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By Dejan Ilijevski, MBA, MS — SCM Investment Services
For decades, the one thing your 401(k) couldn’t buy was the thing Wall Street most wanted to sell you. That’s now changing — and the change is being marketed to you as a gift.
In March 2026, the Department of Labor proposed a rule that would make it far easier for everyday 401(k) plans to offer private equity, private credit, and other “alternative” assets. The proposal builds on an August 2025 executive order directing regulators to open retirement accounts to private markets. The comment period closed June 1, and the industry is not waiting around. BlackRock has reportedly said it will add a 5%–20% private-markets allocation to its target-date funds in the first half of 2026. Empower, which oversees roughly $1.8 trillion in retirement assets, has reportedly lined up partnerships with private-market firms including Apollo, Neuberger Berman, and Franklin.
Translation: the private-equity sleeve may soon show up not as an exotic option you have to go hunting for, but baked into the default target-date fund millions of people own without ever choosing it. So it’s worth slowing down and asking the question the marketing skips: is this good for you, or good for the people selling it?
The default is exactly the point. Since 2006, target-date funds have been the standard “default” investment in most 401(k)s — where your money goes automatically when you’re enrolled and don’t pick anything else. The mix inside a target-date fund is set by the fund manager, not by you, so a private-equity sleeve can be added along the way without your ever opting in. That’s what makes these funds the first and most effective place to put it: the people most exposed are often the least engaged — the set-and-forget savers who simply trusted the default. Standalone options, brokerage windows, and managed accounts are part of the picture too, but those require you to actively choose. The default doesn’t.
It also helps to ask why the push is happening now. After years of easy money, private-equity firms are reportedly sitting on a large backlog of companies they bought but haven’t been able to sell — an estimated $3 trillion-plus in aging assets — while raising fresh capital from pensions and endowments has gotten harder. The roughly $14 trillion sitting in 401(k)-style plans is the biggest pool of money the industry hasn’t yet been able to reach. Wall Street isn’t opening this door because the products got better for small savers. It’s opening it because selling private equity to wealthier buyers has gotten harder.
First, what “private equity” actually means here
Public markets — the stocks inside your index funds — are priced every second of every trading day, and you can sell at lunch if you need the money. Private equity is the opposite. A private-equity fund buys whole companies that don’t trade on an exchange, often using borrowed money, holds them for years, and aims to sell them later at a profit. Private credit is the lending version: loans to companies that don’t go through public bond markets.
Two features define these assets, and both cut against the typical retirement saver:
- They’re illiquid — your money can be locked up for years, and the fund, not a live market, decides what your stake is “worth” in the meantime.
- They’re expensive — the traditional private-equity fee structure is “2 and 20”: roughly a 2% annual management fee plus 20% of profits. That’s a different universe from the single-digit-basis-point fees on a broad index fund.
The pitch — and why it sounds good
The case being made to plan sponsors is genuinely appealing on the surface. Private markets, the argument goes, let ordinary savers access returns and companies that used to be reserved for pensions, endowments, and the wealthy. BlackRock has estimated that adding private assets to a target-date strategy could lift annual returns by roughly half a percentage point, which it suggests could compound to something like a 15% larger balance over a 40-year career.
“Democratizing access” is the phrase you’ll hear. It’s a good phrase. It’s designed to make a fee-heavy, hard-to-value product feel like a privilege you were previously denied.
What the pitch leaves out
Here is the part that doesn’t make the brochure. Over the long run, after fees, private equity has roughly matched a plain index fund — not beaten it — while charging many times the cost. The Financial Times reported that private-market funds lagged large-cap U.S. stocks over one-, three-, five-, and ten-year periods, and more recently the gap has been outright: private-equity funds reportedly returned roughly 5.8% a year from 2022 through late 2025, versus about 11.6% for the S&P 500. Different windows and data sources shift the exact figures, but not the conclusion.
The math problem is simple. A fund has to overcome a fee load of around 2% a year plus 20% of profits just to match a low-cost index fund, before you ever come out ahead. As one analysis put it, when the gross edge is modest, a 2-and-20 fee structure leaves precious little for the investor. The premium you’re supposedly being paid for locking up your money has, lately, often gone to the manager instead of to you.
There’s a second, quieter problem: you can’t easily check the price. Because these holdings don’t trade, their reported values are estimates the fund itself produces. That can make a private sleeve look smoother and less volatile than public stocks — not because the underlying businesses are steadier, but because nobody is marking them to market every day. Smoothness you can’t sell into is not the same as safety.
Even the sophisticated money hasn’t clearly been paid for the risk
The usual defense of private equity is that it belongs in the portfolios of large pensions and endowments — long horizons, no need for quick cash, teams to vet managers. So it’s worth asking the harder question: over the long run, after fees, has private equity actually beaten a simple index fund even for those institutions? The evidence is far weaker than the sales pitch suggests.
The most-cited academic work points to roughly a tie. Research by Oxford’s Ludovic Phalippou — whose June 2025 study covers buyout-fund vintages from 2000 through 2019 — finds a “public market equivalent” of about 0.99, meaning private equity, net of fees, returned essentially what the S&P 500 returned over the same periods. His earlier work put it more bluntly: since 2006, private equity has reportedly delivered roughly S&P 500–like returns while collecting an estimated $400 billion-plus in fees. Other researchers, notably Steven Kaplan, argue the picture is more favorable for buyout funds depending on the benchmark and time window — so this isn’t settled. But “perhaps a small and shrinking edge” is a long way from the market-beating story being marketed.
Then there’s CalPERS, the largest public pension in the country and a useful real-world test. An investigation reported years of underperformance and limited transparency in its private holdings; as recently as the end of 2022, its private-equity program reportedly ranked last among the 30 largest public PE programs, trailing its own five-year benchmark by roughly four percentage points a year. CalPERS has since reported a sharp turnaround after revamping the strategy in 2022 — a private-equity return of about 17.8% in 2025 and a jump toward the top of its peer group — but that’s a short, recent window, self-reported, and measured off a low base. It’s exactly the kind of three-year sprint the industry likes to spotlight while the decade-long record stays muted.
Here’s the honest version. The one place private equity has a defensible role — a handful of elite managers, reached at scale, by institutions that can lock money away for a decade — is precisely the place a 401(k) saver can’t reach. If the largest, most sophisticated, lowest-fee institutional buyers have struggled to clearly beat the index after costs, the average 401(k) participant inherits the fees and the illiquidity without the access that might occasionally justify them. Opening the door is not the same as handing you the good seats.
What this means for you
You don’t need to panic, and you don’t need to become a private-markets expert. You need to do a few boring, powerful things:
- Read your target-date fund. If your plan adds a private sleeve, it may arrive inside the default option. Know what you own and what it costs — the expense ratio tells you a lot.
- Treat “access” as a claim, not a conclusion. Access to a high-fee, illiquid product is only valuable if the net, after-fee result actually beats the simple alternative. Lately, for most investors, it hasn’t.
- Keep the costs you control low. Fees are one of the few things in investing you can know in advance and largely control. A broadly diversified, low-cost portfolio remains a hard thing to beat — which is precisely why so much effort is going into selling you something more complicated.
None of this is a reason to abandon a sensible plan. It’s a reason to remember that when a product that was hard to sell to the wealthy suddenly becomes a “benefit” for everyone else, the question worth asking is who benefits most. For more on why the most heavily marketed opportunities are often the ones to approach slowly, see my earlier post, SpaceX, OpenAI, and Anthropic: What the IPO Headlines Miss.
My job is simple: keep what you can control — costs, diversification, and discipline — working for you, and tune out the rest.
Sources: U.S. Department of Labor proposed rule on alternative investments in participant-directed plans (March 2026) and August 2025 executive order; BlackRock, “Private Markets in Target Date Funds”; reporting on Empower’s private-asset partnerships and on the private-equity industry’s push into the roughly $14 trillion retirement market and its backlog of unsold portfolio companies; Ludovic Phalippou (University of Oxford), “An Inconvenient Fact: Private Equity Returns and the Billionaire Factory” (2020, SSRN), and 2025 research finding a public-market equivalent of approximately 0.99 for 2000–2019 buyout vintages; Steven Kaplan (University of Chicago) and related research finding a modest buyout premium under different benchmarks; CalPERS Private Equity Program performance reviews and reporting on the program’s performance and disclosure; Center for Economic and Policy Research and PE Stakeholder Project analyses of private-equity returns; Financial Times reporting on private-market vs. public-market performance.
Investment advisory services offered through SCM Investment Services, a Registered Investment Adviser. This material is for informational and educational purposes only and is not intended as investment, legal, or tax advice. All investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Any examples are for illustrative purposes only and do not represent any actual investment. Different assumptions or dates would produce different results. Please consult a qualified professional before making investment decisions. For SCM Investment Services’ full firm disclosures, please see our disclaimer page. Form ADV Part 2A is available upon request and at scminvesting.com.
