Alternatives in 401(k)s

"Alternatives in 401(k)s" is the question of whether workplace retirement plans can, and should, offer alternative investments such as private equity, private credit, hedge funds, and real estate alongside the mutual funds and target-date funds that fill most plan menus. For most of the 401(k) system's history the answer in practice has been no. Plan sponsors, who are fiduciaries under the Employee Retirement Income Security Act (ERISA), have generally kept alternatives off their menus because these assets are illiquid, hard to value daily, expensive, and difficult to defend if a participant later sues over fees or losses.

This is an area in motion rather than a settled rule, and that is the most important thing to understand about it. The federal government has moved to make alternatives easier to include, but the framework is still being written, so what is true today may change.

The friction has always been fiduciary risk. ERISA requires the people who choose a plan's investment options to act prudently and in participants' interest, and they can be sued if they do not. Alternatives are a hard fit for a system built around daily valuation and daily liquidity: their prices come from periodic appraisals, they can lock up capital, and their fees dwarf a low-cost index fund's. Rather than defend those features in court, most sponsors simply left alternatives out. Where alternatives do reach 401(k) participants, it has typically been indirect, a modest allocation to private assets buried inside a professionally managed target-date fund or a collective investment trust, where the manager handles the liquidity and valuation problems and the participant never selects the alternative directly.

The policy picture began shifting in 2025. Executive Order 14330, "Democratizing Access to Alternative Assets for 401(k) Investors," signed August 7, 2025, directed the Department of Labor and other regulators to clear a path for including alternatives in participant-directed plans. In response, the Department of Labor issued a proposed rule on March 30, 2026, creating a process-based safe harbor: a plan fiduciary who follows a set of prudence factors when adding an "asset allocation fund" that includes alternatives would be presumed to have met the duty of prudence. As of 2026 this is a proposal with a public comment period, not a final regulation, and the final rule, if adopted, could differ from the proposal. Do not read the safe harbor as settled law.

Litigation is part of the backdrop too. On January 16, 2026, the U.S. Supreme Court agreed to hear Anderson v. Intel Corporation Investment Policy Committee, an ERISA case that grew out of Intel's custom target-date funds holding private equity and hedge funds. The narrow legal question is about the pleading standard for a duty-of-prudence claim, but the case is closely watched because its outcome bears on how much litigation exposure fiduciaries face for offering alternatives. Between the proposed rule and pending litigation, the ground rules for alternatives in 401(k)s are genuinely unsettled, and a participant is far more likely to encounter alternatives through a target-date fund than as a menu choice they pick themselves.

A plan sponsor and its fiduciaries build the menu of investment options employees can choose from. To include alternatives, they must decide the option is prudent and defensible, which is where the liquidity, valuation, and fee concerns bite. The emerging path is not to list a private-equity fund as a standalone choice, but to let a managed, diversified option hold a small alternative allocation internally.

A hypothetical illustration of the indirect route. Suppose a plan's target-date fund holds 90 percent in public stocks and bonds and allocates 5 percent to private equity and 5 percent to private real estate, managed by the fund provider. A participant who selects that target-date fund gets a 10 percent alternatives exposure blended into a mostly public portfolio, with the manager responsible for handling the illiquid pieces. The participant never buys a private fund directly, and the daily share price the plan reports still updates as usual, because the alternative sliver is small and professionally valued.

Pros

• Could give ordinary retirement savers access to return streams and diversification long reserved for large institutions.
• Delivered through professionally managed funds, the illiquidity and valuation problems are handled by the manager rather than the individual.
• Longer investment horizons in retirement accounts are, in principle, a reasonable match for illiquid, long-lived assets.

Cons

• Alternatives carry much higher fees than the index options that dominate good 401(k) menus, and fees are the most reliable predictor of long-run results.
• Valuation opacity and illiquidity sit awkwardly inside an account built for daily pricing and access.
• The rules are unsettled, so plans and participants face uncertainty about what is permitted and how it will be treated.
• Complexity makes it harder for participants to understand what they own and what it costs.