The Agony of The Equity: The Pains of Including Private Equity in 401(k) Plan Assets

by: Lawrence J. Zeller, MSPA, ASA, Enrolled Actuary

On August 7, 2025, Donald Trump issued an Executive Order titled “Democratizing Access to Alternative Assets for 401(k) Investors.” This order directed the Department of Labor (DOL) and the Securities Exchange Commission (SEC) to investigate ways to include alternative assets such as private equity, real estate, commodities, and crypto in 401(k) plans. 

While the DOL and SEC have begun taking measures to facilitate the inclusion of these “alternative” assets in 401(k) plans, there are many potential pitfalls that lead us to generally recommend against doing so.

We published two articles outlining similar concerns, “Don’t Tiptoe Around Crypto: Run The Other Way!” (May 9, 2023), that detailed many reasons why crypto is likely an inappropriate asset class for retirement plans. Similarly, “Real Estate as a Retirement Plan Asset: Likely a Bad Idea” (July 18, 2023), explained the myriad issues involved in including real estate in retirement plan assets.

But what about private equity? Private equity is the ownership of any company that is not traded publicly and therefore not available for purchase on stock exchanges.  Typically, an investment company called a “private equity firm” specializes in buying ownership of privately held businesses and then selling them at a profit.

Many of the same perils mentioned in our previous articles about real estate and crypto also apply to the inclusion of private equity in 401(k) plans:

Illiquidity

Private equity investments typically cannot be sold quickly or easily for cash. Private equity is more suitable for investors with long investment horizons, meaning they will not need to access the funds until many years in the future. Lack of liquidity means that assets in private equity funds are generally not available for rebalancing, loans, or withdrawals, which may lead to financial hardship.

Valuation

The market value of 401(k) plan assets must be determined at least annually. Private equity investments are difficult to value accurately, and obtaining a valuation can be costly and time consuming. Their value is often estimated using models and projections, which can lead to significant valuation errors.

High Fees and Costs

Private equity firms typically charge high fees, and certain transactions can be costly. Because these costs accumulate over time, this can lead to erosion of retirement savings, reducing the overall growth of retirement savings. 

Fiduciary Concerns

The plan sponsor, plan administrator, and Trustees are all fiduciaries, and therefore are obligated to act in the best interest of the participants. The inclusion of private equity funds as an available asset class may be challenged by participants, especially if these investments do not perform as well as more traditional investments. This can lead to personal financial liability on the part of the fiduciaries, including potential penalties or excise taxes if investing in any of the assets are deemed to be prohibited transactions.

Surety Bonds and Audits

Retirement plans must have a fiduciary bond equal to 10% of assets to cover plan losses from theft of assets or fraud. However, if the plan invests more than 10% of assets in non-qualifying assets (those that do not have a readily determinable market value), then either the bond must be increased to cover 10% of the qualifying assets plus 100% of the non-qualifying assets; or the plan must engage an independent accountant to conduct an audit of the plan assets, which can be costly and time-consuming.

Lack of Transparency

It is usually difficult to obtain and evaluate performance metrics for private equity investments. This makes it difficult for the trustee to determine the prudency of continuing to offer the private equity assets as an available investment option, and difficult for the typical 401(k) participant to make informed investment decisions.

Limited Access

Most private equity funds have high minimum investment requirements, and/or stringent investor qualification requirements. This may preclude some participants from being able to invest, and thus result in problems with passing the availability tests under the benefits, rights, and features requirements of the nondiscrimination rules.

Potential for Significant Losses

Private equity assets carry significant risk and may result in substantial losses. They are more vulnerable to business failures, sensitivity to general economic conditions, and market downturns than traditional stocks and bonds.

Plan Documents

Some plans may not permit investment in private equity. It’s possible the plan could be amended but it’s also possible such an amendment could take the plan out of pre-approved status.

Our Recommendation

You need to be cautious before including private equity among your 401(k) plan investment options. Perhaps private equity could be part of your overall investment strategy with the investment done with non-401(k) plan assets. In any case, we strongly encourage you to consult with a knowledgeable advisor before proceeding.

Combo Plan Design Considerations

A 401(k) plan with a new comparability profit sharing feature is a great way to contribute to retirement savings. But what if you want to contribute more than the legal limit available in a defined contribution plan? A combination of a 401(k) and a cash balance plan can be a potent tax-advantaged savings vehicle. But there are some considerations to be aware of.

If you have a 401(k) plan that uses a safe harbor match, you may want to consider changing it to a safe harbor non-elective contribution. In a combo plan, all NHCEs must generally receive a "gateway minimum" contribution of up to 7.5% of compensation. The safe harbor non-elective contribution counts towards this gateway minimum, but the safe harbor matching contribution does not. Therefore, a sponsor who wishes to minimize the total contribution for NHCEs may prefer the SHNEC.

It simplifies administration for both plans to have the same normal retirement age. In a 401(k) plan, the attainment of normal retirement age as defined in the plan entitles a participant to full vesting and usually to a distribution of their account. For a cash balance plan, however, the choice of normal retirement age can affect the amount that may be accrued in the plan and is therefore vital to the overall plan design. If the definition of normal retirement age in the 401(k) plan does not match with the normal retirement age desired in the cash balance plan, the 401(k) plan should be changed. Note that if the change would result in a later normal retirement date for any participants, any rights to vesting or distributions must be preserved.

Under the SECURE 2.0 Act, long-term part-time employees must be allowed to participate in their employer's 401(k) plan. Although they do not need to be covered by the profit sharing or match portions of the plan, some employers may choose to cover them anyway, to simplify plan administration. If your plan covers or excludes certain classes of employees, consider whether those exclusions should or shouldn't apply to the cash balance plan as well.

These are only some of the many considerations that should be taken into account when adopting a new cash balance plan. For more information, contact your plan consultant. Or come hear our own Corey Zeller, MSEA, CPC, speak about this topic at the ASPPA Annual Conference in Orlando, FL on Sunday, October 20!

Form Reform! You Must Conform! Changes to Form 5500 Series!

Background information

Each year, most employee benefit plans covered by ERISA must file a form with the Department of Labor and the IRS known as the Form 5500 Series, or the “Annual Return/Report of Employee Benefit Plan.” It’s called a “series” because there are several different versions of the form. Which version of the form a retirement plan must file depends on the number of participants, as well as the amount and types of assets in the plan. There are also various schedules and attachments that may be required with the form.

Form 5500 Series requires reports on the provisions, operation, and financial condition of the plan. It is generally due by the end of the seventh month following the end of each plan year (1).

For plan years beginning in 2023, several changes have been made to the information requested on Form 5500. This article focuses on a few of the changes that may impact our clients’ plans.

Determining the number of participants for small plan reporting

If a plan covers fewer than 100 participants (2), it’s considered a “small plan” and can file a less extensive version of Form 5500. Importantly, a “small plan” is not required to attach an audit of the plan assets. Audits can be time-consuming and costly, so employers generally wish to avoid them if possible.

In the past, all participants who met the plan’s eligibility requirement were counted, even if they elected not to participate or didn’t have an account balance. Starting in 2023, for defined contribution plans (including 401(k) plans) the determination is based on the number of participants who have an account balance at the beginning of the plan year. In other words, for purposes of determining whether a plan is required to have an audit, a participant does not count unless they have a balance in the plan at the beginning of the year.

New IRS Compliance Questions

Three new questions have been added to the form, which concern the following:

(a) Does the plan use “permissive aggregation rules” to satisfy coverage and nondiscrimination tests? In other words, does the plan pass these tests by using the contributions or benefits provided by more than one plan?

(b) This question applies only to 401(k) plans. It asks how the plan intends to satisfy nondiscrimination tests for deferrals and matching contributions. Specifically, does the plan use a “Safe Harbor” or “Qualified Automatic Contribution Arrangement?” If not, does the plan use the current year testing method or the prior year testing method?

(c) If the plan sponsor is an adopter of a pre-approved plan that received a favorable IRS Opinion Letter, the date and serial number of the Opinion Letter must be entered.

Multiple Employer Plans and Defined Contribution Groups

A new Schedule MEP has been developed to take the place of a previously required attachment for plans that are considered multiple employer plans (i.e., plans that are sponsored by more than one unrelated employer), including pooled employer plans (3).

For plans that are members of a Defined Contribution Group (DCG) (4), a single Form 5500 may be filed for the group. However, each plan must file a separate Schedule DCG. For any large plans which are part of the DCG, the auditor’s report for that plan must be attached to the Schedule DCG.

Expanded Financial Information

Plans that don’t meet the small plan filing exception must include Schedule H, Financial Information. New breakout categories have been added under “Administrative Expenses.” The new categories include audit fees, legal fees, salaries, valuation fees, and trustee fees and expenses.

Defined Benefit Plans

Defined benefit plans (including cash balance plans) must include Schedule SB, Actuarial Information, in the Form 5500 Series filing. Some of the questions on this form have changed. The changes are technical and have to do with the actuarial calculation of the minimum required contribution to the plan.

Whoever files your Form 5500 Series may need additional information to prepare the form. Don’t be surprised if you get a few new questions from your pension administrator this year!

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1. Form 5558 can be filed to extend the filing deadline by 2 1/2 months; i.e., from 7 months to 9½ months after the end of the plan year. Late filing penalties are imposed by both the IRS and DOL and can be extremely large.

2. Plans that cover between 80 and 120 participants on the first day of the plan year can elect to file the same form as the previous year. For example, a calendar year plan that had 90 participants on 1/1/2022 and 110 participants on 1/1/2023 can still file as a small employer in 2023.

3. Employers are unrelated if they are not members of a Controlled Group or Affiliated Service Group. The definition of these terms is complex, but it generally concerns common ownership among the employers (including ownership by certain relatives of the owners); whether the employer is a service organization; and whether the employers perform services for each other. Other employers may be related if they share employees or are members of a Management Function Group.

4. A Defined Contribution Group, sometimes referred to as a “Group of Plans,” consists of more than one employer with separate defined contribution plans, which have the same trustee, named fiduciary, plan administrator, plan year, and investment options.