CNBC.COM
President Donald Trump signed an executive order on Thursday allowing alternative assets such as private equity, cryptocurrencies and real estate into workplace retirement plans.
The entrance of private equity investments — funds that invest in non-publicly traded businesses — into workplace plans is a big win for the world's largest money managers, who stand to profit from expansion of access to an asset class that has historically been available only to wealthy investors.
BlackRock CEO Larry Fink in particular has been an advocate for opening the doors to private equity, arguing in his most recent annual shareholder letter that "democratizing" private markets could provide market-beating long-term returns for American workers.
But while these new investments can offer tantalizing profits, they also pose a major risk for long-term retirement savers, some investor advocates say.
"The objective for the average person is to have a safe, secure retirement plan," says Jerry Schlichter, founding partner of Schlichter Bogard, a firm known for lawsuits on behalf of employees over excessive fees in 401(k) plans. "When you talk about new areas like cryptocurrency or private equity, these are fraught with danger for investors for a variety of reasons."
To be clear, Schlichter and other financial pros don't deny these assets' potential to make investors money. They just may not be appropriate for everyday investors' retirement accounts, they say.
"It's a square peg in a round hole," Schlichter says.
The dangers of nontraditional 401(k) investments
Investing experts generally advise parking your core, long-term portfolio in a diversified mix of assets that have delivered proven, consistent returns over the long-term — decades, at least. Given the stock market's historical upward trajectory, a broad stock market index mutual fund would fit the bill of an appropriate 401(k) investment option, Schlichter says.
Under this framework, the argument against crypto's inclusion in workplace plans is clear. Although certain cryptocurrencies have delivered impressive returns, the asset class hasn't been around long enough to have proven itself as a safe option for investors.
"There's no long-term performance history for cryptocurrency, and the short- to intermediate-term has been all over the place," says Schlichter. "This is not the kind of investment that people want and deserve when they need to have something that's protected for their years in retirement."
The case against private equity is a little more complicated. As the name implies, private equity funds invest in a manner similar to mutual funds, but instead of holding shares in publicly-traded companies, they hold stakes in firms that aren't yet on the market.
It's not hard to imagine how investors in such funds can earn impressive returns. Just think how well you could have done if you owned a piece of Tesla or Nvidia before the firms went public.
For now, investment in such funds is typically reserved for accredited investors — generally those with annual incomes above $200,000 or a net worth north of $1 million.
The argument from Fink and others is that opening 401(k) plans to these investments would allow everyday investors to get in on the same return potential that the only the wealthy currently enjoy. Fink says in his letter that pension funds, many of which invest in private equity, tend to outperform 401(k)s, but experts debate whether private funds actually outperform market indexes on a long-term basis.
"There's nothing wrong with [nontraditional 401(k) investments], but you have to know what you own," says Sam Stovall, chief investment strategist at CFRA. "What is it that you're buying? What are your expectations for this investment? And if it goes through a slump, what are you going to do then?"
For regular investors, who may not be familiar with how private equity works, there are a few key pitfalls to consider before buying.
They're expensive
An investment's fees eat into the returns you earn from it. And while private equity advocates argue that their returns are worth it, these funds have a very high hurdle to clear. Under one popular model, a private equity fund may charge a 2% annual fee, plus 20% of the fund's profits over a certain threshold.
Compare that with an index fund, which mirrors the return of the market while charging fractions of a percent in fees. "They're almost free these days," says Schlichter.
They're illiquid
Say you want to pull money out of your 401(k) plan. If you own a stock or bond fund, that's generally an easy ask. Stocks or bonds that you ostensibly own are sold and you get your cash.
That's not so easy with private equity, which often has set holding periods and limits on how much investors can redeem.
"If there's a desire to pull out of private equity, there isn't a way to actually sell that company or sell shares — there's just no market for it," says Charles Rotblut, vice president of the American Association of Individual Investors.
That could mean that owners of private equity funds in 401(k)s could have trouble selling shares quickly, either to raise cash or to buy another investment. Or, Schlichter posits, such funds could choose to keep some cash on hand for redemptions, instead of investing it, which could dampen returns.
They're tough to understand
Private equity funds aren't as heavily regulated as exchange-traded funds and mutual funds and are therefore generally less transparent about their investment strategies.
That may leave everyday investors at sea as they try to understand complex strategies, which may include investing with leverage, trading derivatives or taking highly concentrated positions in private companies.
None of that is to say that, over a period of decades, a particular private equity fund won't outperform the market. But when it comes to your 401(k), the message is simple, says Schlichter: "If you don't understand the investment, you shouldn't depend on it for your retirement assets."
Want to stand out, grow your network, and get more job opportunities? Sign up for Smarter by CNBC Make It's new online course, How to Build a Standout Personal Brand: Online, In Person, and At Work. Learn from three expert instructors how to showcase your skills, build a stellar reputation, and create a digital presence that AI can't replicate. Sign up today with coupon code EARLYBIRD for an introductory discount of 30% off the regular course price of $67 (plus tax). Offer valid July 22, 2025, through September 2, 2025.
Plus, sign up for CNBC Make It's newsletter to get tips and tricks for success at work, with money and in life, and request to join our exclusive community on LinkedIn to connect with experts and peers.
