Over the last few decades, the number of publicly traded companies has fallen considerably, while the share of assets inside privately held companies has skyrocketed. Since regulations have historically locked out all but a few investors from those companies, the broader public—and especially the bottom half of the income distribution—has entirely missed out on reaping returns from firms until they already mature. And, as SpaceX’s recent IPO shows, public demand for privately held companies is large.
That changed last year, when President Trump signed an executive order which effectively allows 401(k) accounts to hold private equity. As a result, a worker with no particular wealth, and no sophistication test to pass, can now own a piece of the fastest-growing part of the economy through the retirement account he already holds.
The change is nontrivial. A few years ago, I argued for FREOPP that the SEC’s accredited investor rules were a quiet paternalism with little behind it. The new rule does not repeal those rules. Instead, it goes around them by allowing fund fiduciaries to invest in private equity on behalf of ordinary workers. As I argue below, the main beneficiary is young workers starting out their careers.
The rule, and why it matters
Start with what the rule actually does. Nothing in federal law ever banned a 401(k) from holding private equity. What kept it out was litigation risk: under the Employee Retirement Income Security Act, a plan sponsor who added a private markets option could be sued over its fees and complexity, and Labor Department guidance from 2021 during the Biden Administration had warned sponsors off. Naturally, they stayed away. That matters because, whereas traditional pensions hold significant alternative assets, defined contribution plans hold almost none.
The recent executive order told the Department of Labor (DOL) to clear the path for defined contribution plans to invest in private equity, and it has. DOL rescinded the 2021 guidance and, in March 2026, proposed a six-factor “safe harbor.” This functions as a checklist on fees, liquidity, valuation, and the like that, once followed, shields a prudent sponsor from second-guessing in court. As a result, asset managers like BlackRock and Empower are already building target-date funds with a private markets sleeve.
The case begins with a fact that has quietly reshaped American capitalism: the public stock market is no longer where the growth is. The number of public companies has fallen by more than half since the late 1990s—to under 4,000—even as the private sector has swelled into the tens of millions of firms. Companies that once went public to finance their fast-growing years now stay private through them. The index fund investor, in other words, increasingly owns the mature and the slower growing firms, while the dynamic part of the economy is reserved for those allowed into private funds. That excludes less affluent investors, particularly young households, and it matters because the return on private equity is high relative to public markets and there is no capacity for younger workers to arbitrage it, even considering larger fees and the liquidity premium.
A reform for the young
The reform, above all else, helps young people. That’s because a marginally higher return, compounded over decades, yields substantially higher lifetime income. That follows exactly from work I helped lead at the Council of Economic Advisers, in which we found that a modest private equity allocation raised risk-adjusted returns for every age group, but the gains for the youngest were several times those near retirement.
Consider a worker auto-enrolled at 25 on a $40,000 salary, saving a tenth of it. The mean-variance model implies that opening her target date fund to private equity lifts her annual return by roughly a fifth of a percentage point; industry estimates run up to half a point. Neither sounds like much. Compounded over a 40-year career, the smaller figure is the same 2.5 percent gain in lifetime income the CEA reported, and the larger is more than double it.
In dollars, that is somewhere between $18,000 and $57,000 more at retirement. The identical edge handed to a worker who starts at 45 is worth less than half as much—she has half the runway left. This is the whole argument: a small advantage is trivial over a few years and decisive over a career, so it falls, for once, most heavily on the workers with the least behind them and the most time ahead.
There is a catch, however. Many young workers are not yet where the benefit can reach them. In the 2022 Survey of Consumer Finances, fewer than three in ten under-35 households in the bottom half of the income distribution own any retirement account at all; among those who do, the typical balance is $8,000. Among the richest tenth of young households, nearly all do.
Nor do lower-income workers reliably find their own way into the retirement system. Among workers in the bottom third of the income distribution who began with no retirement account, only about one-fifth had one three years later, half the rate of the top. Of those who did have one, more than one-quarter lost it. Even among those whose incomes rose, fewer than half gained an account. Put another way, left to opt-in on their own, the workers this reform is meant to help mostly will not. That is unsurprising because two-thirds of the lowest-income households tell surveyors they will take no financial risk at all. Nevertheless, the reform is essentially a free lunch for those who do want risk and will eventually have accounts.
The reform works because it is automatic
The rule works for ordinary workers because they typically get defaulted into the plans that would invest in private equity. DOL’s safe harbor is built for private markets delivered inside professionally managed, diversified target date funds. Sixty percent of participants sit in a single target-date fund, and the share of plans that automatically enroll new hires has climbed from one in ten in 2006 to roughly six in ten. Under the SECURE 2.0 Act, almost every newly created plan must now enroll its workers automatically, defaulting their savings into one of those funds. The worker who would never choose a buyout fund, and who says she wants no risk, is already being placed in a diversified portfolio she did not assemble. Adding a small private sleeve to it is simply how she comes to hold an asset class that once required a seven-figure net worth or very high income, and expands access to the bottom of the income distribution.
For decades, a stake in the most dynamic firms in the country was something you had to be rich to buy. That wall is now coming down, in the one account where a young worker has a foothold and at the one age when a small edge has time to become a large one. Keep it cheap, keep it prudent, and widen the door—and a generation will retire owning a real piece of the private economy. That is a reform worth getting right.