But it's unclear what will happen if a plan sponsor wants to switch to a new target date fund with different private equity offerings, or if employees change jobs and want to transfer their 401(k)s, or simply need to access their cash, as some are doing now.
Batt also points out that investors would have to earn at least 300 basis points more than the stock market to justify the illiquidity risk of their private equity exposure.
Finally, the Labor Department is putting the responsibility of vetting the private equity funds squarely on the shoulders of 401(k) plan sponsors. I spoke to several investment management professionals who stressed that many plan sponsors don't have the sophistication or background in alternatives to fully understand the complicated structures of many private equity funds.
They pointed out the difficulties posed by the lack of performance consistency even among funds offered by the same providers and how hard it can be to value the underlying assets in funds invested in private companies. They also emphasized how private equity funds are more lightly regulated than mutual funds so don't have to be as transparent about their holdings.
Whatever the consequences for people’s 401(k)s, investor advocates say it's only a matter of time before other alternative investments like hedge funds line up to tap retirement accounts. And they have no doubt that private equity will eventually make a play for retirement assets directly, not just those in target date funds. That could be the riskiest proposition of all.
This opinion piece was provided by Bloomberg News.