Now, however, the Trump administration is working on rules that would let retirement plans offer private-equity funds and other “alternative investments” to ordinary investors. And Wall Street firms, eyeing trillions of dollars in potential new business, are lobbying hard for it.

While it is likely to be a few years before such choices show up on many 401(k) menus, individual investors and financial advisers will be looking at the arguments for and against having at least part of a person’s portfolio in private equity, and whether the potentially higher returns will be worth the greater risk and higher fees.

Higher returns, but…

Industry boosters say everyday workers deserve access to private-equity funds’ return potential: Through the first quarter of 2025, data provider State Street said private-equity funds beat the S&P 500 by 2.5 percentage points for the past 20 years.

Advocates also say that private equity offers diversification via access to returns from thousands of companies with more than $100 million in revenue before they go public, something investors in only traditional assets can miss out on. By contrast, the public-company population in the U.S. has dropped by half since the 1990s to around 4,000.

Critics of private equity, though, offer several counterarguments. For one thing, they say, the stellar returns have faded in recent years. State Street’s data show that the 2.5 percentage point advantage over 20 years drops to only 0.4 point for the past 10 years and becomes a negative 2.5 points in the latest five years.

State Street said private-equity returns have beaten a weaker global stock index that some firms highlight by a wider margin of 4.6 points over the past 20 years, but this gap too has narrowed to just 0.4 point over the past five years.

“The trend is clear: In recent years, the excess return in the private market has been diminishing,” says Nan Zhang, global head of State Street’s private capital index.

The decade of 2010-20 “was a great period for private equity” because lower postcrisis interest rates were “a big driver of returns,” says Mike Brandmeyer, who leads external private-equity investing at Goldman Sachs Asset Management. As rates have risen since 2022, he adds, some fund managers have had to reprice asset values to reflect higher interest rates and narrower profit margins on investments.

At the same time, both U.S. and global public stock markets have soared to record levels since 2022, worsening the comparisons for private equity.

Lack of transparency

The returns argument is further undercut by the fact that returns are hard to measure because of a lack of reporting transparency. Unlike public stock funds whose returns are reported daily based on market moves, private-equity funds generally report their returns only quarterly, by metrics that differ from mutual funds, and even then mainly to their own investors.

One metric is called the “internal rate of return,” which reflects returns on chunks of investor money as they go in and out of the fund. There is also a “public market equivalent,” a shorthand score that compares a fund’s returns to public market performance over the same period.

Critics say the internal rate of return can be inflated by the use of “subscription credit lines,” which allow funds to borrow money against investors’ committed capital in order to smooth out the capital-call timing. The internal rate of return can also be inflated by taking profits on big winners early in a fund’s life. And critics say the public-market-equivalent figure, which isn’t widely available, can be inflated by reporting overly optimistic net asset values on unsold holdings.

Investors should also be aware that firms can present their funds’ performance in the best possible light as there is no standard benchmark by which to compare private-equity returns, critics say. Some firms point to a global stock index for comparison, while others use the S&P 500 index of the largest U.S. companies or the Russell 2000 index of small-capitalization companies.

At least a half-dozen databases track private-equity returns, sometimes using numbers provided by a fund’s investors or else obtained under the Freedom of Information Act from the public pensions and other entities that invest in private equity. Even this data can be inflated when sponsors or investors don’t include poorly performing funds.

Fee factor

Another issue to consider when comparing private-equity returns versus those of stock and bond funds is the level of fees.

Many traditional mutual-fund and exchange-traded fund offerings in 401(k)s have fees well under half a percent. In 2024, according to the Investment Company Institute, 401(k) plan participants who invested in stock mutual funds paid an average expense ratio of 0.26%.

Private equity is much more costly, with management fees of 1.25% to 2% annually and a 20% share of profits.

This fee disparity looms as BlackRock, the No. 1 global money manager with $12.5 trillion in assets, looks to expand beyond its low-fee index-fund franchise in 401(k)s into private assets. One-third of its revenues come from exchange traded funds that pay only 0.17% in average annual fees. BlackRock, which has made three recent acquisitions in private markets, says it wants to boost its revenues from higher-fee assets.

In a 401(k) promotional report this year, BlackRock said adding private equity and private credit could boost lifetime returns in target-date funds. The firm, which already offers active and passive target-date funds, cited return assumptions of 11% for private equity and 8% for public stocks.

BlackRock plans a new 401(k) line with a low-fee private-asset allocation, which could include private equity. It says it aims to give the new line competitive fees and transparency.

In a call with investors in July, BlackRock CEO Larry Fink suggested that the company’s recent acquisition of Preqin, a provider of data for private markets, could help it clear the future rules on putting private assets in 401(k)s.