Introducing a new menu item!

August 28, 2025

There’s an exciting new investment option about to be added to your retirement plan menu! Some of you may have noticed that private asset investments are going to be made available to workplace plans like 401(k)s, 403(b)s, etc. Before I get into the more nuanced discussion, I hope you might consider this question.

Considering private equity firms are having difficulty sourcing new investment commitments (fresh money) from their institutional clients like pension funds, why are private asset investments being made available to the general public now?

This soup du jour is being dished up now because it is good for someone, and that someone is probably not you. It's not that accessing private investments is inherently bad, but how you do it is important. Just like with public markets, allocating assets properly, minimizing fees, understanding the risk/return tradeoff, and proper benchmarking are all necessary.

Many of you are already private asset investors. If you own a home, land, or other real assets—things that don’t trade on an exchange—then you have a piece of this market. For most, a house or real assets represents an outsized portion of your wealth, so you’re set on that side of the menu. But the private investments being served up now come with a whole host of issues that may not be apparent to 401(k) savers.

Private investments, often billed as great for diversification, typically come with very high fees, opaque terms, illiquidity, and appraisal-based valuations. It’ll be interesting to see how these assets are packaged for mom-and-pop investors. Their supposed diversification is really a function of how returns are reported, not their underlying economic attributes. These assets trade infrequently, and their values are based on appraisal, which is far from the reality experienced with competitive price-setting markets. So, the lagged and appraisal-based values create artificially smoothed volatility that overlays with that of public markets in a neat “uncorrelated” fashion. This is accounting, not reality. It’s this faux diversification that is often used to justify the inclusion of these assets in a portfolio.

But maybe more problematic is how the inclusion of private assets in a portfolio affects benchmarking practices. How you measure something matters. If your measuring stick is flawed, you are getting a result that may deceive you. This is relevant to you—we’ll get there, I promise. Please read on. Richard Ennis, founder of EnnisKnupp and a pioneer of the investment consultant industry, pulls no punches in his efforts to expose the unsavory practices of the investment industry. Several years ago, he performed research on how institutions (pensions and endowments) unwittingly rely on benchmarks that may be fooling them into thinking their portfolios are outperforming when they are really just “chasing slow rabbits,” as he put it.¹ His follow-up paper, Lies, Damn Lies and Benchmarks: An Injunction for Trustees (Richard Ennis, 2023), summarizes the findings in readable terms and serves as a call to action.

The benchmarks in question are custom “policy” or “strategic” benchmarks meant for performance comparison with pension or endowment portfolios. Because private assets and other alternatives are compared with custom and uninvestable “indexes,” in cases where these assets are part of a larger portfolio, the total portfolio benchmark becomes a combination of investable public indexes and uninvestable private ones. The result is a total benchmark that is not a viable alternative (you can’t actually invest in it) and one that is frequently biased low. Think of a yardstick where the first 24 inches are neatly marked, but the last foot is missing its dash marks, and your dog chewed up the end. Now go measure a space you hope is at least 3 feet long. What did you learn?

Utilizing such a measuring stick allows the advisors and consultants of institutional portfolios to show outperformance where there is none. Benchmarked (measured) properly, the reported outperformance vanishes. And remember, seeking outperformance of “the market” is used to encourage investing in high-fee active strategies in the first place. If the performance of endowment and pension portfolios, packed with active managers, hedge funds, and private assets, is unlikely to beat a collection of public market indexes, it seems the industry decided the easier thing to do is just lower the bar! Much like you are swimming in a pool intentionally made 48 meters long. Your “50” meter lap times look awesome! You’re outperforming and might even be a world record holder.

OK, OK, here’s where you fit in. I would imagine it is only a matter of time for this type of performance benchmarking to creep into 401(k) plan reporting. With private investments arriving and the opportunity to show a mirage of outperformance relative to public markets, this will provide the industry another tool to persuade people into high-fee and ill-suited products. I hope I am wrong, but if you jump on the private asset bandwagon, and your 401(k) shows that you are outperforming a custom benchmark, remember you might be chasing a slow rabbit.

- John Bass

(1). Ennis, R. (2021). Cost, Performance, and Benchmark Bias of Public Pension Funds in the United States: An Unflattering Portrait. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3883370