Part 07 · Resources
Frequently asked questions.
The questions we hear most often, from both sides of the plan.
Is it legal to put private equity in a 401(k)?
Yes. It always has been. ERISA1 sets a standard of conduct (prudence, loyalty, diversification, reasonable fees), not a list of approved assets. The 2020 DOL information letter and the 2025 executive order clarified how fiduciaries can prudently do it, particularly inside professionally managed funds like target-date funds. The legal question is never "is this asset allowed?" but "was the decision process prudent?"
Why not just let participants choose a private equity fund from the menu?
Three reasons. Illiquid funds cannot honor unrestricted daily trading. Individual participants cannot diligence private managers or time capital calls. And the DOL's guidance specifically contemplated alternatives inside asset-allocation funds, not standalone options. Professional intermediation is the feature, not a limitation.
How can something illiquid have a daily price?
The fund calculates a daily net asset value using the most recent independent valuations of its private holdings, adjusted for cash flows and income, and in some designs supplemented by public-market indicators. It is an estimate. Accuracy is better over months than over days. The liquid portion of the fund, which includes cash, Treasuries, and public securities, prices normally and provides the money for daily participant transactions.
What happens if everyone tries to withdraw at once?
Funds are engineered for this scenario. Liquidity buffers are sized against historical worst-case participant flows. Ongoing contributions provide a natural offset. As a last resort in underlying semi-liquid vehicles, redemption gates slow (but do not stop) withdrawals to protect remaining investors from fire-sale prices. In a DC plan, participant flows are also remarkably stable. Most money is payroll-driven, and most participants do not trade even in crises.
Are the fees worth it?
It depends entirely on implementation. The honest math: if a private sleeve adds, say, 40 to 60 basis points to a fund's total cost, it needs to add more than that in net return or diversification benefit to be worthwhile. Institutional evidence says skilled implementations have cleared that bar and unskilled ones have not. This is precisely what the plan fiduciary1 is required to evaluate and document. It is also why manager selection and vehicle design matter more here than in index investing.
Will this make my retirement account riskier?
Riskier in some dimensions, potentially less risky in others. Individual private assets carry real risks including leverage, concentration, and valuation uncertainty. But a modest, diversified sleeve can reduce a portfolio's dependence on public equity markets, add inflation-linked income, and smooth the experienced ride. The design intent is a better-diversified whole, not a hotter portfolio. Sizing, typically 5 to 20% of a target-date vintage, is what keeps it that way.
What is the difference between this and what pension funds do?
Substantively, not much. That is the point. DB pensions have allocated to private markets for decades because they invest over decades. The engineering difference is that a 401(k) must offer individual daily accounts, which requires the daily-valuation and liquidity-sleeve machinery described above. The investment logic is the same. The plumbing is new.
As a sponsor, will adding alternatives increase my litigation1 risk?
Candidly, plaintiffs' firms are watching this space, and higher-fee options are historically the primary target. But litigation risk attaches to weak process, not to asset classes. A committee with documented expertise, a rigorous vehicle-level diligence file, a defensible fee analysis, and a pre-agreed monitoring framework is in a strong position. The riskiest posture is a casual adoption. Arguably, in the long run, a categorical refusal to ever evaluate the question as the practice becomes mainstream is also risky.
Can I opt out if my plan adds alternatives to the default fund?
Yes. You always retain the right to move your money to any other option on your plan's menu, which will include index funds and other traditional choices. You will receive advance notice before changes to a default investment take effect. That gives you time to decide. Doing nothing means accepting the new design. A few clicks moves you elsewhere.
Glossary
Terms you will see.
Plain-English definitions for the vocabulary of disclosures, IPS documents, and product materials.
- 3(21) fiduciary1 adviser
- An adviser who provides investment recommendations to a plan committee. The committee retains final decision authority.
- 3(38) investment manager
- A fiduciary1 with discretionary authority to select, monitor, and replace plan investments. Takes on that liability from the sponsor.
- BDC (business development company)
- A registered vehicle that lends to or invests in private companies. Non-traded and evergreen versions are common private-credit building blocks.
- Capital call
- A traditional private fund's demand for committed capital. Evergreen DC-oriented vehicles are designed to avoid this mechanic.
- CIT (collective investment trust)
- A pooled, bank-maintained investment vehicle available only to qualified plans. The dominant wrapper for modern target-date funds due to cost and flexibility.
- Evergreen / semi-liquid fund
- A perpetual-life private-markets fund offering periodic (often quarterly) redemptions rather than a fixed 10-year term.
- Gate
- A provision letting a fund limit redemptions in a period (for example, 5% of NAV per quarter) to avoid forced selling.
- Glidepath
- A target-date fund's schedule for shifting from growth assets toward conservative assets as retirement approaches.
- Illiquidity premium
- The additional expected return investors demand for holding assets that cannot be quickly sold at fair value.
- Interval fund
- A registered closed-end fund that offers to repurchase a set percentage of shares at NAV at stated intervals.
- IPS (investment policy statement)
- The plan's governing document for investment objectives, permitted strategies, and monitoring criteria.
- NAV (net asset value)
- A fund's per-share value: assets minus liabilities divided by shares. For private assets, based on appraisals and models.
- PEP (pooled employer plan)
- A single 401(k) plan serving multiple unrelated employers under a pooled plan provider. Created by the SECURE Act. A growing channel for institutional-quality DC investing.
- QDIA
- Qualified default investment alternative. The fund (usually a target-date fund) a participant's contributions go to absent an election. Carries fiduciary1 safe-harbor protection.
- Valuation lag / smoothing
- The tendency of appraisal-based values to trail market moves. Understates short-term volatility and correlation.
- Vintage
- A target-date fund keyed to a retirement year (for example, 2055). Also refers to the year a private fund begins investing.