ERISA when considering such investments haven’t changed.

HR leaders who are exploring these solutions seriously have likely worked with alternative assets before, sources said. Mercer is seeing heavy interest from financial services companies, as well as “very large, sophisticated corporate sponsors” that have an in-house investment staff and already include alternatives in defined-benefit plans, where private equity has a stronger presence, said Verdeyen.