What to know about private equity in your 401(k)

Historically, private equity has not been among the investment options available for 401(k) plans. But that could soon change, providing a new opportunity for retirement savers — though also one that may carry substantial risk.

In evidence of this potential shift toward private investments, at the end of June, BlackRock, the "world's largest asset manager," announced that it "plans to offer a 401(k) target-date fund with a 5%-to-20% allocation to private investments," said The Wall Street Journal. BlackRock is the "biggest such provider yet to announce that it will make private investments available" in employer-sponsored retirement plans. Still, it "will be up to employers to decide whether they want to add them," said the outlet. Investors, too, should evaluate the opportunity carefully.

What is private equity?

Private equity is a "form of investment in privately held companies that are not publicly traded on stock exchanges," said SmartAsset, a personal finance blog. Usually, private equity investment is "made through funds pooled from institutional investors or high-net-worth individuals" who are "aiming to acquire ownership stakes in businesses with growth potential." Participation often requires "significant capital" and a certain level of investment knowledge or wealth.

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Why is private equity getting added to 401(k)s?

The potential incorporation of private equity into 401(k) investment options would follow an "increasing push to provide more private capital investment opportunities for retail investors and participants in workplace retirement plans," said CNN Business.

Private equity firms "see the $12.2 trillion market for 401(k)-type retirement plans as a way to reach the everyday investors that are crucial to their growth," said the Journal. They also make the case that investors deserve access to these opportunities. According to Jaime Magyera, the co-head of BlackRock's U.S. wealth advisory business, "private assets play an increasingly important role in the global economy," which is "why the company believes it is important to give 401(k) investors access to them," said the outlet.

President Trump has also indicated an openness to allowing the shift. In Trump's first term, the Labor Department "issued an information letter to plan fiduciaries, telling them that private equity may be part of a 'prudent investment mix' in a professionally managed asset allocation fund in a 401(k) plan," said CNBC.

What are the risks of investing in private equity?

Private equity investments "would offer more choices and potentially higher returns" for those investing for retirement, but they also have "significant drawbacks," said Investopedia. "These investments typically carry higher risks, charge steeper fees and offer limited liquidity." They are also "less transparent, making them more difficult to assess than traditional retirement investments."

Further, evidence of the returns is "mixed," according to "academic and industry studies on it," said CNN Business, citing Jason Kephart, the senior principal for multi-asset strategy ratings at Morningstar. This means there is "no guarantee that you will enjoy meaningfully better returns in your portfolio" in exchange for the downsides.