The Indicator from Planet Money The risk of private equity in your 401(k)
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Jul 30, 2025 Private equity investments are stirring up controversy in 401(k) plans. With high-risk, high-reward scenarios, the debate is heating up, especially with an anticipated executive order from President Trump aiming to enhance their inclusion. The discussion also dives into the balance between potential gains for younger investors and the need for regulatory safeguards. Experts weigh in on the unique challenges of private equity, like transparency and illiquidity, raising questions about whether this aligns with the ultimate goal of securing a stable retirement.
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Private Equity's Risk vs. Retirement Plans
- Private equity is secretive, risky, and expensive, contrasting with the steady nature expected in retirement plans.
- Despite these risks, President Trump believes 401(k) plans can handle private equity investments.
ERISA Sets Prudence Standard
- ERISA requires retirement plan managers to act prudently and solely in participants' interest.
- This usually excludes risky investments like private equity from typical 401(k) portfolios.
Private Equity's High Risk-Return Profile
- Private equity investments typically offer higher returns but come with high risks and low transparency.
- These funds invest in smaller, often non-public firms more likely to fail than public companies.