In a recent comment letter, we take issue with a Department of Labor proposal (the “Proposal”) to create a safe harbor that would facilitate large-scale retail investment in private markets through 401(k) plans. While much of the DOL’s analysis was careful and thoughtful, the Proposal’s assumptions do not hold up when the realities of private market investing and 401(k) intermediation are seriously reckoned with.

The Upside Is Limited

The policy underlying the push to open private markets to retail investors rests on two claims: that private markets deliver superior risk-adjusted returns and private assets improve diversification. The Proposal takes both as given, citing isolated studies. But a careful look at high-quality studies shows that both claims are disputed and unresolved at best.

The timing also raises serious concerns. Private equity faces a multi-year shortfall in distributions, a global backlog of portfolio companies, depressed exits, and interest rates that have strained the business model, and traditional institutional investors have responded by scaling back their allocations to the asset class. As recently as two years ago the private equity industry was telling regulators that the success of private markets depended on serving institutional investors exclusively. That reversal reflects no change in the underlying facts, only a change in sponsors’ fortunes.

Even if we assume  that institutional investors outperform public markets in their private equity investments, retail investors cannot expect to replicate those returns. Private markets cannot be indexed, and wide variation in returns is the norm. Outcomes depend on manager selection, access, bargaining power, timing, and negotiated terms—precisely where retail capital is systematically disadvantaged. Meanwhile one feature is entirely certain: higher fees. Compounded across a lifetime against near-zero index fees, even a modest fee drag will result in an enormous transfer from savers to asset managers.

The Downside Is Underexamined

The Proposal says little about the risks, and there are three in particular worth emphasizing.

First, retail investors have a well-documented history of poor decision-making even in the world’s most transparent and liquid markets. They chase past performance, ignore fees, respond to marketing rather than fundamentals, and select –high-price options when identical, cheaper ones are available. If decades of regulatory effort to make public markets investor-friendly have not fixed this, there is little basis for optimism about private markets, which are far more opaque, illiquid, complex, and heterogeneous.

Second, the likely vehicle for delivering 401(k) access to private investments compounds the problem. The approach  most attractive to private asset managers will be to embed a percentage of private assets inside 401(k) target date funds—vehicles that hold an assortment of assets and serve as the default for tens of millions of participants. That structure makes costs and risks nearly invisible. Participants who cannot identify high fees when plainly disclosed will certainly not detect them inside target date funds or attribute underperformance to the private assets in those funds.

Third, opening private markets to retail investors would erode the very features that make private  markets valuable. Private equity has long created value at the portfolio company level through active ownership with a long-term horizon and freedom from the constraints on public companies. Each would be undermined by retail capital: Funds will grow larger and less responsive, retail liquidity needs will drag on any illiquidity premium in private markets, and more regulation and litigation will almost certainly follow a flood of retail capital. The result is likely to be a market that has private equity’s high fees and opacity while delivering no more than a public index.

The Limits of Plan Fiduciaries

For these reasons, the magnitude of any net benefit that retail investors could theoretically receive from private markets is much smaller than the Proposal acknowledges, even in the best-case scenario. Critically, that scenario requires that retail investors rely on intermediaries to adequately represent their interests in the unforgiving private markets. The Proposal assumes plan fiduciaries will be able to play this role. We are much less optimistic.

The historical record gives little reason for confidence. It has been orthodoxy among financial economists for nearly 50 years that retail investors are best served by low-cost index funds. For decades after the introduction of index funds, however, plan fiduciaries funneled savers into high-fee active products that systematically underperformed, often offering only expensive share classes in cases where an identical, cheaper one existed. An extensive literature shows a long history of 401(k) fiduciaries making conflicted decisions that failed to optimize the retirement outcomes of plan beneficiaries.

This pattern broke in the late 2000s, thanks in significant part to ERISA fiduciary litigation and more prescriptive oversight. The Proposal treats the resulting narrowing of plan menus toward low-cost index funds as a harm litigation caused, but it should be framed as one of the great welfare gains in the history of American retirement saving. The Department of Labor rightly notes that the costs of litigation are real and, as in every area of the law, that at least some litigation has been meritless. But the Proposal’s focus on only the cost side is not a balanced accounting.

We are not convinced that the processes set forth in the safe harbor will resolve these concerns. One important reason: Under the terms of the Proposal, a fiduciary lacking the skills to analyze private market investments is directed to seek assistance from a “qualified investment advice fiduciary.” The Proposal assumes that such market participants will be able to offer independent assessments, but the harsh reality is that no unconflicted advice will realistically be available in these circumstances.

While private asset managers and their affiliates obviously have the greatest expertise, it goes without saying that they have a vested interest in moving more 401(k) money into the system. Retail asset managers might appear neutral, but after two decades of fee compression due to the rise of passive products, a large-scale return to actively-managed products lacking objective benchmarks would provide a massive windfall. Similarly, while there are scores of private market consultants, their continued existence relies on clients allocating to private markets. All of these market players thus face profound conflicts, and because performance data and benchmarks are easily manipulable, it won’t be difficult for an adviser to assemble a record satisfying the safe harbor factors.

This conflict can be readily illustrated. BlackRock, the largest of the retail asset managers, has a white paper claiming that private-market exposure would allow 401(k) participants to retire with up to 15 percent more assets, based on certain assumptions buried in the endnotes. These assumptions include 11 percent annual private-equity returns against 8 percent for public equities, and 10 percent private credit returns against 5 percent for public fixed income, sustained for 40 years. These assumptions are unreasonable: When private credit beats public equities by 200 basis points a year for four decades, these projections are clearly inconsistent with basic principles of corporate finance.

Defined Benefit Plans Are No Precedent

Proponents of private assets in 401(k) plans often analogize defined contribution plans to defined benefit plans. Defined benefit plans also have retirement savers as their ultimate beneficiaries and have been investing in private markets at scale for decades, so why shouldn’t defined contribution plans do the same thing? The DOL invokes this logic throughout the Proposal when it treats the former’s performance as illustrative of the latter.

But these two forms of intermediation differ in fundamental ways. At the level of incentives, defined benefit sponsors bear investment outcomes on their own balance sheets and face political scrutiny and legislative oversight. 401(k) fiduciaries, on the other hand, share neither the upside nor the downside of participants’ investments and face little labor-market or reputational discipline, since employees do not choose jobs based on menu construction. Those incentive differences matter more in private market investments, where performance is harder to measure, terms are more complex, valuations are discretionary, and outcomes turn on access and sophistication.

Structural differences cut the same way. Defined benefit plans persist indefinitely and have predictable payouts, giving them time horizons ideally suited to illiquid assets. Defined contribution plans face job-change rollovers, hardship withdrawals, and liquidity needs that are hard to predict and that spike during downturns, creating fire-sale risk precisely when private assets are hardest to value and sell. Intermediation is also far more complete in a defined benefit plan, where the fiduciary makes every allocation decision and thereby shields beneficiaries from return chasing, panic selling, and naïve diversification. And because defined benefit plans rarely transact at interim valuations, they can wait for cash-flow realizations, while defined contribution participants will unavoidably need to transact at estimated valuations sometimes—exposing them to dilution, first-mover advantage, and rushes to redeem when interim marks turn out to be wrong.

Retail Returns

In public markets, intermediation quality hardly matters. This is the crowning achievement of the last two decades of 401(k) practice: A mediocre fiduciary and an excellent one produce nearly the same outcome, because the product does the work and requires zero monitoring. Private markets offer no such backstop. There is no index, no passive vehicle delivering the asset class return at low cost, and enormous dispersion between top and bottom managers. Retail investors will earn exactly what their intermediary is capable of earning for them, in an environment where private market returns will likely be continuing a downward trajectory.

How good will the DOL’s proposed intermediation approach be? When we see fiduciaries that internalize none of the outcome, that face negligible monitoring, that are advised by parties who profit from saying “yes,” that leave allocation and redemption decisions to beneficiaries, and that are insulated from the litigation that has been the primary source of discipline on their conduct, we see little reason to be optimistic.

William W. Clayton is a professor at BYU Law School, and Elisabeth de Fontenay is a professor at Duke University School of Law. This post is based on their recent comment letter, “Private Assets in Defined Contribution Plans: A Comment Letter on the 2026 DOL Proposal,” available here.