Ritholtz: Private Equity In Retirement Accounts? No Way

The Trump administration has set in motion a plan that would effectively allow 401(k) plans for American workers to invest alongside buyout firms. The Labor Department said in June that the move will bolster investment options for consumers and let them access an asset class that can provide better earnings than stocks and bonds. Consumer groups blasted the plan, claiming that high-fee private equity firms are inappropriate for unsophisticated investors because the industry locks up clients’ money for years and backs risky, debt-laden businesses. Bloomberg Opinion writers Nir Kaissar and Barry Ritholtz met online to debate the merits of the plan.

Nir Kaissar: Everyone should have equal access to financial markets. Every time I say it, I’m amazed by the pushback. In any other context, the idea that everyone should be treated equally would go virtually unchallenged.

Not so when it comes to investing. U.S. securities laws openly discriminate against some investors, mostly based on the size of their wallet. Probably the best-known example is the exclusion of ordinary investors from private markets. Investors typically access private assets such as venture capital and private equity through private funds. But securities laws restrict those funds to “accredited investors” who meet certain income and net worth hurdles, and which exclude more than 90% of Americans.

The purported justification is that ordinary investors need protection – that they’re too unsophisticated to navigate the arcane and sometimes shady world of private investments. But as any money manager will tell you, there’s no correlation between a fat paycheck or a big bank account and financial sophistication. And the more obvious problem: How can ordinary investors become more sophisticated without access to markets?

Last month, the U.S. Securities and Exchange Commission opened the door to private markets a bit wider. It amended the definition of “accredited investor” to include, among other things, investors with financial knowledge, experience or certifications, including certain employees of private funds, who don’t otherwise qualify. But even after the change, most Americans will still be excluded from private markets.

Those who support giving access to some investors while excluding others must answer some thorny questions. Who should be excluded and on what basis? And who should be the arbiter of those exclusions, today and in the future? In her statement accompanying the SEC’s action, Commissioner Hester Peirce asks, “Why should I, as a regulator, decide what other Americans do with their money?” The question answers itself.