Private Equity Groups Want a Piece of Your 401(k)

Key Points

• Private equity groups are keen on the idea of getting into the $12 trillion 401(k) market.

• Investing in a PEG can potentially lead to high returns, but it also carries a higher level of risk than you may be comfortable with.

• Conducting an annual review of your 401(k) plan and portfolio will let you know if PEGs have been added to your menu of options.

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Private equity groups (PEGs) are having a moment. First, President Donald Trump's "Big Beautiful Bill" (now law) included a provision allowing them (through the companies they buy) to deduct more of the interest they pay. And now, it appears that PE giants, whose executives are among the president's biggest supporters, are inching closer to a goal they've long worked toward: getting a piece of the $12 trillion 401(k) retirement market.

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What is a private equity group?

A PEG is a firm that invests in private companies or purchases public companies and employs strategies to make them more profitable. The new companies are leveraged by debt, which helps explain why PEGs are so excited to receive the new, larger interest deduction gifted to them in Trump's megabill. Once they've restructured a company (usually within three to five years), the PEG sells the asset at a profit.

Why would private equity groups be interested in your 401(k)?

PEGs are lobbying President Trump to issue an executive order allowing retirement plans to add private equity investments to their menu of investment options. Entrance into the 401(k) market provides access to the money that PEGs need to buy up more companies, make changes, and sell those companies for a profit.

The ability to invest a portion of your retirement funds in a PEG may sound like a sure bet. However, a recent study from the Johns Hopkins Carey Business School suggests that investing in a PEG may carry the promise of high returns, but it's also fraught with risk and may not align with the predictability and financial security you seek. The study advises American workers and their financial advisors to carefully evaluate the risks and complexities involved before diving in.

A good time to review your 401(k)

You should review your 401(k) plan and portfolio at least once a year. A review will not only inform you of any new offerings (like PEGs), but it also allows you to assess the health of your account, identify any weaknesses, and make changes as needed.

If you've never conducted a review before (or aren't sure you've been doing it right), here's what a thorough review should include:

• Revisit your contribution amount: The goal is to maximize your contributions, while still maintaining a comfortable debt-to-income (DTI) ratio for your ongoing living expenses (experts suggest 36% or less). Ensure you're saving at least as much as your employer will match. If you're not yet maxing out your contributions, consider signing up for automatic yearly increases of as little as 1%.
• Check performance: As you review your portfolio, check the growth of your investments. Compare how your portfolio is doing to how the overall market is performing. Checking major indexes like the Dow Jones Industrial Average and S&P 500 makes it easy. If your portfolio is underperforming or no longer aligns with your retirement goals, now is a good time to consider adjusting your investments.
• Become familiar with expense ratios: Fees are easy to overlook, but they can affect long-term profits. Review the expense ratios in your plan. If you're uncomfortable with how high they are, speak with your plan administrator about ways to lower them.
• Ensure your beneficiaries are up-to-date: If it's been a while since you checked who you've named as your 401(k) beneficiary (or beneficiaries), make sure the person or people listed are still who you want the money to go to if you die.
• Conduct a gut check: Decide how comfortable you are with the current market. Are you in a good spot, or would you feel better if your portfolio included higher or lower-risk investments? Periodically checking in allows you to decide if your investments are still aligned with your risk tolerance.

Whether or not the president signs an executive order allowing PEGs to get into the 401(k) market, it's ultimately up to you to know where your investments stand and to decide if investing in a PEG is right for you.

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