Private equity in your 401(k) reports 10% volatility and 0.55 correlation to stocks. Neither number is real.
6 min read by Opthest
In March 2026 the US Department of Labor moved to open 401(k) plans to private equity and private credit, and BlackRock has said it plans to launch a target-date retirement fund carrying a 5-20% allocation to private markets, scaled down as the investor ages. Forty-one private credit “evergreen” funds — open-ended vehicles designed to let retail investors buy in and redeem periodically — launched in 2025 alone. The pitch, repeated across the industry, is that private markets give ordinary savers something public markets can’t: strong returns with a fraction of the volatility, and a correlation to stocks low enough to genuinely diversify a portfolio. The numbers behind that pitch are real numbers on real fund decks. They’re also, in a specific and measurable way, not telling you what they look like they’re telling you.
Why is “low volatility” the main selling point for private markets right now?
Because it’s the easiest thing to put in a slide, and because this year the pitch has an obvious audience: a 401(k) saver watching a public-market portfolio whose risk feels concentrated and jumpy (the kind of concentration this blog has already covered) is a receptive audience for “here’s an asset class that barely moves.” A June 2026 Journal of Financial Planning piece by Michael Kothakota walks through an actual sponsor deck: a private fund reporting 10% annualized volatility and 0.55 correlation with the S&P 500 — figures that, if taken at face value, make the fund look like a nearly ideal diversifier. That’s the number retail investors are shown. It’s not the number that describes the risk they’re actually taking.
Why would a reported number simply be wrong?
Because a stock trades every few seconds and reprices on every piece of news, while a private holding doesn’t trade at all most days. Its value on your statement comes from a periodic appraisal — quarterly, often with a lag — not from a market clearing price. When an appraiser sets a number today that only partially reflects what’s happened since the last appraisal, the resulting return series looks smoother than the underlying economics actually were: big moves get spread out and damped across several reporting periods instead of showing up where they happened. This is the well-documented mechanism of return smoothing. Endowus’s August 2026 explainer on the topic lays out the mechanics with a simple illustration: take a market-index-like series with 5.0% volatility and a market correlation of 1.00 by construction, run it through increasing degrees of smoothing, and a “strongly smoothed” version of the same underlying risk reports volatility of just 2.3% and correlation of 0.58 — a 60%+ haircut on volatility and a comparable one on correlation, produced entirely by the pricing mechanism, with zero change to the actual asset.
How big is the gap once you try to undo the smoothing?
Big enough to change the conclusion, not just the decimal point. Kothakota’s own adjustment on the real fund example — using a standard unsmoothing technique — pushes the reported 10% volatility up to roughly 15%, and the 0.55 correlation up to roughly 0.60. Separate industry analysis of private equity and venture capital return series (via PitchBook’s own analyst research) has put the gap even wider for those categories specifically: reported private-equity volatility understating realistic, unsmoothed volatility, with venture capital’s reported figures diverging from estimated true volatility by an even larger multiple, given how infrequently and subjectively early-stage holdings get repriced. Different funds, different degrees of lag, different magnitudes — but the direction is the same in every study that has looked at this: the less often something gets priced, the calmer and less correlated it looks, regardless of what it’s actually doing.
Doesn’t lower correlation still help diversification, even if the volatility number is off?
Only the part of the correlation that’s real. A genuinely low correlation — two assets that respond differently to the same macro shocks — is valuable and exactly the kind of relationship this blog has written about for any pair of assets. A correlation that reads low because the second asset simply hasn’t been repriced yet is not diversification; it’s a timing gap that closes the moment the appraisal catches up, often right when public markets are falling hardest and the illiquid holding gets marked down in a lump. That’s the scenario private-market skeptics point to: the diversification shows up on paper exactly when you don’t need it, and tends to evaporate — all at once, in a delayed markdown — exactly when you do.
Does this mean private equity is secretly a bad investment?
No — it means the risk shows up in a different place than the volatility number suggests. Illiquidity has a real, legitimate price: you’re giving up the ability to sell on a bad day, and in exchange investors have historically demanded an illiquidity premium. That’s a genuine trade-off some portfolios are built to accept. What smoothing does is launder that illiquidity risk into something that reads as lower risk on a statement, when it’s really just risk that’s been deferred and repackaged as calm. Comparing a smoothed private-market Sharpe ratio to a public-market Sharpe ratio side by side — the same risk-adjusted-return math covered here — isn’t comparing like with like; it’s comparing a measured number to a lagged one.
What does this mean for how you’d actually evaluate a private allocation?
That the question to ask isn’t “what’s the reported volatility,” it’s “how was this priced, and how often.” A fund marked monthly on actual transactions is a different animal from one marked quarterly off internal models, even if both show up as “private equity” on a factsheet. The same discipline that applies to recomputing correlation on rolling windows instead of trusting a textbook number applies here with more force: an input that is smoothed by construction needs to be unsmoothed, or at least heavily discounted, before it goes anywhere near a portfolio-level risk calculation — not taken at face value because it arrived with a fund’s logo on it.
What this is NOT
This isn’t an argument against private markets, and it isn’t a forecast of how the DOL rule or BlackRock’s target-date fund will perform — reasonable people disagree on whether expanding retail access to illiquid assets is good policy, and that’s a separate debate from the one this article is making. The verified point is narrower and purely mechanical: appraisal-based pricing structurally understates volatility and correlation versus what a continuously-traded version of the same risk would show, by amounts that published research puts at anywhere from roughly 50% to several multiples depending on the asset and study. Whether a private allocation belongs in your own portfolio, at what size, and at what price for its illiquidity, is a question only you — with corrected numbers, not reported ones — can answer.
A statement that says “10% volatility, 0.55 correlation” is reporting what the appraiser wrote down, not what the asset actually did. Knowing the difference between a measured number and a lagged one is the first step — what to do with that is a separate, personal decision this article can’t make for you.
Sources: Michael Kothakota, “The Smoothing Problem in Private-Market Due Diligence,” Journal of Financial Planning, June 2026; Endowus, “Smoothing in private markets: what it is, and what it means for your portfolio,” August 2026; rethinking65.com, “BlackRock Looks to Expand Private Markets to Retirement Plans”; NYU Stern, “The Labor Department’s Proposed 401(k) Rule Protects Private Equity, Not Retirees”; The Middle Market, “Blackstone, KKR, Blue Owl Reportedly Launch 401(k)-Compatible Private Credit Funds”.