Private equity appeared to notch a huge victory earlier this month when the Labor Department issued guidance to clarify that 401(k) retirement plans could deploy their money into private equity funds, giving the industry access to a new $6.2 trillion market.

But there is still a long list of questions to be answered before that practice could potentially become the norm, according to industry experts. And concerns remain about just how beneficial the change would be for everyday investors saving for retirement.

"On the one hand, the 401(k) market is enormous, and by and large untapped by alternative investment managers," said Kevin Neubauer, a partner at Seward & Kissel, a law firm that represents several alternative investors. "But on the other hand, there are a number of operational hurdles that remain in place for the plan sponsors, such as the need to generate liquidity for the 401(k) participants."

Those hurdles mean that the industry likely won't be able to tap into a large percentage of the vast 401(k) market any time soon.

"It's going to take a few years," cautioned Wylie Fernyhough, a private equity analyst at PitchBook. "This is not giving investors wholesale access to private equity through their 401(k) portfolios."

Private equity advocates have long argued that retail investors should have the same opportunity as pension plans to tap into their investment funds because of the potential for outsized return. 

Labor Secretary Eugene Scalia's guidance comes three years after Partners Group and Pantheon asked the Labor Department to clarify whether 401(k)s and certain other retirement vehicles were allowed to invest in private capital funds. Previously the government hadn't specifically barred the practice, but the private equity industry was fearful of being sued by 401(k) plan participants and had yet to implement the strategy on a wide scale.

In issuing his new guidance, Scalia echoed that viewpoint, saying that opening up private equity funds would "help Americans saving for retirement gain access to alternative investments that often provide strong returns."

In practice, however, not everybody would be eligible to use their 401(k) savings this way. Under current law, a retail investor must have a net worth of at least $5 million in invest in a private equity fund, and the new language from the Labor Department doesn't change that.

"(Pension plans) have benefited from decades of returns that have outperformed the public markets," Neubauer said. "And those that are investors in defined contribution plans like 401(k)s have missed out on that in their retirement account."

But not everyone sees putting 401(k) dollars into private equity as such an opportunity. Some money managers have already disavowed the practice because they don't fully understand the intricacies of how private equity funds operate, a concern that could be even larger for retail investors.

"These are complex organizations," said Eileen Appelbaum, an economist at the Center for Economic and Policy Research who has testified before Congress about private equity industry practices. "They're completely opaque. There's a lack of transparency. And you can't get the regular information that an investor needs to be able to judge whether this is good for you or not."

"There's no way an ordinary person can understand this," she added.

Appelbaum also pointed to a growing body of research that questions whether private equity funds actually offer superior returns. A recent study from Oxford University concluded that, from 2006 to 2015, the average buyout fund failed to outperform public indexes.

Buyout heavyweights including Blackstone and KKR took issue with the analysis. But the report is the latest in a line of academic papers to question whether the industry's high fees are worthwhile for smaller investors, particularly the 401(k) market, which has traditionally favored lower-risk mutual funds that come with few or no fees.

"You'd have to have really high performance here to get any money," Applebaum said of 401(k) managers putting their capital into buyout funds. "They are returning money to investors, but the investors could have gotten just as much with much less risk, and in half the cases gotten more from investing in a good set of benchmark funds."

Money managers may also be increasingly wary of risk after the Supreme Court ruled earlier this year that retirement brokerages that pursue high-fee investments such as private equity and hedge funds could in some cases be held liable for breaching their fiduciary duty.

For buyout firms, the 401(k) market is now a vast potential source of new capital and fees. But for money managers and everyday investors, there are still plenty of worries about just how risky it might be to delve too deeply into private equity.

Promoting 401(k) access to a private equity fund, if accompanied by caveats about risk, could minimize the potential for poor outcomes for some investors. Otherwise, Appelbaum suggested the results could be catastrophic.

"It's going to be like ads you see for medicines," she said. "If you're listening carefully, one of the side effects is death."

Featured image via PM Images/Getty Images

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