Five reasons to rethink how your retirement is invested

A recent study from the Johns Hopkins Carey Business School questions the growing trend of workplace retirement plans investing in private equity, or PE funds—an investment class traditionally reserved for wealthy individuals and institutional investors. While private equity can offer high returns, the study suggests that these riskier investment vehicles may not align with the financial security and predictability most 401(k) participants expect.

Here are five key reasons to reconsider how your retirement is invested:

1. Private equity funds lack transparency 
Unlike publicly traded companies, which must regularly report financial performance, PE-backed firms operate with less transparency. This makes it harder for investors and financial advisors to assess risk, making these funds less predictable compared to traditional stocks and bonds.

2. Long investment timelines limit liquidity
Private equity investments typically take more than a decade to generate returns, which can be problematic for 401(k) participants who need access to their savings when they retire. Unlike stocks, which can be bought and sold easily, PE funds often require investors to wait years before they see meaningful returns—if any.

3. Higher fees reduce net returns
Private equity funds charge higher management and performance fees than traditional public market funds. While some PE investments deliver strong returns, many studies suggest that once fees are accounted for, these investments may underperform compared to publicly traded companies.

4. Increased risk from LBO funds
Many PE investments, particularly leveraged buyout funds, rely on significant debt to acquire and restructure companies. While this can lead to high returns in successful cases, it also increases financial risk. If the acquired companies struggle, investors could see lower returns—or even losses.

5. Varying strategies
While some state pension plans and institutional investors have committed billions to private equity, their investment strategies vary. The study raises concerns about how private equity consultants select investment opportunities, often basing decisions on future turnaround potential rather than proven performance.

“With the PE industry targeting a significant portion of the $12 trillion 401(k) retirement market, millions of American workers and their financial advisors must carefully evaluate the risks and complexities involved,” said Jeffrey Hooke, author of the study and adjunct instructor at the Johns Hopkins Carey Business School.

As the debate over the role of private equity in retirement savings continues, Hooke’s study urges retirement plan managers, investors, and policymakers to critically assess whether these complex investment structures align with the financial needs and expectations of the account holders Understanding the risks and rewards of private equity investments is crucial for anyone involved in finance, whether they are managing funds, advising clients, or studying investment strategies.