Market Data 
- Trump opened the door for alternative assets in 401(k), but the entrance to market has been slow.
- Private-equity bosses now say they want protection from lawsuits over fees.
- Here’s what this could mean for savers.
In June of 2020, Eugene Scalia, the acting head of the Department of Labor and son of conservative judicial legend Antonin Scalia, issued a letter paving the way for private-equity investments to be added to funds popular with 401(k) plans, like target-date funds.
The move, Scalia said at the time, would “help Americans saving for retirement gain access to alternative investments that often provide strong returns” and help “level the playing field for ordinary investors.”
Nearly five years in, however, and the industry, which invests in everything from privately-held companies to corporate loans, has barely moved on this massive opportunity, save for two investment vehicles launched last year tied to assets managed by Apollo Global Management.
Why?
Apollo CEO Marc Rowan explained at the Goldman Financial Services conference in December: When asked what the Trump administration would need to do to open up 401(k)s to nontraditional investment strategies, Rowan responded: “Litigation relief.”
With Trump back in office, Wall Street bosses can’t seem to stop talking about litigation reform. Michael Chae, Blackstone’s longtime CFO, mentioned it just this month at a Bank of America financial services conference, preceded by similar comments by Ares CEO Michael Arougheti in December. KKR, meanwhile, appointed its first head of defined contribution plans, a category that includes 401(k)s, at the end of 2024.
Business Insider spoke with a range of industry insiders and other experts to find out what these firms want and what it could mean for the average investor’s retirement plans.
According to Bridget Beardon, a research and development strategist with Employee Benefit Research Institute, a retirement research group, litigation stands in the way of new investing models. Her research shows that ESG funds, which invest in companies that pass certain standards of environmental and social responsibility, have also been left out of reach for most retirement funds because of the threat of lawsuits.
“The general theme is that litigation risk inhibits innovation,” Beardon said, noting that this is the case for ESG funds and other asset classes.
Change, however, also comes with risks, including the potential for higher costs and less transparency into underlying investments. Here are the potential benefits — and risks — associated with these plans as firms like Apollo and KKR gear up to sell their investments to retiree 401(k) plans.
Fees
401(k)s are employer-sponsored retirement plans that allow employees (and some employers) to contribute pre-tax earnings into an investment account. That money is usually parked in index funds made up of stocks and bonds managed by a large money manager like Vanguard or Fidelity for a fee.
The alternative assets industry, whether private equity or hedge funds, has traditionally been excluded from these plans thanks to the Employee Retirement Income Security Act of 1974, which designates the employer offering the plan as a fiduciary. Fiduciaries are legally responsible for selecting investment offerings that are in the sole interest of the plan participants. Fiduciary best practices can be open to interpretation, but the law specifically mentions keeping expenses down, and a series of lawsuits in recent years have helped make fees top of mind for plan fiduciaries.
Jerry Schlichter, the founder and managing partner of Schlichter Bogard, was described by The New York Times as the “Lone Ranger of 401(k)s” for his example-setting lawsuits over fees at companies like Lockheed Martin and Caterpillar.
His work to lower 401(k) fees has been so impactful that former Illinois federal judge Harold Baker, before he died in 2023, described Schlichter as “acting as a private attorney general,” with his work cutting $2.8 billion in fees paid by retirees, according to a filing explaining the judge’s ruling on the firm’s fees, which are generally a percentage of the monies collected for clients.
401(k) fees decreased 25% between 2009 and 2021 down to an average of .81% of assets annually, the time period in which Schlichter began filing these suits. These fees are much smaller than the typical 2% of assets and 20% of profits charged by private equity, though that’s not to say that funds invested in private credit or other alternative assets would rise to that level.
Better performance?
The industry’s pitch is simple and involves looking at fees through the lens of overall returns.
During Apollo’s fourth-quarter earnings call in January, Rowan put it this way: “Simply being told as a trustee that your job is to produce the best net returns, not the lowest fee, I believe would go a very, very long way to solving this in a way that would be overwhelmingly positive for our business.”
“Everywhere in the world, where privates — and I’m going to use the word private, not alternative — have been added to retirement solutions, the results are not just a little bit better, they’re 50% to 100% better,” Rowan said.
Rowan, who interviewed for the position of Trump’s Treasury Secretary before the role went to Scott Bessent, has also suggested that giving retirees access to alternative investments would help 401(k) savers diversify.
“We basically have levered the retirement system of the country to Nvidia,” he said, referring to the current practice of investing most retirement income into public markets.
A study from Georgetown University’s Center for Research Initiatives estimated that a 10% exposure to real estate and private-equity assets could increase the net return for the US defined-contribution market by $35 billion. The study was funded by the American Investment Council, formerly the Private Equity Growth Capital Council, a private-markets lobbying and advocacy group.
Pension funds have long invested in alternative assets like hedge funds and private equity, which has prompted Jon Gray, president of Blackstone, to refer to pensioners as the “haves” and 401(k) savers as the “have nots.”
A 2023 Morningstar white paper examined the performance of pension plans that had allocated funds to private equity and found that these funds largely outperformed the public markets and provided diversification — but not in every case. While the best funds outperformed the public markets, the report found a wide range of outcomes, including some underperformers.
Liquidity
While 401(k) plans are designed to be held until retirement, they can be tapped earlier, whether for a financial emergency or to take out a loan for a first home. They may also need to be liquidated or moved when someone moves jobs or is laid off.
That need for liquidity is easy to satisfy when it comes to publicly traded stocks and bonds, but private markets often invest in illiquid assets like real estate and loans. In order to meet liquidity demands, these funds may need to set aside a portion of funds as cash, diminishing potential returns, said Schlichter.
“So what that means is you’d have to set aside cash for that eventuality, which means you’re not investing, which means you’re losing the whole point of what the private-equity industry pitches — that you’ll get a great return,” Schlichter said.
Proponents of alternative assets in 401(k) plans say liquidity is an easily solved structural problem because the private investment vehicles themselves have a pool of liquidity that they can draw on.
Additionally, the private funds would make up only a portion of an actual defined-contribution plan, which would also include maybe a dozen allocations to traditional liquid assets.
For example, the 2020 Department of Labor letter and current industry proposals recommend these funds make up only a portion of a professionally managed target-date fund. That, they say, would allow the manager to access liquidity the same way they do now: selling off the liquid assets within the plan first.
Transparency and Risk
Private assets, whether an office building or a privately held company, are less transparent and less regulated than public assets. It’s even in their name.
As a result, plan members would have to get used to less up-to-date valuation information than they get with publicly traded stocks and bonds.
Less transparency could also mean more risk, depending on who you ask.
“Price discovery, to the extent it really exists here, is minimal,” writes Morningstar of the valuation of certain private assets, which are often valued by appraisal.
Rowan said he disagrees with the long-held idea that public necessarily means less risky, citing the 50% decrease in public companies and the trend of companies staying “private for longer.”
“I think that professionals in our industry now understand that private is safe and risky, and public is safe and risky,” Rowan said.
