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Private Equity in Your Retirement Plan? Who Really Wins

Written by Dennis Coon | Aug 12, 2025 4:01:05 PM

Wall Street has a long history of creating and promoting investment products that sound promising for the average investor — but when you peel back the layers, they tend to benefit the seller far more than the buyer. Private equity in 401(k)s and IRAs is shaping up to be the latest example of that pattern.

What Exactly Is Private Equity?

Put simply, private equity means investing in companies that aren’t traded on public stock exchanges. Instead of buying shares of Apple or Procter & Gamble, you’re putting your money into a private business — often through a fund that pools money from many investors. These funds use that money to buy companies, try to improve them, and (hopefully) sell them later for a profit.

Sounds exciting, right? Here’s the catch: because these companies aren’t publicly traded, there’s no daily market price. You often don’t know exactly what you own, how much it’s really worth, or whether you could sell it if you needed to.

Why This Can Backfire in a Retirement Account

Retirement accounts are meant to provide you with predictable, accessible income in your later years. That’s where private equity’s biggest weaknesses — lack of transparency and lack of liquidity — can turn into real problems.

Unlike stocks or mutual funds, private equity investments can be extremely illiquid. In some cases, you simply can’t sell them until the fund decides to distribute proceeds, which could be years away. That’s a big problem when you need cash for:

  • Required Minimum Distributions (RMDs): At age 73 (for most people today), you must take money out of your retirement accounts each year, whether you need it or not. If part of your account is tied up in private equity, you may be forced to sell other holdings at a bad time or risk penalties.
  • Rollovers: Moving money from a 401(k) to an IRA should be straightforward. Private equity can complicate or delay the process — and in some cases, you may have to leave the investment behind or sell it at a discount just to move forward.

  • Unexpected Cash Needs: Whether it’s a medical expense, a family emergency, or an opportunity you want to act on, private equity makes it harder (or impossible) to access your funds quickly.

The Tax Angle — And Why It’s Worse in Retirement Accounts

If you’re going to take on the extra risk of private equity, holding it in a retirement account is one of the least tax-efficient ways to do it. Here’s why:

  • Any gains from the investment, no matter how long you’ve held it, will be taxed as ordinary income when withdrawn from your IRA or 401(k) — often at a higher rate than long-term capital gains in a taxable account.
  • Losses in a retirement account can’t be used to offset gains elsewhere, meaning you lose one of the few potential benefits of taking on that risk in the first place.

If you can truly afford to take the risks private equity brings — and are willing to wait years for potential returns — it’s generally better suited to a taxable account, where gains may qualify for lower capital gains tax rates and losses can work in your favor.

Why This Goes Against My Investment Beliefs

My approach is built on decades of academic research: low-cost, diversified, transparent investments that you can understand, monitor, and adjust as needed. This evidence-based philosophy is designed to manage risk, control costs, and maintain liquidity — all of which are critical for retirees.

Private equity checks none of those boxes. It is expensive, opaque, and illiquid. Historically, it’s been marketed to “sophisticated” investors who can afford to take on more risk. Dropping it into retirement accounts for the average saver feels less like innovation and more like a new revenue stream for Wall Street.

Allowing private equity in 401(k) plans might be a big win for Wall Street, but it’s not necessarily a win for you. If you’re tempted by the promise of higher returns, take a step back and ask: Who really benefits here?

Your best defense is knowledge. Know what you own, why you own it, and how it fits your long-term plan. And remember — the investments most likely to help you retire with confidence aren’t the flashiest; they’re the ones that are built to work for you, not Wall Street.