The growing push to place private credit inside 401(k) plans deserves much more skepticism than it is currently receiving. While proponents frame private credit as a way to “democratize” institutional investing and enhance returns, the risks, structural conflicts, and fiduciary complications are substantial — particularly in participant-directed retirement plans.
The recent concerns raised by Representative Richard Neal (D-MA) are well-founded. His request for a GAO review specifically highlighted fund downgrades, redemption restrictions, valuation concerns, liquidity issues, and conflicts of interest surrounding private credit. Those are not abstract academic concerns. They go directly to the heart of ERISA prudence.
The first issue is liquidity. A daily-valued 401(k) plan structure was built around publicly traded securities that can generally be priced and sold quickly. Private credit is fundamentally different. Many of these loans are negotiated privately, lack transparent market pricing, and may become difficult to exit during periods of market stress. Recent reports of private credit vehicles restricting redemptions reinforce that concern. A retirement participant nearing retirement does not care that a portfolio theoretically produces an “illiquidity premium” if they cannot efficiently access their money during a downturn.
Second is valuation opacity. Public bonds and stocks have observable market prices. Private credit often relies on internal modeling and manager estimates. That creates an environment where pricing can lag reality. During stable markets, this can make returns appear smoother and less volatile than they truly are. But delayed pricing recognition is not the same thing as reduced risk. In many cases, it simply means the risk has not yet fully surfaced.
Third is participant comprehension. Even the GAO has repeatedly expressed concerns that average retirement savers struggle to understand basic fee disclosures and target-date fund structures. If participants already struggle to understand ordinary mutual fund fees and glide paths, expecting them to understand private lending structures, covenant risk, leverage, valuation methodology, lockups, or liquidity gates seems unrealistic.
It is in this third point that I think there is substantial litigation risk. Imagine if a private equity or private credit investment does not perform or, even worse, goes bankrupt. How fast do you think there will be litigation, with a current or former participant stating, "I didn't know"?
There is also a major mismatch between institutional investors and retail retirement participants. Large pension funds and endowments often invest in private credit with dedicated investment staffs, consultants, legal teams, and long investment horizons. A small business 401(k) committee meeting quarterly over lunch is not operating with those same resources. Yet the industry narrative increasingly implies that if Yale’s endowment can own private assets, a 401(k) participant should as well. That comparison ignores governance sophistication and operational scale.
Another concern is litigation exposure. Ironically, some proponents argue that new DOL safe harbor proposals are needed specifically because fiduciaries fear lawsuits over alternatives. But if a product category requires a special regulatory framework to shield fiduciaries from litigation, that alone should raise questions about whether the investment belongs in participant-directed retirement plans in the first place.
The incentives behind the push also deserve scrutiny. The movement toward private credit inside defined contribution plans is not emerging primarily from participant demand. It is largely being driven by large asset managers, private equity firms, insurance companies, and recordkeepers seeking access to the enormous pool of 401(k) assets. Public markets have become highly competitive and fee-compressed. Private markets remain an area where managers can still command materially higher fees and maintain greater pricing discretion. In many ways, the push resembles a search for new asset-gathering opportunities as traditional investment management margins decline.
That does not mean private credit is inherently inappropriate in every circumstance. Certain diversified institutional structures may ultimately prove reasonable inside carefully designed target-date or managed account frameworks with limited allocations and strong fiduciary oversight. But the current enthusiasm often feels driven more by industry economics than by demonstrated participant need.
The central ERISA question remains unchanged: Is the investment prudent for the actual participants in the actual plan? Not for sophisticated institutions. Not for theoretical long-term return models. For real employees with varying levels of financial literacy, varying retirement horizons, and an expectation that their retirement savings remain understandable, transparent, and reasonably accessible.
The Parting Glass
Retirement plans should be extremely cautious before embracing private credit. The burden of proof should rest with those advocating its inclusion — not with skeptical fiduciaries asking whether the additional complexity, liquidity risk, valuation uncertainty, and fee load genuinely improve participant outcomes.