With the help of regulators and lawmakers, 401(k) plans are trying to become more like the old-fashioned pension plans they replaced. The latest example involves private equity, an illiquid investment that is a staple in pensions and now wants to be in your 401(k).

While the addition of shares of privately held companies may boost 401(k) investors’ returns, there are reasons for concern, including high fees and a lack of transparency.

Earlier this month, the Labor Department issued guidance confirming that 401(k) plans can offer private equity in a diversified fund, such as a target-date fund. These portfolios shift from stocks to bonds as people age. Because they serve as default investments in many 401(k) plans that automatically enroll workers, they receive more than half of employees’ contributions.

For private-equity firms, some of which have been trying for a decade to break into the $7.9 trillion market for workplace retirement plans, this is a victory.

“401(k) plans have become a huge pool of long-term money,” said Fred Reish, an attorney who specializes in employee benefits. He said other illiquid investments, including hedge funds, may also use the guidance to market themselves as additions to target-date funds.

The Labor Department’s move follows a 2019 law that encourages 401(k) plans to replicate another feature of old-fashioned pensions by offering annuities, insurance contracts that turn savings into a monthly income for life.

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