Private Equity in Your 401(k): Why Fair Value Just Got More Important

For decades, private equity and venture capital investments were reserved for institutional investors and high-net-worth individuals. Pension funds, endowments, sovereign wealth funds, and family offices dominated the LP base. The minimum commitment was typically $1 million or more, lock-up periods stretched five to ten years, and the complexity of the asset class kept it firmly in the domain of sophisticated capital allocators.

That is changing. An executive order has opened the door for private equity and alternative investments to be included in 401(k) plans and other defined contribution retirement accounts. For the estimated 70 million Americans who participate in employer-sponsored retirement plans, this creates access to an asset class that has historically delivered strong returns relative to public markets.

For fund managers, this shift introduces an entirely new set of challenges -- and fair value reporting sits at the center of all of them.

The Transparency Gap

Public equity markets operate with a level of transparency that investors take for granted. Stock prices update in real time. Quarterly earnings reports follow standardized formats. Regulatory filings are publicly available. An investor in an S&P 500 index fund knows, at any moment, what their investment is worth.

Private equity operates differently. Portfolio companies do not publish earnings. There is no public market price. Valuations are determined quarterly (at best) using methodologies that involve significant judgment and estimation. The gap between when a portfolio company's value changes and when that change is reflected in the fund's NAV can be measured in months.

For institutional LPs, this gap is understood and accepted. They have the expertise to evaluate fund manager valuations, the patience to wait for quarterly reports, and the sophistication to distinguish between paper gains and realized returns.

Retirement plan participants are different. They check their 401(k) balances on mobile apps. They make allocation decisions based on daily NAVs. They expect the number on the screen to reflect reality. The transparency gap that institutional investors tolerate may erode trust among retail participants -- particularly during periods of market volatility when public and private valuations diverge.

The Valuation Challenge

The fundamental tension is this: 401(k) plans require daily pricing for participant transactions (contributions, withdrawals, transfers between funds), but private equity investments do not lend themselves to daily valuation.

This creates several practical challenges:

Stale pricing. If a PE fund updates its NAV quarterly, the values used for daily participant transactions are based on data that may be up to 90 days old. During periods of rapid market change, stale pricing can result in participants buying or selling at prices that do not reflect current value.

Liquidity mismatch. Private equity investments are illiquid by nature. 401(k) plans, however, must accommodate participant redemptions. If too many participants request transfers out of a PE allocation simultaneously, the fund may not be able to liquidate holdings to meet those requests without selling at a discount.

Complexity of valuation. As discussed in our companion piece on ASC 820 and IFRS 13, private company valuations involve significant judgment. Level 3 inputs -- unobservable estimates based on the fund manager's own assumptions -- drive most PE valuations. Bringing this complexity into a retail context raises the bar for accuracy, consistency, and explainability.

Fiduciary responsibility. Plan sponsors (employers) and their advisors have a fiduciary duty to act in participants' best interests. Offering PE allocations requires plan sponsors to evaluate the fund manager's valuation practices, fee structures, and liquidity provisions. Many plan sponsors lack the expertise to perform this diligence effectively.

What This Means for Fund Managers

For PE and VC fund managers, the entry of retirement capital into the asset class is both an opportunity and an obligation.

The opportunity is significant. Defined contribution retirement plans hold approximately $10 trillion in assets. Even a small allocation to alternatives represents a massive new source of capital. Managers who position themselves to serve this market gain access to stable, long-duration capital from a vast new investor base.

The obligation is equally significant. Retirement plan assets carry a level of regulatory oversight, transparency expectation, and fiduciary responsibility that exceeds what most PE managers have historically faced. The Department of Labor, which oversees retirement plan regulation, will scrutinize valuation practices, fee disclosures, and liquidity management with an intensity that goes beyond the SEC's current examination framework.

The Fund Manager Playbook: Five Steps to Readiness

Fund managers seeking to participate in the retirement plan market should take the following steps to ensure their valuation infrastructure meets the heightened requirements.

Step 1: Institutionalize Your Valuation Policy

If your valuation policy is a two-page document that was written during fund formation and has not been updated since, it is not sufficient for the retirement plan market.

An institutional-grade valuation policy should include:

Detailed methodology descriptions for each valuation approach used (market, income, asset-based), including the circumstances under which each is applied
Input sourcing protocols that specify where comparable data, market multiples, and other inputs are obtained
Adjustment frameworks that document how and when discounts (DLOM, minority, illiquidity) are applied, with ranges and decision criteria
Change management procedures that govern how and when valuation methodologies are updated
Escalation protocols for investments that experience significant events between regular valuation dates (material revenue changes, down rounds, management departures)

Step 2: Establish Independent Oversight

Retirement plan regulators will expect a level of independence in the valuation process that goes beyond what many emerging managers currently maintain. Specifically:

Valuation committee. Establish a formal committee that includes at least one member who is independent of the investment team. The committee should review and approve all valuations before they are reported.
Third-party validation. Engage an independent valuation firm to perform or review valuations for all significant positions at least annually. For retirement plan assets, consider semi-annual or quarterly independent reviews.
Audit readiness. Ensure that your valuation documentation is sufficient for your auditor to opine on fair value without qualification. Audit adjustments to valuations are a red flag for regulators.

Step 3: Upgrade Your Valuation Infrastructure

The technology and data infrastructure that supports quarterly NAV reporting for institutional LPs may not be adequate for the retirement plan market. Investments in the following areas are likely necessary:

Valuation management systems that centralize data collection, methodology application, and documentation in a single platform
Data feeds from portfolio companies that provide monthly (not quarterly) financial updates, enabling more frequent and accurate valuations
Market data subscriptions that provide current comparable company multiples, transaction data, and industry benchmarks
Scenario modeling tools that allow the valuation team to stress-test marks under various market conditions

Step 4: Enhance Reporting and Disclosure

Retirement plan participants and their plan sponsors will expect a level of reporting transparency that goes beyond typical LP communications. Fund managers should prepare:

Plain-language valuation summaries that explain how portfolio companies are valued without requiring readers to understand ASC 820 or DCF analysis
Performance attribution that breaks down returns into components (operating improvement, multiple expansion, leverage, market movement) so participants understand the sources of value creation
Risk disclosures that honestly communicate the illiquidity, valuation uncertainty, and return variability inherent in PE investments
Fee transparency that clearly presents management fees, carried interest, and any underlying fund expenses in a format consistent with retirement plan disclosure requirements

Step 5: Train Your Team

The transition from institutional-only to retail-accessible investing requires a cultural shift within fund management organizations. Investment professionals, operations teams, and investor relations staff should all understand:

The regulatory framework governing retirement plan investments (ERISA, DOL guidance)
The heightened fiduciary standards that apply to retirement plan assets
The importance of valuation discipline and consistency in a retail context
The reputational risk associated with valuation errors when retirement savers are affected

Why This Matters for Retirement Savers

The inclusion of PE and VC in retirement plans has the potential to improve long-term outcomes for millions of Americans. Private equity has historically generated returns that exceed public markets over long time horizons -- precisely the kind of time horizon that retirement savers have.

But those returns depend on accurate, consistent, and transparent valuation. If fund managers mark their portfolios aggressively, retirement savers may allocate based on inflated returns. If valuations are stale, participants may buy or sell at the wrong price. If liquidity provisions are inadequate, participants may find themselves unable to access their savings when they need them.

The stakes are fundamentally different when the capital comes from retirement accounts rather than institutional allocators. A pension fund that experiences a bad quarter adjusts its allocation. A retirement saver who loses confidence in their 401(k) may stop contributing entirely -- with consequences that compound over decades.

The Path Forward

Private equity in retirement plans is not a question of if but when and how. The regulatory framework is evolving, plan sponsors are evaluating options, and record-keepers are building the infrastructure to accommodate alternative investments.

Fund managers who invest in valuation infrastructure now will be positioned to capture this opportunity responsibly. Those who approach it with the same governance rigor they apply to institutional capital will build trust with plan sponsors, record-keepers, and ultimately the retirement savers whose financial futures depend on getting it right.

At Rubric Financial, we help fund managers build the financial reporting and valuation infrastructure required to meet institutional standards. Whether you are preparing for the retirement plan market or strengthening your existing valuation practices, our team provides the expertise and technology to ensure your fair value reporting is defensible, transparent, and aligned with the highest standards.

The retirement plan market represents a generational opportunity for the alternative investment industry. The managers who get valuation right will lead it.