EOs and 401Ks (8/15/2025)
In honor of National Financial Awareness Day, I’m sending this week’s newsletter a day early 😊 and using it to spotlight a major (and potentially risky) change coming to one of the most important investment accounts many of you will ever have: your 401(k).
Let me start with this: I’m a big fan of making investing more accessible.
Over the past decade, we’ve seen incredible progress in democratizing finance: lower-cost index funds, commission-free trading, apps that help you invest with just a few dollars (special shoutout to other SoFi & Stash alumni! 🙌🏻) Giving more people access to investing tools that used to be reserved for the ultra-wealthy has, overall, been a good thing. 👏🏻
But I also believe that not all investments should be available to everyone. Sometimes, not having access to something has actually been protecting you.
That’s the case with private equity. It's sophisticated, it’s opaque, often illiquid and expensive. These features aren’t inherently bad, but they are a terrible fit for someone without substantial investing experience.
Which brings us to what happened last week….
President Trump signed an executive order that opens the door for private equity to slide into your 401(k). As regulatory barriers come down, private equity firms can tap directly into the retirement plans of everyday people who are saving out of each paycheck, trying to build long-term security.
The problem? Most workers don’t actively choose their 401(k) investments. They get automatically enrolled. And when that happens, their contributions typically go into target date funds - those “set it and forget it” investments based on your estimated retirement year.
If private equity gets bundled into those target date funds, millions of people could end up with exposure to one of the least transparent, most expensive asset classes around without even realizing it.
🚨 Why should you care?
Because this change is a major win for private equity firms, not end investors. The massive pool of retirement funds, now valued in the trillions, is a new capital source for fund managers. Opening 401(k) plans to private equity means access to hundreds of billions in fresh assets
🧘 But won’t adding private equity reduce risk?
lol, nah. That’s an illusion. PE returns look smoother on paper because they’re valued quarterly, not daily like stocks. But when adjusted apples-to-apples, private equity is actually more volatile than the S&P 500. (Smoothing helps the spreadsheet, not your savings.)
💸 Let’s talk about those fees…
Most target date funds today charge less than 0.10% in annual fees. Add in a 20% allocation to private equity (which can carry a 1.75%+ fee), and suddenly the total cost could rise 4x to 7x. That might not sound like much in a single year, but over a few decades? It’s huge. How huge? Like could reduce your investment earnings by almost 50% after 30 years huge! 🤯
Here’s what makes it even worse:
If just 10% of the $4 trillion already sitting in target date funds shifts into private equity, that’s $400 billion headed into higher-fee funds. This isn’t money “going to work” for you, it’s money going from your future retirement to firms like Blackrock, KKR, Goldman Sachs, etc. 🤑
And because this could happen via default investment settings, most people won’t even know it’s happening. Private equity can have a place in a portfolio, but that place is for sophisticated, experienced, high-net-worth investors. It has no business being the automatic investment option for teachers, firefighters, or nurses saving for retirement.
🔥 Not totally fired up yet? Don’t worry, I’m not done.
The icing on the cake of this Trojan horse of an executive order? The EO directs the Department of Labor to reexamine its guidance on fiduciary duties under ERISA as it relates to alternative assets in 401(k) plans. The DOL has already amended guidance that cautioned fiduciaries (plan sponsors) against offering private equity in 401(k) plans and is expected to issue new guidance offering “safe harbor” protections for sponsors who include private assets. Translation: Trump has directed the DOL to abandon guidance protecting investors and instead make it easier for employers and plan administrators to add these investment options without fear of litigation.
Happy Financial Awareness Day to you & yours! 🫠🤡
