Should regular Americans be allowed to put more of their retirement savings into private investments long reserved for the wealthy? The White House is seriously considering the proposal, at the behest of some of the country’s largest financial firms. This has never been a good idea.
The pitch sounds compelling. Accredited investors — professionals and relatively well-off individuals — have entrusted trillions of dollars to private capital funds, which purport to generate superior returns by locking up money for multiyear periods in assets ranging from infrastructure to business loans. American workers with more than $12 trillion in retirement accounts such as 401(k)s have long time horizons, too. Why not let them share in the riches instead of confining them to publicly traded securities?
The Labor Department, which oversees 401(k)s, took a step in that direction in 2020 when it suggested it could be appropriate to include investment options containing private funds. But the employers responsible for the plans largely balked, apparently concerned that they’d get sued for breaching their fiduciary duty. To remove this legal obstacle, the government (or Congress) would have to provide a clearer safe harbor, perhaps in the form of a new rule.
Problem is, private capital really might not be appropriate for 401(k)s. Before proceeding, the US administration should consider a few crucial questions.
Why now? The latest push to tap 401(k)s comes at a time when many private funds are struggling to exit their investments. Despite efforts to raise more cash by repackaging or borrowing against unsold assets, private equity firms returned less than ever to investors last year. Institutional clients such as sovereign wealth funds and university endowments are expressing concern and looking to get out. Cracks are showing in private credit as well. If retail investors jump in, there’s a risk they could end up stuck with assets nobody else wants.
