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Private equity and private credit may fit your 401(k) plan -- but here's the lowdown

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  Published in Health and Fitness on Thursday, October 9th 2025 at 11:31 GMT by MarketWatch
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Private Equity and Private Credit: A New Frontier for 401(k) Plans – What You Need to Know

The retirement industry is in the throes of a quiet revolution. A growing number of 401(k) plans are now opening the door to private equity (PE) and private credit (PC) investments—assets that were once the preserve of high‑net‑worth individuals and institutional investors. While these alternative strategies promise higher returns, they also come with a unique set of risks, liquidity constraints, and regulatory considerations. In this article, we break down the essential facts that plan sponsors, trustees, and fiduciaries should weigh before adding these vehicles to their retirement portfolios.

1. Why the Shift to Private Assets?

Higher Yield Potential.
Private equity funds historically have delivered returns that exceed those of publicly traded equities, largely because they can take control of businesses, implement operational improvements, and exit at premium valuations. Private credit, on the other hand, offers higher interest rates than traditional fixed‑income products, thanks to the borrower’s lack of public market visibility and the bespoke nature of the loan agreements.

Diversification Benefits.
Both PE and PC tend to have a low correlation with mainstream asset classes. For a retirement plan that already includes U.S. and global equities, bonds, and perhaps real estate, adding a private‑asset allocation can smooth volatility and improve the risk‑adjusted return profile over the long term.

Competitive Edge for Plan Sponsors.
Plan sponsors are under pressure to offer a broad set of investment choices that can keep members engaged. By offering alternative investments, they can differentiate their plans from competitors and potentially reduce “fee‑for‑fee” costs through lower administrative charges on certain private‑asset funds.

2. How Do Private Equity and Private Credit Work in a 401(k)?

Because of their illiquid nature, these vehicles are typically held through a “private‑fund” structure that the SEC permits for registered investment companies. Plan sponsors must still ensure that the investment strategy complies with ERISA’s “prudent person” standard.

3. Regulatory Landscape

SEC Private Fund Guidance (2020)
The Securities and Exchange Commission released guidance clarifying that ERISA fiduciaries can invest in private funds that are registered with the SEC or have a specific exemption. The guidance does not require private funds to be fully regulated under the Investment Company Act, which has historically limited plan sponsors’ ability to use private assets.

DOL Fiduciary Rules
The Department of Labor’s fiduciary rule now allows plan sponsors to invest in a broader range of private‑asset vehicles, provided they can demonstrate due diligence and compliance with ERISA’s “fiduciary duty” requirements. The rule also mandates that plan sponsors disclose the risks and fees associated with alternative investments to plan participants.

Qualified Custodian Requirement
Because private‑fund investments are held in a custodian’s account, sponsors need a custodian that can handle “outside‑the‑box” assets. Major custodians—Vanguard, Fidelity, Charles Schwab, and T. Rowe Price—have all expanded their private‑asset offerings, offering both fund-of-funds and direct‑investment platforms.

4. The Risks to Watch

1. Illiquidity and Valuation
   - PE investments can take years to exit.
   - PC funds may call on capital for loan underwriting, reducing the principal available to participants.
   - Valuations are typically performed by independent third parties, but the lack of a public market can lead to over‑optimistic appraisals.

2. Higher Fees
   - Management and performance fees can eat into returns, especially if the private‑asset manager fails to meet hurdle rates.
   - Some funds also charge “deferment” or “commitment” fees that are not transparent in public filings.

3. Credit Risk
   - Private credit is not immune to default, particularly in economic downturns.
   - Lenders may hold collateral that can be liquidated, but recovery rates can be lower than expected.

4. Transparency & Reporting
   - Unlike public equities, private assets lack real‑time trade data.
   - Participants may receive quarterly or semi‑annual statements, making it harder to track the exact position of the investment.

5. Operational Complexity
   - Custodians and administrators need robust processes to monitor lock‑up periods, capital calls, and fund performance.
   - The additional paperwork can inflate administrative costs, especially for smaller plans.

5. Practical Tips for Plan Sponsors

6. Case in Point: How Big Plan Sponsors Are Moving Forward

• Fidelity’s “Private Fund Solutions” allow plans to invest in a curated selection of private‑equity and private‑credit funds. Fidelity offers a single point of contact for custodial services and investor education.

• Vanguard’s “Private-Equity Fund of Funds” has a fee structure that is generally lower than that of many standalone PE funds, making it a more accessible option for 401(k) plans.

• BlackRock’s “Alternative Asset Portfolio Management” has integrated private credit as a core component of its risk‑adjusted return strategy for institutional clients, and the firm has recently announced a new platform for 401(k) plans that streamlines reporting and compliance.

These platforms demonstrate that the infrastructure for private‑asset investments is maturing, with custodians and asset managers offering clearer fee structures, improved reporting, and greater transparency.

7. Bottom Line

Adding private equity and private credit to a 401(k) plan can be a powerful way to enhance returns and diversify risk—but only if handled with rigorous due diligence and an unwavering focus on fiduciary responsibilities. The regulatory environment has evolved to provide sponsors with more flexibility, yet the core principles of prudent investing remain unchanged. As the alternative‑investment landscape continues to expand, plan sponsors who carefully balance the allure of higher yields against the inherent risks of illiquidity and fee intensity will be best positioned to deliver superior retirement outcomes for their participants.

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