Beware, Wall Street is working to get you to invest your 401(k) in “alternatives.” Money managers are in a race to allow participants in retirement plans to invest in private equity and debt projects.

Until now, these products were generally only available to “accredited investors” as defined by the Securities and Exchange Commission as individuals with a net worth (excluding primary residence) of more than $1million and incomes of $200,000-$300,000 for the prior two years.

Wall Street’s pitch is to “democratize” the investment landscape by making these alternatives available to retail investors — so everyone can “earn high returns at a low risk.”

Sounds fair, right? But a deeper dive might be in order.

While products vary, in general private market offerings have three big pitfalls.

Illiquidity

You can buy anytime you want — but getting out of them isn’t so easy. The idea is that by encouraging investors to stay put for years, managers can make illiquid investments without being forced to sell during inevitable downturns.

Products often allow investors to sell quarterly or annually — but only if the manager has funds to do so. If not, you’re stuck.

And if lots of investors want out at the same time, you may be stuck for a long time.

Valuations

Unlike publicly traded stocks and bonds that are continually priced by the market, private market products are not.

The money manager typically sets the value of underlying holdings infrequently. While this can appear to seem like low volatility, it really isn’t.

The fact that the fund isn’t valued daily isn’t a big deal while you hold it, it can be a really big deal when you want to sell it.

If the funds have adequate cash, they will buy back your funds at “net asset value” — which is what the manager says it is.

But what if lots of investors want out at the same time and the managers can’t raise enough cash because they’re holding assets that are illiquid or distressed?

Fees

Most private market products have substantially higher fees than those in the highly competitive mutual fund market where costs have continued to drop.

Those higher fees might be justified for a truly superior money manager, but it’s been my experience that most of the “alternatives” available with much smaller minimums to retail investors aren’t really the cream of the crop.

Supposedly, accredited investors are sophisticated enough to understand these risks and carefully evaluate private market products.

But what about retail investors, especially workers trying to protect and grow their retirement nest eggs?

Participants in 401(k)s are used to being able to choose among a variety of investment choices and able to move funds within the options anytime they wish.

Mutual fund prices are determined shortly after the close of business every day, with underlying securities priced daily in traded public markets.

Interestingly, recent studies from Schwab indicate that only 29% of workers are confident in making investment decisions in their 401(k). Are these folks who should be thinking about putting their retirement money into complex and illiquid “alternatives”?

Democratization — or yet another way for Wall Street to push complex and higher fee products to more investors? Maybe Luke’s plea is spot on as 401(k) participants truly may not know what they do.