As retirement plan menus evolve beyond traditional stocks and index funds, everyday savers are encountering a wider range of alternative investments. Former NBC “Today” show financial editor Jean Chatzky warns that while expanded 401(k) choices may sound appealing, they do not automatically lead to better retirement savings results.
Among the most notable additions entering the defined-contribution landscape is private equity — an investment strategy where capital is pooled to purchase, restructure, or directly invest in private companies that do not trade on public stock exchanges.
While alternative assets have historically been reserved for high-net-worth individuals and institutional endowments, Chatzky cautions that high management fees, strict liquidity constraints, and long lock-up periods can work against typical workers relying on steady compounding for retirement.
“Wall Street will always innovate,” Chatzky wrote on HerMoney. “And when it sees an opportunity to expand access to a product — especially one that has traditionally been limited to high-net-worth investors — it will. But more options don’t automatically mean better outcomes.”
“For many investors, low-cost diversified index funds remain a powerful, proven foundation,” she continued. “For others, a small allocation to alternatives may make sense, but only as part of a well-thought-out plan.”
Chatzky emphasizes private equity fees in 401(k)s
The private equity industry has traditionally run on a “2 and 20” structure, taking a 2% management fee alongside a 20% cut of any investment gains, according to Chatzky.
“If you’ve been able to buy into private equity as an individual investor, it’s way more than your average index fund ETFs, where we’ve gotten down to fractions of a percentage point,” wrote Chatzky.
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Chatzky asked Liz Miller (CFP, CFA and former chair of the CFP Board) about private equity fees.
“These have always been very expensive. I have always felt that as the years go by, these structures all tend to provide lower and lower returns,” she said.
“Investors who were in these funds were comfortable with that because, over time, they were getting much higher returns than public market returns,” Miller added.
“Like any product, as we build it out and it becomes a bigger and bigger slice of the market, I’m not sure we’re going to see those kinds of returns.”
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Another consideration: Traditional vs. Roth 401(k)s
In addition to private equity in 401(k) accounts, there is one other consideration I want to consider before getting back to some questions about private equity in retirement plans.
Over many years of reporting on personal finance and retirement savings, I have repeatedly seen evidence that, regardless of what their 401(k) plans hold, it’s very important for investors to take a step back and consider tax implications and which options are best for each individual.
Specifically, a very important decision here is whether a worker should invest in a traditional 401(k) plan or a Roth option.
Fidelity Investments offers a clear explanation of the difference.
“With a traditional account, your contributions are generally pre-tax (401(k),” Fidelity wrote. “A Roth account is the opposite: Contributions are made with money that has already been taxed (your contributions don’t reduce your taxable income), and you generally don’t have to pay taxes when you withdraw the money in retirement.”
“This means you need to choose between paying taxes now or in retirement,” Fidelity explained, suggesting that one needs to decide whether they believe taxes are currently lower than they will be in the future, or the other way around.
Vetted Prop Firms CPA Dat Ngo has a different take on this decision.
“One thing I always walk clients through is the idea that the Roth vs.traditional decision isn’t just about where you expect tax rates to go — it’s about your income trajectory right now,” Ngo told me. “If you’re in a lower tax bracket today and expect meaningful income growth over the next decade, paying taxes upfront with a Roth contribution is often the smarter long-term move.”
“That said, for someone already in a higher bracket who anticipates a lower income in retirement, the traditional IRA’s deduction can provide real, immediate relief,” he added. “There’s no universal right answer, which is exactly why people should run the numbers for their specific situation rather than defaulting to a rule of thumb.”
A certified public accountant and personal finance specialist, Ngo draws on his experience and expertise, which includes tax planning as a major focus.
Chatzky suggests 5 questions on private equity in 401(k)s
There are five major questions investors should ask themselves before adding private equity to their portfolios, according to Chatzky.
- Do I fully understand how this investment works?
- How will the fees impact my long-term compounding?
- What am I giving up in liquidity?
- Does this align with my time horizon and retirement income plan?
- Am I investing because it fits my strategy, or because it sounds sophisticated?
- (Source: HerMoney)
Regarding private equity in 401(k) plans, Chatzky emphasizes a key point.
“The most important takeaway isn’t whether private equity is ‘good’ or ‘bad,'” she wrote. “It’s that you never feel pressured to adopt a new investment simply because it’s being marketed more broadly.”
This article is for informational purposes only and should not be construed as individualized tax or investment advice.
Related: Dave Ramsey has straight answer on whether your 401(k) is enough
