401(k) Plans Near a Historic Opening to Private Markets

WASHINGTON — The U.S. Department of Labor is moving toward a final regulation that could give 401(k) and other defined contribution plans a legal route into private equity, private credit, and alternative assets. Originally proposed in March, the measure has received more than 46,000 public comments.

The proposal would create a “safe harbor” for plan fiduciaries that choose to add alternative investments to employee retirement portfolios. Fiduciaries seeking a legal “presumption of prudence” would need to objectively evaluate and document the assets’ risk-adjusted performance, associated fees, and liquidity.

The framework would also require attention to valuation methodologies, appropriate benchmarks, and investment complexity. The Department of Labor describes the approach as principles-based and asset-neutral, emphasizing the rigor of the selection process rather than the category of asset chosen.

That shift comes after decades in which retirement responsibility moved away from employer-funded defined-benefit pensions. The Employee Retirement Income Security Act, or ERISA, passed in 1974, and Section 401(k) was added to the Internal Revenue Code in 1978. Since then, employee-funded defined-contribution plans have expanded rapidly.

Traditional pensions are managed by professional institutional investors that allocate heavily to private markets. Individual 401(k) plans, by contrast, have generally been limited to public equities, bonds, and mutual funds. Supporters of the proposed rule say everyday workers have therefore been excluded from diversification and high-return tools used by institutional investors and high-net-worth individuals.

The private-market opportunity has grown as the number of U.S. publicly traded companies has fallen from more than 8,000 in 1996 to approximately 4,000 today. Private markets now hold more than $15 trillion in total assets.

Research cited by the Department of Labor includes a 2022 study from the Georgetown University Center for Retirement Initiatives at the McCourt School of Public Policy. It found that a modest 15% to 20% allocation to private assets within target-date funds could increase overall retirement income by 6% to 8%, net of fees.

The same institution’s 2025 report examined five demographic profiles: average-income workers, family caregivers, lower-income laborers, frequent job changers, and people facing early forced retirement. In each profile, target-date funds using private market assets produced a 7% to 8% net-of-fee increase in retirement income.

Critics from consumer advocacy organizations, labor groups, and market analysts warn that retail savers could be exposed to highly complex, illiquid, and high-fee products. They also point to the cyclical nature of private equity and projected underperformance in 2025 among investments made during recent high-valuation boom years.

Valuation is another concern because private assets do not trade on public exchanges. Instead, they are valued through subjective internal models rather than real-time market pricing. Liquidity poses a separate problem: 401(k) plans require daily liquidity for participant transactions, while private equity funds commonly lock up capital for a decade or longer.

ERISA requires plan sponsors to act with care, skill, diligence, and absolute loyalty to participants. A wave of class-action lawsuits in recent years has accused sponsors of excessive fees and poor fund selection, making corporate plan sponsors highly risk-averse and discouraging innovative or non-traditional plan designs.

Supporters stress that the Department of Labor’s initiative would neither endorse nor mandate private assets. They say it would clarify that discretion belongs to plan fiduciaries rather than regulators or trial lawyers. Smaller corporate sponsors, companies with high employee turnover, and firms without specialized in-house investment expertise could still decide that the fees and complexity outweigh the prospective benefits.

As the Department of Labor moves closer to publishing the final rule, the financial services industry is watching closely to see if the final language will provide the explicit legal certainty necessary for plan sponsors to begin integrating alternative investments into mainstream retirement plans.