Private equity may offer higher returns and diversification, but bringing it into retirement plans requires new rules and safeguards to protect savers.

Private equity has a compelling case for inclusion — but one that demands caution. Traditional retirement accounts still focus on public stocks and bonds, even as public markets represent a shrinking share of today’s economy. The number of publicly traded U.S. companies has nearly halved since the mid-1990s. Meanwhile, companies are staying private longer. As a result, retail investors are missing out on much of today’s economic growth, which is increasingly concentrated in private markets.

Private equity offers a way in, providing access to that private growth and the potential for higher returns. One of its core promises is the “illiquidity premium” – a higher potential return for agreeing to lock up your money for a longer period. Over the past 15 years, Preqin reports a 14.22% annualized net return for private equity, compared to 10.25% for the MSCI World Index.

Recent performance has softened. But still, private equity can play a meaningful role in retirement portfolios – not only as a potential return enhancer, but also as a diversification tool that gives exposure to parts of the economy otherwise out of reach.

The potential benefits come with risks that must be fully understood and responsibly managed. These investments are inherently complex, involving limited liquidity, higher fees, and valuation opaqueness. Without strong oversight and clear frameworks, this lack of transparency could undermine the very retirement security these plans are meant to ensure.

Protection over experimentation

If private equity is to play a role in retirement plans, plan sponsors, regulators, and fund managers must ensure it’s done with responsibility and transparency.

Plan sponsors — typically employers — have a fiduciary duty to act solely in the interest of plan participants. That means any inclusion of private equity must be supported by robust due diligence, clear communication, and ongoing oversight. The added complexity and costs demand nothing less.

For private equity managers, or General Partners (GPs), the opportunity is substantial. With over $12 trillion in defined contribution assets, 401(k) plans represent a new and relatively stable pool of long-term capital. As traditional institutional investors hit allocation ceilings, GPs are looking toward individual retirement accounts as their next major capital source.

Nonetheless, caution is warranted. Ensuring equal access to high-quality investment opportunities is critical to democratizing private markets. This will require GPs to embrace not only new fund structures, but a new mindset around disclosure and inclusivity.

Public pension funds illustrate this well. After a regulatory shift in 1979, many began allocating to private markets. Today, average exposure to private capital stands at over 13%, up from under 5% in 2000, according to the Equable Institute. These investments are overseen by experienced professionals with access to top-tier managers – resources most 401(k) savers don’t have. That’s why private equity in defined contribution plans must be delivered through pooled funds managed by professionals, with strong governance and professional oversight.

And finally, regulators must provide clear guidance and legal protection.

What must happen first

Any 401(k)-eligible private equity fund must offer clear liquidity protections. These could include maintaining buffers or containing partially liquid assets to ensure people can access their savings when needed. To strike a balance between opportunity and flexibility, private market allocations might reasonably be capped at around 15%, a threshold consistent with the SEC’s liquidity rule for mutual funds, which limits illiquid holdings to preserve redemption flexibility. Plan structures could also incorporate tools like liquidity lines to allow participants to liquidate under pre-determined conditions.

Sponsors also need legal clarity. Without it, fear of litigation could prevent innovation, even when it’s in participants’ best interest. Safe harbor provisions should be established to protect sponsors who follow well-defined, rigorous due diligence and oversight processes.

At the same time, private equity managers must meet a higher standard of transparency if they want access to retirement capital. Regulators should require clear, standardized disclosures on fees, investment performance, and valuation methodologies. Transparent reporting will empower investors, strengthen public trust in plan design, and significantly reduce fiduciary risks for sponsors and advisors. Fund-level reporting should be complemented by enhanced visibility into underlying holdings, particularly when a private equity fund is part of a publicly traded vehicle. In such cases, requiring audited financials for companies inside the fund would bring disclosure standards closer to public markets. There would be immense value in transparent private market data. Accessible data would enable rigorous academic research, improve market oversight, and support better policy decision-making.

Investor education is essential. Participants must understand the unique risks and opportunities associated with private equity. But education alone isn’t enough. Smart plan design should incorporate behavioral cues such as default allocations into diversified, professionally managed private equity sleeves, ensuring access while protecting participants from decision fatigue or missteps.

Private equity holds real potential for retirement savers. But without reform, we risk shifting unnecessary complexity and risk onto individuals. If private equity is coming to the 401(k), it must evolve to meet the moment.

The 401(k) is changing, and private equity must change, too.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.