401(k)s Not the Place for Private Equity, Says Johns Hopkins Study

While private equity firms are increasingly looking to penetrate the defined contribution plan market—seen as a largely untapped pool of money—new research from the Johns Hopkins Carey Business School questions whether private equity—specifically leveraged buyout funds—is suitable for workplace retirement plans.

The report argued that private equity funds—which pool money from a few exclusive investors to purchase privately held companies with “little to no public reporting”—may not be a good fit for the relative safety that workers expect from 401(k) plans that typically invest in public companies whose performance is routinely reported and measured.

In June 2020, under the first administration of President Donald Trump, the Department of Labor issued guidance allowing the inclusion of certain private equity investments in professionally managed funds like target-date funds. The administration of former President Joe Biden did not intervene on this issue from 2021 through 2024, and with Trump back in office, many believe private equity-related regulations could loosen even further.

Challenges of Private Equity

Jeffrey Hooke, author of the study and an adjunct professor at the Johns Hopkins Carey Business School, says because of the high fees often associated with private equity funds, their failure to “frequently beat the stock market” and their lack of liquidity, they are not suitable for many defined contribution plans.

Hooke also found in the study that private equity firms have a long shelf life, with some big-name firms taking more than 12 years to sell their portfolio companies.

According to the report, the median number of years it took a typical fund to invest 60% of its commitments was 2.5 years. For those funds that had sold, for cash, more than 90% of their respective total value to paid in, the youngest fund was vintage 2012—or 12 years old. Only 20 funds out of the 59 that Hooke’s team analyzed achieved the 90% threshold. Multiple funds were eight to 12 years old, yet not meeting the 90% threshold.

Hooke’s article, to be published in the Spring 2025 issue of the Journal of Alternative Investments, studied the returns of 59 prominent funds with collective commitments of $498 billion, using Preqin data reflecting PE data lags that were available as of April 2024.

The study focused on 19 of the 25 largest U.S. private equity-leveraged buyout families, ranked by LBO assets under management.

“If a private equity fund is 10 or 12 years old, that means, [for example], my son might be in fifth grade, and the fund isn’t liquidated until he’s out of college,” Hooke says. “That’s a long period of time for the private equity fund to be collecting fees and not even selling the stuff.”

Others in the retirement industry have argued that the long-term nature of retirement plan investment is a good place to hold long-term investments like those in private-equity offerings.

Hooke’s report also questioned the criteria used by limited partners in selecting new funds for investment and the private equity consultants used by institutional investors to choose the “riskier” investment vehicles. Hooke found that private equity consultants often invest with little regard for prior performance and tolerate opaque information from private equity managers.

“I thought that it was a little surprising that limited partners invest in some of these managers that don’t [perform] very well,” he says. “They just want to close their eyes and send them a check for the new fund, even though the last one was lousy.”

Hooke found in his study that investors in a private equity fund, known as limited partners, committed to new funds without definitive knowledge of the cash return of the immediately prior fund and faced a long runway before the predecessor fund sold 90% of its investments.

When conducting his research, Hooke says he asked some limited partners why they invested in funds with weaker performance, despite some of them being big-name brands like Apollo [Global Management] or KKR [& Co.], and LPs responded that they “wanted to give [the funds] another chance.”

Fiduciary Considerations

Bradley Fay, a partner in law firm Seward and Kissel LLP’s ERISA and employee benefits and executive compensation group, says it is more common for a private equity investment to be offered as a component in a larger pool, such as a target-date fund. For example, Lockheed Martin Investment Management Co. began offering a private equity co-investment sleeve in the TDFs of the company’s DC plans last year.

Fay says this was made possible by the DOL’s 2020 guidance, and part of the reasoning was that the investment would still offer some liquidity, because the private equity component is only a small portion of the overall investment.

However, liquidity issues would arise if a company were offering a private equity investment that locks up a fund participant’s money for 10 years, Fay explains. If that employee leaves the company before that amount of time and wants to move 401(k) plan assets, it could create a liquidity concern. Fay says investment committees need to consider the liquidity needs of the plan when selecting investments.

In addition, Fay says plan sponsors should consider any disclosures that need to be provided to participants about a private equity investment option and how they are going to provide that information. With TDFs that have a private equity sleeve, however, Fay says disclosures may not be as relevant, because it is not common to provide information on each product within a TDF investment.

“Reporting is definitely something to consider, but I’m not sure it’s a reason that you couldn’t have private assets in the 401(k) plan,” Fay says. “But it is one complication, and you certainly need to find a fund or manager comfortable providing that report.”

Fay adds that it is important that plan sponsors make sure a plan’s investment policy statement appropriately reflects how they will address private assets.

Overall, Fay says participants are expressing increased demand for access to private markets in 401(k) plans, largely due to the opportunity for more diversification in their investments.

“There’s been an overall reduction in the number of publicly listed companies as a percentage of total companies, and the indexes a lot of people follow have become fairly concentrated,” Fay says. “So this is an opportunity for diversification, … but with every investment option in a plan, sponsors [need to] consider the appropriateness of the fees.”