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.

Are You Getting All of Your Tax Credits?

Understanding the tax credits available to newly established retirement plans

by: Brian Kane, CPC, QPA, QKA

If you have recently implemented a 401(k) or other qualified plan, you may be eligible for significant tax credits that can cover most, or even all, of your plan costs for the first few years of the plan. Plans already in existence may also be eligible for a credit if they are adding a new eligible automatic enrollment feature.

The Retirement Plan Startup Costs Tax Credit

This credit is intended to reimburse the employer for costs involved in implementing the plan, and for participant education.

To qualify, your business must have 100 or fewer employees who earned at least $5,000 in the prior year, and you cannot have sponsored a plan that covered substantially the same employees in the previous three years.

For employers with 50 or fewer employees, the credit covers 100% of your qualified costs. For employers that have between 51 and 100 employees, the credit covers 50% of your costs. Regardless of which percentage applies, the credit is capped at up to $5,000 per year, and you can claim it for the first three years the plan is in effect.

The dollar amount of the credit is calculated using the following formula:

$250 multiplied by the number of Non-Highly Compensated Employees (NHCEs) eligible to participate in the plan.

Therefore, if you have 20 or more eligible NHCEs, you will reach the maximum credit dollar amount of $5,000 (assuming you have at least that amount in qualified costs).

The Employer Contribution Credit

This credit provides a credit for matching or non-elective contributions the employer makes on behalf of their employees. The credit is up to $1,000 per employee earning less than $100,000. The credit is available over the first five years of the plan as follows:

• Years 1 & 2: 100% of the eligible employer contribution.

• Year 3: 75% of the eligible employer contribution.

• Year 4: 50% of the eligible employer contribution.

• Year 5: 25% of the eligible employer contribution.

Employers with 51 to 100 employees also qualify, but the credit percentage is reduced by 2 percentage points for every employee over 50.

The Automatic Enrollment Credit

An additional $500 per year tax credit is available for the first three years a new or existing plan includes an eligible automatic enrollment feature. Given that most new 401(k) and 403(b) plans starting after 2024 with 10 or more employees are required to include auto-enrollment, many new plan sponsors will automatically qualify for this credit, boosting the total potential startup credit.

New plans that are exempted from the requirement to include auto-enrollment include government, church, and SIMPLE 401(k) plans; plans sponsored by small businesses that normally employ 10 or fewer employees; and plans sponsored by businesses that have existed for less than three years. 

In summary, an eligible small business can now receive up to $5,500 per year in administrative and auto-enrollment credits for three years, plus a multi-year credit for employer contributions. For many, the cost of establishing a retirement plan is now essentially federally subsidized.

Taking the Credit: IRS Form 8881

The primary form used to claim the Small Employer Pension Plan Startup Costs Credit, the Employer Contributions Credit, and the Auto-Enrollment Credit is IRS Form 8881: Credit for Small Employer Pension Plan Startup Costs, Contributions, Auto-Enrollment, and Military Spouse Participation.

Your tax preparer must complete this form and file it as an attachment to your federal business income tax return (such as Form 1120, 1120-S, or 1065).

Necessary Information and Documentation

To accurately complete Form 8881, your tax preparer will need the following information and documentation:

• Eligible Employee Count: You must be able to verify that you had 100 or fewer employees who received at least $5,000 in compensation in the tax year preceding the first credit year.

• Plan Start Date: The date the retirement plan became effective.

• Qualified Startup Costs: Invoices or receipts detailing the ordinary and necessary expenses (setup fees, administrative costs, education expenses) incurred.

• Non-Highly Compensated Employees (NHCEs): The number of employees eligible to participate in the plan who are not Highly Compensated Employees (HCEs). This is used in the calculation of the maximum startup costs credit.

• Employer Contribution Amounts: Documentation of the qualifying employer contributions (matching or non-elective, excluding elective deferrals) made to the plan for the eligible employees (those making under the HCE compensation limit, currently $160,000 as indexed for the contributions credit).

• Auto-Enrollment Confirmation: Verification that the plan includes an Eligible Automatic Contribution Arrangement (EACA), if claiming that credit.

Please note that you cannot claim a deduction for the same expenses for which you claim the tax credit. You must choose between the credit and the deduction for those startup costs.

As always, please feel free to contact our office with any questions regarding these important tax credits.

It’s Almost Time for Plan Document Restatements!

by: Tara Giella, QPA, QKA, ERPA

While it may seem like your plan document was just restated, the next defined contribution restatement period is approaching and is expected to begin in 2026.  This mandatory process applies to 401(k), profit sharing, money purchase, and 403(b) plans and involves updating plan documents to reflect recent law changes. Restatements occur every six years as part of the IRS remedial amendment cycle.  

For 401(k), profit sharing, and money purchase plans, the upcoming restatement, known as Cycle 4, is expected to begin October 1, 2026 and end September 30, 2028.  For 403(b) plans, the restatement period, called Cycle 2, will end December 31, 2026.

The new restatement is based on the 2023 Cumulative List and will include legislation from the SECURE Act of 2019, the CARES Act, and the SECURE 2.0 Act of 2022.  While there are many changes, some of the key ones include:

• Catch-up contributions: 

• Starting in 2026, these contributions for participants aged 50 and older, whose 2025 FICA wages exceed $150,000 (indexed), must be made on a Roth basis.

• Beginning in 2025, the catch-up limit for participants who are ages 60-63 as of December 31st increased to $11,250 (indexed).

• Required Minimum Distributions (RMDs): The starting age for RMDs has increased from 70½ to 72 for  individuals born on or after July 1, 1949; to age 73 for those born on or after January 1, 1951; and to age 75 for those born on or after January 1, 1959.  

• Long-Term, Part-Time Employees: Plans can no longer exclude long-term, part-time employees who work at least 500 hours of service annually for two consecutive years from making elective deferrals.

• Hardship Distribution Rules: The next restatement will incorporate the updated hardship rules from the Bipartisan Budget Act of 2018. This includes any optional elections adopted on the prior Hardship Addendum as well as the elimination of the six month suspension on contributions.

• Involuntary Cashout Limit: The maximum amount a plan can involuntarily cash out for a terminated participant's account has increased from $5,000 to $7,000.

Our clients will be receiving correspondence from us in the upcoming months regarding the restatement process. Ensuring your plan document is restated is mandatory for maintaining the plan’s tax-qualified status.  We will work with plan sponsors to make this process as seamless as possible.

Plan Sponsor Responsibilities: An Essential Guide

by: Aaron Epstein, QKA

Plan Sponsors receive significant support in managing and administering their retirement plans from TPAs, recordkeepers, financial advisors and accountants. However, the Plan Sponsors still retain overall responsibility for the plan. 

Below is a list of common tasks that must be performed by Plan Sponsors:

Providing Census Data

Plan Sponsors must provide accurate employee census data to their TPA. This data enables the TPA to perform the required compliance and administrative work for the plan. Census data includes dates of birth, hire, termination and rehire, hours of service, gross compensation and pension plan contributions. The Plan Sponsor should also notify the TPA about any corporate changes that might impact the pension plan, such as a change in ownership, merger or acquisition, change in corporate name or Employer Identification Number (EIN), change in legal entity type or trustee of the plan.

Tracking Eligibility

Plan Sponsors should be aware of the eligibility requirements of their plan. As employees come close to reaching the date when they can enter the plan, the Plan Sponsor should assist them in enrolling in the plan. The sponsor should provide new participants with the Summary Plan Description (SPD), Enrollment Booklet and instructions for how to enroll in the plan.

In addition to the plan’s eligibility requirements, plan sponsors need to be familiar with the Long Term Part Time (LTPT) employee eligibility rules introduced by the SECURE Act of 2019 and modified by SECURE 2.0 (2022). A helpful article to remind Plan Sponsors about the intricacies of this law can be found here: LTPT. Penalties are assessed if eligible employees are not given the opportunity to participate in the plan due to the negligence of the plan sponsor.

Timely Deposit of Employee Contributions and Loan Repayments

Plan Sponsors have a responsibility to their participants to timely remit employee 401(k) deferrals and, if applicable, loan repayments on the earliest date that the deferrals/loan repayments can reasonably be segregated from the employer’s general assets.  

The earliest date for depositing contributions is based on individual facts and circumstances—meaning the funds must be remitted as soon as the employer can reasonably segregate them from its general assets.

In general, for plans with fewer than 100 participants, the DOL provides a 7-business-day safe harbor rule; if the deposit is made within this timeframe, it is deemed timely, even if the employer could have made the deposit sooner. For larger plans (100 participants or more), the determination of timeliness is based strictly on the individual employer’s operational facts and circumstances, which often requires deposit within a few business days.

Failure to remit these amounts in a timely fashion will result in penalties and the requirement to make up “lost earnings” plus interest on those lost earnings through the date of the late remittance.  

Plan sponsors should review their internal procedures to ensure that amounts withheld through payroll deduction are being remitted as soon as feasible and that there are checks and balances in place to avoid any oversights.

Approving Distributions

Funds from the 401(k) plan can only be distributed to participants if a distributable event has occurred. Plan sponsors should be familiar with the distributable events that are defined in the plan document. 

Plan sponsors are also responsible for ensuring that all eligible employees receive their Required Minimum Distribution (RMD). With the changes introduced by the SECURE 2.0 Act, plan sponsors must stay current with the updated RMD requirements.

Retaining Plan Documents

Although the plan’s TPA and other service providers may keep copies of the plan documents, the IRS states that it is the responsibility of the plan sponsor to retain the plan documents since the inception of the plan. Plan documents include the Basic Document, Adoption Agreement and Plan Amendments.

Maintaining Beneficiary Forms

It is the plan sponsor’s responsibility to maintain the records of the original Beneficiary Election forms. They should distribute the Beneficiary Election Form with the Summary Plan Description to new participants in the plan and to any participants that do not currently have a form on file. 

Managing the Forfeiture Account

Beginning in plan years on or after January 1, 2024, a plan must use forfeitures no later than 12 months after the close of the plan year in which the forfeiture occurred. For example, if a forfeiture occurs in a calendar year plan in 2024, the forfeiture would have to be used by 12/31/2025. Plan sponsors can use forfeitures to 1) reduce employer contributions 2) enhance employer contributions or 3) pay plan related administrative expenses. 

Plan sponsors should review their plan documents to confirm that it provides for the 3 allowable options regarding how forfeitures may be used.

ERISA Fidelity Bond Coverage

Under Department of Labor (DOL) regulations, retirement plans need to maintain an ERISA Fidelity Bond. A fidelity bond protects the assets in the plan from misuse or misappropriation by the plan fiduciaries. Plan fiduciaries include the plan trustees and any person who has control over the management of the plan and its assets.

The required bond must be a minimum of 10% of the total plan assets' value. However, if the plan includes any non-qualifying assets, the bond amount must instead cover 100% of the value of those specific assets. 

The bond is also subject to a maximum, which is generally $500,000 for plans without employer securities and $1,000,000 for plans that hold employer securities.

Providing Annual Notices to Participants

The Department of Labor (DOL) requires that employers provide certain information to eligible plan participants and beneficiaries. These regulations help ensure that participants and beneficiaries have the information they need to make informed retirement planning decisions.

These Annual Notices include, but are not limited to:

• ERISA Section 404(a)(5) Fee Disclosure: Requires plan administrators to disclose detailed investment-related information to participants and beneficiaries at least annually. This includes anticipated expenses and fees charged to a participant’s account.

• Automatic Enrollment Notice: For plans with an automatic enrollment feature, the notice details the plan’s automatic enrollment process and participant rights.

• Safe Harbor Notice: For safe harbor plans, the notice provides details of the safe harbor feature.

• Qualified Default Investment Alternative Notice (QDIA): The QDIA Notice describes the plan’s default investment and the participants’ rights to direct their investments.

• Summary Annual Report (SAR): The SAR is a concise document summarizing the key financial details of the plan, including assets, expenses, contributions, and investment performance.

These annual notices are often prepared and distributed by the plan’s TPAs and recordkeepers. Check with your service providers to make sure that all the annual notice requirements are taken care of.