Private equity, crypto, alternative investments too complex for retirement

Odds are you’ve never heard of the late David Swensen, a finance legend who ran Yale University’s endowment fund.

Swensen was an investment pioneer who committed substantial sums of Yale’s money to private equity and alternative investments (such as hedge funds, timber and energy). Yale’s endowment earned a spectacular average annual return of 11.8% from 1999 to 2009. In sharp contrast, a portfolio of all publicly traded equities during the same period sported a negative rate of return, calculated Burton Malkiel, author of “A Random Walk Down Wall Street.”

Swensen also wrote a book aimed at helping individuals save for their retirement. In “Unconventional Success: A Fundamental Approach to Personal Investment,” Swensen argued against individuals trying to emulate the complicated approach with illiquid investments he honed at Yale. Instead, he pushed for individuals to embrace diversification, invest in broad-based index funds and keep fees low.

Swensen’s admonitions are well worth remembering now that President Donald Trump’s administration has made its first move: opening the retirement savings market to private equity, cryptocurrencies and alternative investments. Promoters of that trio are looking to improve their returns by gaining access to the $12 trillion-plus retirement savings market.

Of course, adding these investments to 401(k)s theoretically offers participants greater diversification and the potential for higher returns. Yet these expected benefits come with significant trade-offs. For instance, private equity and alternative investments are difficult to trade, while asset valuations can be mushy.

Recent research calls into question the narrative that private markets outperform public investments. Much of the outperformance comes from top performers’ returns only. Private equity doesn’t outperform public equity once fees come into play.

Fees are critical. Take target-date funds (also known as lifecycle funds), diversified portfolios popular with 401(k) participants. One idea out there is to add various alternative investments to the target-date fund mix. Fees on target-date mutual funds averaged 0.29% at the end of 2024, according to Morningstar. Most private funds charge more than 1% in management fees, plus incentive fees as high as 20%. Even if the standard fee formula adjusts for 401(k)s, it’s likely alternative investment fees will be higher than the typical equity index fund.