Private equity investments have, in defined benefit plans, historically served as an effective way to diversify risk and increase returns. Regulatory developments, especially President Trump’s recent Executive Order (EO) on “Democratizing Access to Alternative Assets for 401(k) Investors”, have pointed the way to how a PE investment program may be included in a defined contribution (DC) plan. In this article, we examine key considerations for DC plan fiduciaries seeking to incorporate private equity in their investment program.

Regulatory Background

In 2020, the Trump 1.0 Department of Labor (DOL) issued an Information Letter with respect to the inclusion of private equity investments in a “designated investment alternative” in a participant-directed defined contribution plan (e.g., a 401(k) plan), concluding that, as a general matter, “a plan fiduciary would not … violate [ERISA fiduciary rules] solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan.” At the same time, the DOL emphasized that private equity in DC plans raises “special issues,” including complex structures and strategies, longer time horizons, and typically higher and more complex fees. In 2021, the Biden DOL issued a Supplemental Statement that reiterated these concerns and stressed that fiduciaries must carefully evaluate whether a target date fund with a private equity sleeve provides appropriate diversification and net returns over time, is managed by capable and experienced professionals, limits its private equity exposure appropriately, and aligns with the plan’s specific characteristics and participant needs.

In 2025, President Trump issued an Executive Order, “Democratizing Access to Alternative Assets for 401(k) Investors”, directing the DOL to further support and clarify the use of alternative investments, including private equity, in DC plan fund menus. The EO instructs the DOL to rescind the Biden 2021 Supplemental Statement, clarify guidance by identifying criteria fiduciaries should use to balance higher expenses against goals of higher long-term net returns and broader diversification, and, where appropriate, propose well‑designed protections (“safe harbors”) for fiduciaries who use asset allocation funds that include alternative investments.

PE in a DC Plan: Four Fiduciary Fundamentals

With this background, when considering inclusion of a PE investment allocation in a participant-directed DC plan, we can identify four fiduciary fundamentals:

  • Structure: PE (at this point at least) should only be offered as part of an “asset allocation fund,” e.g., as a sleeve in a target date fund.
  • Expertise: As these are complicated investments, sponsor fiduciaries should generally get expert help in analyzing and selecting PE alternatives.
  • Fees: In considering possible legal challenges, fees are likely to be the primary target of plaintiffs’ lawyers.
  • Transparency and Adequate Disclosure: Not just technical compliance; fiduciaries must be confident that participants understand the terms (and, critically, the fees) associated with a plan PE investment.

Focus on Fees

Fees on PE investments can be particularly complex and are a critical consideration for fiduciaries.

While many of the structural concerns surrounding private equity investments, e.g., liquidity and valuation, may be managed when a DC PE investment is structured as a limited sleeve in a TDF, the issue of associated fees is clearly a DOL concern (highlighted in both the 2020 and 2021 guidance). And if history is any guide, PE fees may be the primary focus of plaintiffs’ lawyers looking for a new fiduciary-lawsuit revenue stream.

Clarity on Fee Structure Options

Private equity managers structure PE investments for DC plans in two main ways today:

  1. A Collective Investment Trust that invests into a pre-existing commingled fund (typically a mass market retail or ’40 Act Fund or private fund) with underlying investment into private equity investments, such as primary and secondary funds, that typically charge a management fee and carried interest.
  2. A Collective Investment Trust that invests directly into private equity investments, of which those direct investments (co-investments) typically do not charge a management fee or carried interest.

Two major concerns with the fee structure option 1 outlined above are:

  • Potential “double payment” for similar services: The plan may effectively be paying twice for private equity portfolio management (operating expenses of the CIT and again at the underlying private equity fund level) unless the structure is specifically designed to avoid this double payment.
  • Significantly higher underlying fees for the private equity investments: The underlying PE investments often charge a “2 and 20” cost structure (2% fee on assets under management plus 20% of profits as carried interest). These charges are generally higher than fees on even the most expensive traditional DC plan options (such as actively managed equity funds). While these fees may be fully justified by higher returns, proving that will likely require going through a costly discovery process.

Given these dynamics, plan fiduciaries should actively explore approaches that mitigate duplicative or excessively high fees and better align costs and value delivered.

Get Expert Help on Fees

Both 2020 and 2021 DOL guidance emphasize that a plan’s PE investments should be overseen by fiduciaries or investment professionals with “the capabilities, experience, and stability” to manage this sort of investment.

Obviously, the primary concern in analyzing this (or any) investment will be with fundamentals/returns. In that regard, however, a critical question will be fee structure and the underlying investment strategy pursued by the private equity manager.

So, in discussing a potential PE investment with your advisor, one of your first questions should be “How do the fees work? And is there a lower fee alternative?”

Disclosure – Formal Disclosure Requirements vs. What Participants Need to Know

In many cases, managers treat certain underlying investment expenses (such as the 2% AUM fee and 20% carried interest) as expenses within the fund rather than as plan-level investment management fees on the theory that they are paid by entities with no direct relationship to the plan. While those expenses are reflected in the net performance of the investments, that treatment can limit how clearly those costs appear in standard fee disclosures and participant materials. At the same time, both 2020 and 2021 DOL guidance also emphasize the importance of disclosure with respect to PE investments in a participant-directed DC plan. And whatever the limits on what is required under ERISA’s (formal) disclosure rules, ERISA’s fiduciary rules require that a participant have a basic understanding of the costs of the investment options available to them.

According to the Trump 1.0 DOL, the fiduciary must determine whether participants receive adequate information about the character and risks of the investment alternative to make an informed decision about investing or remaining invested in the fund. This obligation is especially important where the plan relies on ERISA section 404(c) limited fiduciary liability for participant-directed investments and/or designates such an option as a qualified default investment alternative (QDIA).

In practice …

In addition to the committee’s usual practice in reviewing a plan investment, what, practically, should a committee do when considering including a private equity “sleeve” in a target date fund allocation?

  • Get expert help. Private equity investments are often very complicated, and committee members may not even “know what they don’t know.” An expert can supply critical insight and support the prudence of the committee’s decision.
  • Focus on fees. While all terms of a PE transaction may be scrutinized, plaintiffs’ lawyers have most often focused on the issue of fees. And given that PE fee arrangements are different from (and generally more expensive than) the typical 401(k) investment (stock and bond funds), the committee will want to be able to demonstrate a clear understanding of what the plan and plan participants are paying.
  • Review and account for the other issues typical of PE investments. We have noted that PE investments may present challenges with respect to transparency and liquidity that require special consideration in participant-directed DC plans. The committee will want to be able to demonstrate that it considered and addressed these issues.
  • Make sure that participants are given robust disclosure. Whatever the legal minimum, participants investing in a TDF that includes a PE allocation should be given a clear, understandable explanation of the risks and the fees associated with this investment. That will provide an intuitive defense against challenges: “We told them how it works and what it costs.”
  • Practice strong fiduciary protocols. Document (typically in committee minutes) committee deliberations with respect to this decision and work with (and involve) committee counsel at all stages.

 

Despite broad agreement that private equity has the potential to improve the net risk‑adjusted returns on defined contribution participants’ retirement savings, the history of regulation and litigation in this area underscores that the way a private equity program is designed and implemented is critical. In participant‑directed DC plans in particular, fiduciaries must carefully consider the structure of the private equity exposure, ensure they or their delegates have the requisite expertise, closely monitor and negotiate fees, and provide transparent, comprehensive disclosures to participants.