Alternative investments in 401(k) plans: What sponsors should know

Alternatives are one of the hottest topics in the market—and for good reason. New regulatory guidance has opened the doors for more 401(k) plans to consider them, while asset managers have been busy rolling out products designed for retirement plans, and making plenty of noise about them.

In our Alternatives 101 post, we covered the basics. Now we’re going to take a closer look at how the main types actually work, and what plan sponsors should consider before adding them to their investment menu.

Alternatives is a broad label, and the things underneath it don’t have much in common.

Private equity. These funds buy all or part of private companies, often using borrowed money to finance the purchase. Fund managers spend several years trying to increase the company’s value before selling it or taking it public. The potential payoff is higher returns, but investors’ money is tied up in the interim.

Private credit. Instead of buying companies, private credit funds lend money to businesses and earn interest on those loans. It’s a market that’s worth roughly $2 trillion. The draw for investors is steady income, often at higher rates than public bonds pay. The tradeoff is that these loans don’t trade anywhere, so you’re leaning on the fund manager’s assessment of whether borrowers can repay them. Similar to private equity, investors' capital is typically tied up for an extended period of time.

Private real estate and infrastructure. Here the fund owns physical things: apartment buildings, warehouses, data centers, sometimes toll roads or power plants. Income comes from rent and fees, which often rise with inflation. Values are set by periodic appraisals rather than by a market, so they tend to move slowly.

Secondaries. When an investor wants out of a private fund before it winds down, a secondaries fund buys their stake, sometimes at a discount. This gives the buyer access to existing investments rather than newly formed funds instead of waiting years for a new fund to put money to work.

Hedge fund strategies. These funds use a range of investment strategies, such as betting against certain stocks, following price trends across markets, and trading currencies or interest rates. Many now come packaged in ordinary funds (such as ETFs), so the strategy can be unusual even when the wrapper isn’t.

Commodities. These investments provide exposure to raw materials like oil, copper, and gold. They don’t produce earnings or pay dividends, so returns come from price movements alone. That makes them more of a cushion against inflation than an engine for growth.

Alternatives also differ widely in how easily money can come back out, and in a plan where people take loans and change jobs, that’s worth understanding up front.

• Liquid alternatives are investments that employees can generally buy or sell each business day, much like traditional mutual funds or ETFs. They typically include commodities and liquid hedge fund strategies. Asset managers are continuously looking for ways to package traditional private equity and private credit in more liquid vehicles.

• Illiquid funds invest in assets like private equity, credit, infrastructure, and real estate. Investors typically commit their money for several years, sometimes a decade or more, with limited opportunities to withdraw it early.
• Semi-liquid funds hold private investments but offer a withdrawal window on a schedule, often once a quarter, and usually cap how much can leave at one time. These funds offer more liquidity than traditional illiquid funds, but withdrawals are still subject to restrictions.

Many alternative investment products designed for retirement plans use semi-liquid funds, so it's worth understanding how withdrawal limits work. Say a fund allows investors to withdraw up to 5% of its total value each quarter, but requests add up to 10%. Depending on the fund's rules, investors may receive only half of what they requested and have to wait to withdraw the rest. These limits help protect investors who stay in the fund by reducing the need to sell assets at unfavorable prices. But they can create complications for participants who need access to their money sooner.

Two things, mostly. An executive order in 2025 asked federal regulators to make it easier for retirement plans to consider alternatives, and last March the Department of Labor followed with a proposed rule. Rather than blessing or banning anything, it lays out a process: Look closely at performance, fees, liquidity, valuation, benchmarking and complexity, decide whether each one works for your plan, and document how you got there. We wrote about that rule in more detail here. It drew close to 45,000 public comments before the window closed in June, which tells you how much dialogue there is around the topic.

A related case is also working its way through the Supreme Court, which should clarify how much legal exposure comes with offering this kind of option. So the direction is clearer than it was a year ago, though parts of it are still settling.

One practical note on how this tends to arrive. It usually isn’t a standalone fund on the menu. More often a slice of a target-date fund goes to private investments, so most participants would end up with some exposure without ever choosing it.

Before adding alternatives to a 401(k) menu, sponsors should look closely at five issues that matter more in a retirement plan than almost anywhere else: cost, liquidity, valuation, manager selection and complexity.

Cost is the most concrete: private options in plans often run over 1% a year, where our Core portfolio runs 0.05% at the 90% stock level. On a $50,000 balance, that’s roughly $500 a year against $25.

Liquidity carries more weight in a plan than it would elsewhere, because a plan can be patient while an individual often can’t. Around 6% of participants took a hardship withdrawal last year, roughly triple the pre-pandemic rate, and none of them were waiting on a quarterly window when they needed the money.

Valuation is subtler and easy to overlook. Without a daily market, values come from appraisals, so the figure on a statement is an informed estimate rather than a price. It also means these investments can look steadier than they really are, since an appraisal doesn’t reprice as quickly as a market does.

Then there’s the spread between managers. Among public stock funds, the gap between the best and worst performers tends to run around 1.5 percentage points. In private equity it has run well into double digits. That makes the decision less about the category than about who is actually running the money.

And complexity carries a cost of its own. An option nobody can explain in a benefits meeting or to their employee base is a hard one to offer well, and harder still to stand behind later.

As the 3(38) investment fiduciary for the plans we serve, we’re weighing all of that on every investment we review, and we’ve been following this category closely as it develops.

So far we’ve held off on private assets and crypto in the plans we manage. The fees are steep next to what retirement savers pay today, and valuations are harder to pin down without a daily market. Even with us handling selection and monitoring, sponsors would still carry a real communication burden. They’d need to understand what’s under the hood of these investments, explain the risks to employees, be clear about what the higher costs buy and what they give up, and warn that money may not always be available when someone wants it out. None of that makes them bad investments. It makes them a difficult fit for a menu that has to work for someone in their first job and someone retiring next year.

It’s also worth keeping perspective on what actually shapes retirement outcomes. Capturing the full employer match, letting auto-escalation raise savings over time, keeping costs low, and staying put when markets get bumpy tend to matter more than any single fund choice.

That could change. Regulation is still being written, product structures keep improving, and we’ll keep evaluating as they do. When our thinking shifts, you’ll hear it from us.