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Private equity (PE) is no longer just for institutions and millionaires. A change in Department of Labor guidance (under the Trump administration) now allows 401(k) plans to offer indirect exposure to PE through diversified funds like target-date or balanced funds.
You still can’t pick a private equity fund directly in your retirement account — but your plan may start including it behind the scenes. Here’s what that means for you.
1. What is PE?
Private equity (PE) firms buy private businesses, improve them, and eventually sell them (i.e. business development companies). Returns typically come from:
- Improving operations;
- Using debt strategically;
- Growing profits; and
- Selling the company at a higher valuation
Two major categories of private equity include:
- Buyouts: Mature, cash-flow-positive companies
- Venture Capital (VC): Early-stage start-ups with more risk and higher upside
Fees charged for traditional private equity funds can be very high. Often, the managers (GP) of the PE fund will charge 2% of AUM and 20% of profits exceeding some threshold of return.
2. Why PE may show-up in a 401(k)?
Plan managers may add small allocations to PE for various reasons including, but not limited to,:
- Access to businesses not in the stock market
- Diversification
- Potentially higher long-term returns
3. Risks & Benefits in PE Investing
| Potential Benefits | Potential Risks |
| – Diversification – Professional management – Exposure to private markets | – Higher fees – Illiquidity – Big differences between “top-tier” and “average” PE funds – Less transparency vs. public stocks |
PE isn’t “good” or “bad” — what matters is how your plan uses it and the quality of the underlying strategies.
4. Conclusion
If private equity starts appearing in your 401(k)’s target-date or balanced funds, it’s worth understanding what it is and how it works. A small allocation can make sense when managed professionally — but fees, transparency, and execution matter.
If you’d like a quick review of whether PE exposure fits your goals, shoot us an email.
Disclaimer: The information provided herein is intended solely for informational purposes and no person(s) or other third-party may rely upon it as financial, tax, or legal advice or use it for any other purposes. As a result, Royal Financial, and any affiliates, assume no responsibility whatsoever to readers, or any other persons for that matter, as a result of the information contained herein.