Private equity is gaining attention in everyday 401(k) plans after President Donald Trump’s executive order. Researchers debate whether the potential for higher returns outweighs the complexity of adding private investments. A new Morningstar study models semiliquid funds in 401(k)s, showing promising outcomes for retirement savers.

Morningstar’s research uses real 401(k) participant data to model retirement outcomes with private market investments. The results suggest that private market allocations may improve retirement outcomes modestly, with no scenario producing worse outcomes than the base case without private markets.

Private market investments can impact different investor groups differently. Those heavily reliant on Social Security may not see significant benefits, while prepared investors could benefit from private market allocations. Diversification benefits, rather than astronomical returns, may be the main advantage of private investments in retirement portfolios.

Asset managers are pushing to include private market investments in 401(k)s due to thinning institutional funding sources and cooling expectations for future private equity returns. Private market products are projected to overtake actively managed public strategies, generating significant revenue in the asset and wealth management industry within five years.

Private market vehicles in 401(k)s differ from traditional private equity funds, with a focus on maintaining a mix of liquid and illiquid assets. This balance, along with the cash-flow demands of 401(k) plans, leads to lower-risk, lower-return private holdings in defined contribution plans. Historical data for evergreen funds is limited, impacting forecasts for private market returns.

Read more at Yahoo Finance: Do ‘modest’ private market returns justify the added complexity?