European pension funds have long relied on private markets for long-term investments, and family offices have built substantial allocations as well. That model is now edging into the US retail retirement system, where the Trump administration is moving to allow 401(k) investors to gain exposure to private assets, potentially opening up a trillion dollar market to alternative managers as early as February.
How exactly private-market assets fit into 401(k)s is still uncertain. “We have conversations every day with pension plan sponsors where the first question is the same: Will adding private-market investments to our plan get us sued?” said Robert Sichel, a partner at K&L Gates who advises on retirement-plan issues. “Fiduciary liability is the key issue in almost every one of those discussions.”
Resolving that uncertainty comes with enormous potential for alternative managers. American retirement assets hold about 44,000 billion dollars, including roughly 12,000 billion inside 401(k) defined-contribution plans. Even a modest allocation to private markets would open one of the largest new capital pools the industry has ever targeted.
High fees, limited liquidity and valuation challenges
An answer seems to be coming soon. An August executive order from President Donald Trump directed the Department of Labor to make it easier for defined-contribution plans to include alternative investments. The order instructs the agency to clarify, within 180 days, what an “appropriate fiduciary process” looks like when a plan uses private assets inside target-date funds or collective investment trusts.
The legal risk stems from the structure of the US retirement system. Under the current Employee Retirement Income Security Act (ERISA), plan fiduciaries can be sued if investment options are judged imprudent or excessively costly. Private assets raise exactly the issues plan sponsors worry about, Sichel said: high fees, limited liquidity and valuation challenges.
The concern is amplified because the US system differs sharply from Europe’s. In most European countries, workplace pensions are managed by institutional trustees who make investment decisions for millions of workers. Exposure to private equity, infrastructure and private credit is routine. In contrast, a US 401(k) is a defined-contribution plan in which individual savers choose their own funds from a menu provided by their employer, leaving pensioners responsible for their own asset allocation.
Endless capital for PE firms
The attractiveness for private-asset managers is obvious. The capital is long term, contributions are automatic, and flows are far more stable than in brokerage accounts. For private-equity and private-credit managers accustomed to decade-long lockups, the defined-contribution system offers the closest thing to a perpetual capital base in the retail market.
That scale has drawn the biggest firms. Blackstone this year launched a dedicated 401(k) business unit after a decade of lobbying for regulatory change, naming senior executives to lead partnerships, product development and education.
Apollo Global Management has built a retail division and struck alliances with State Street, Lord Abbett and others to seed private-credit ETFs, interval funds and retirement products. The firm raised about 5 billion dollars from wealth channels in the third quarter alone, as demand for semi-liquid funds climbed.
Ares Management, meanwhile, has taken a more cautious stance. Chief executive Michael Arougheti said he remains unconvinced that pairing traditional and alternative managers produces better outcomes for retirement savers, though the firm continues to explore opportunities, Bloomberg reported this month.
Rules might change
In a reversal of the usual roles, some PE managers are now flagging potential risks to pensioners, while the usually cautious SEC seems more optimistic.
Robert Morris, founder of private equity group Olympus Partners, warned sovereign wealth funds that fee layers in private-equity products designed for 401(k) savers could reduce net returns to levels below simple equity index funds, while adding significant risk for individuals who may not be prepared to absorb losses.
At the same time, SEC Commissioner Mark Uyeda argued in a recent speech that retirement savers should not be shut out of private markets entirely, noting that concentrated US stock indices make diversification more necessary. Uyeda said the question is how to achieve better risk-adjusted returns, not whether private-market exposure should be zero.
The SEC has also cleared away some older rules. It dropped a staff policy that limited certain funds with private-asset exposure to accredited investors. It also loosened co-investment rules, making it easier for retail products to invest alongside private funds run by the same manager.
Yet even as products proliferate, Sichel warns that firms may be racing ahead of investor understanding. He points out that the liquidity risk lies in the inability of private-market assets to provide the cash flows or redemptions required by 401(k) plan structures, which could prevent rebalancing and expose fiduciaries to legal claims.