There’s growing momentum — including regulatory support — to allow private equity (PE) investments inside 401(k) plans. Advocates say these private funds offer potential for higher returns and portfolio diversification. But before embracing this trend, it’s worth revisiting what Warren Buffett and the late Charlie Munger — arguably the greatest investors of our time — had to say about private equity.
Spoiler: They weren’t fans.
In his 2020 Berkshire Hathaway shareholder letter, Buffett criticized the industry’s lack of transparency:
“When a pension fund manager or a college endowment manager talks about ‘private equity,’ they may be talking about valuations that are highly subjective... They’re very dependent on what managers report, and that can be manipulated.”
— Warren Buffett, 2020 Source: Berkshire Hathaway Shareholder Letter
Munger, never one to mince words, took it further in a 2019 Daily Journal meeting:
“Private equity buys things, leverages them up, pays themselves a lot of fees and sells them to somebody else. It's a compensation scheme masquerading as an asset class.”
— Charlie Munger, 2019 Source: CNBC / Daily Journal Annual Meeting
Their critiques generally centered on three key concerns:
1. Opaque Valuations
Unlike public stocks with daily market prices, private equity assets are often valued using internal models, not actual market transactions. This “mark-to-model” approach can obscure risk and overstate returns.
2. High Fees
The traditional private equity fee model — “2 and 20” (2% management fees plus 20% of profits) — can significantly erode returns over time, particularly when compared to low-cost index funds that Buffett and Munger championed.
3. Illiquidity
Private equity investments typically involve multi-year lockups, making them highly illiquid. That’s a poor fit for the daily liquidity and portability requirements of most 401(k) participants.
What Changed?
In 2020, the Department of Labor issued guidance allowing PE exposure within professionally managed asset-allocation vehicles such as target date funds — provided certain disclosures and fiduciary standards are met. Since then, some asset managers have introduced funds with modest allocations to private equity inside 401(k) plans.
The idea is that broadening access to PE can help close the “return gap” between institutional investors and individuals. But with broader access comes broader risk — especially when it involves complex structures, opaque pricing, and steep fees.
The Bottom Line
Private equity may have a place in large institutional portfolios with expert oversight and deep due diligence capabilities. But the average 401(k) saver isn’t a pension CIO — and may be ill-served by exposure to an asset class that two of the greatest investors of all time warned against.
Buffett’s advice still rings true: “Never invest in a business you cannot understand.” That goes double for your retirement plan.