Over half of all 401(k) assets are invested in Target Date Funds (TDFs), the default investment for most workers. Proposals to embed 15% allocations to private equity (PE) in these TDFs raise severe fiduciary, legal, and policy concerns.

Private equity’s opaque self-valuations, smoothed returns, and layered fees (≈600 bps) make it wholly unsuitable for retirement savers—particularly in default funds where workers have no choice. This is not innovation; it is regulatory arbitrage designed to funnel billions in hidden fees out of participant accounts.

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Key Findings

1. Fees 100x higher than index funds.

• PE all-in costs: ~6.0% annually (Phalippou 2020).
• Index funds: 0.03%–0.05%.
• A 15% sleeve adds 0.90% annual drag to the entire TDF—cutting lifetime wealth by 20–25%.

2. Fraudulent return smoothing.

• PE funds self-price and delay write-downs.
• Reported volatility and correlations are artificially low.
• Asset allocation models therefore over-allocate to PE, embedding mispriced risk in retirement glidepaths.

3. Liquidity mismatch.

• TDFs promise daily liquidity.
• PE funds lock up capital for 10+ years.
• Participants could face redemption delays, gates, or markdowns inconsistent with plan representations.

4. Weakest regulator wins.

• SEC and OCC rules demand transparency and independent valuation.
• Sponsors are instead turning to state-chartered CITs, where oversight is minimal and disclosure optional.
• This is textbook regulatory arbitrage.

5. Fiduciary red flags.

• ERISA requires prudence and reasonable fees.
• Supreme Court precedent (Tibble; Hughes) obligates ongoing monitoring and removal of high-cost options.
• Embedding PE in QDIAs (defaults) is especially egregious because workers never affirmatively opt in.

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Policy Recommendations

1. DOL & SEC Joint Guidance: Prohibit private equity allocations in QDIAs until independent valuation and full fee disclosure are mandatory.
2. State CIT Oversight: Close the loophole by requiring federal standards (SEC/OCC level) for any retirement-plan CIT.
3. Fee Disclosure Reform: Mandate reporting of all fees, including portfolio company monitoring and transaction charges.
4. Participant Protections: Require opt-in consent, with plain-English disclosures, before allocating participant funds to PE.

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Conclusion

Private equity in 401(k) Target Date Funds is not diversification—it is defaulting American workers into opaque, fee-rich products they cannot understand or escape. This violates fiduciary duty under ERISA and undermines retirement security. Regulators and policymakers should act now to prevent a massive transfer of wealth from retirement savers to private equity sponsors.