The president just issued an executive order to encourage adding private equity and private credit — as well as other alternative investments — as options to 401(k) plans.
The Department of Labor (DOL) is tasked with accomplishing this goal. Some suggest the expansion could be limited to 10% to 20% of target-date funds, the default investment option in most 401(k) plans, but the goal may be broader.
My view is: Why bother? As far as I can see, the only party pushing for private equity in 401(k) plans is the private-equity industry. Moreover, private equity comes with numerous negatives, and our studies on the performance of state and local pension plans show that the addition of private equity has not increased the return or reduced the volatility in these plans.
Read: Trump’s order greenlights crypto in 401(k)s, so why isn’t my job on board yet?
To date, the DOL has issued two letters that cautioned fiduciaries but did not preclude anyone from introducing private equity into 401(k)s.
The first, in June 2020, was in response to an application on behalf of Pantheon Ventures and Partners Group soliciting DOL’s views. After repeating — uncritically — all the applicants’ arguments in favor of private equity, the agency did note that private-equity investments tend to be more complicated, have longer time horizons, are less liquid, and have higher fees than traditional investments. Nevertheless, it concluded that fiduciaries would not violate their duties under ERISA solely by offering an asset fund with a private-equity component.
Read: Trump wants private assets in 401(k)s. How do everyday investors value them?
One year later, concerned that the prior administration’s letter could be seen as broadly endorsing private equity in 401(k) plans, the agency issued a statement of clarification. This letter stressed the caution in the earlier letter regarding the fiduciary skills, knowledge, and experience required to select and monitor private equity options. It also reiterated that the DOL had not endorsed or recommended the inclusion of private equity, and fiduciaries should be wary of marketing efforts saying otherwise. Why change positions now?
My view is that people should invest in things they understand, and private equity is not a transparent investment. Moreover, it takes years for returns to be realized, and participants who leave early will have paid higher fees for nothing. Private equity simply adds unnecessary risk to retirement saving.
