The Dangers of Private Equity Entering 401(k)s
By Andrew Cullen
For a long time, retirement accounts like 401(k)s have served as a way for workers to invest and grow wealth for the future. However, Trump recently issued an executive order that will allow risky private equity investments, like private equity and cryptocurrency, into these plans. To highlight the threats these hasty changes pose to peoples’ financial futures, Americans for Financial Reform Education Fund hosted a webinar featuring perspectives from financial and labor experts in academia, unions, and advocacy groups.
Liquidity issues may harm regular investors
Private equity firms pool money raised from investors into funds, which they combine with significant levels of debt to purchase and run portfolio companies. In addition to the use of debt, what makes this model different from other funds such as mutual funds or hedge funds is that these are long term, majority ownership stakes that often take 10 or more years to sell.
While a long term investment might seem appealing to have in a retirement fund, this can actually be quite dangerous. Private equity investments are highly illiquid, meaning that it often takes several years to be able to convert a private equity investment back to cash without losing money on the investment.
As Ali Khawar, former Principal Deputy of the Employee Benefits Security Administration in the Department of Labor, underscored, this is at odds with the needs of a typical 401(k) beneficiary. “In a 401(k), it is really important that you have liquidity, which is not a thing you would associate with private equity. For example, if someone retires, you can’t say ‘I need six months to sell these assets that are in the private equity holding. Would you mind not retiring right now so I can redeem all your money?’ That wouldn’t make sense.”
Passing off the worst investments to 401(k) holders
Trump’s executive order allowing private equity investments into 401(k)s serves more as a way to bail out a failing private equity industry than it does a way for working people to securely invest in their future. The private equity industry has extensively lobbied to allow for this change as a way to access more capital, all while for investors profitability in private equity investments have decreased for the past 20 years.
Erin Markiewitz, senior analyst at the AFL-CIO, highlighted private equity’s recent underperformance and fundraising difficulties. “Private equity buyout funds have raised 23 percent less capital this year globally… In our view, adding private equity to 401(k)s possibly risks offloading some of these underperforming investments.”
Rushed decision to bail out a struggling industry
The Department of Labor took less than a week after Trump’s executive order to rescind its 2021 guidance, warning fiduciaries of the risks of private equity in 401(k)s, not nearly enough time to perform a serious analysis on the issue.
Adding private equity to 401(k)s adds unnecessary risk to the retirement system that is supposed to support millions of workers, not billionaires. As Oscar Valdes Viera, private equity and capital markets policy analyst at AFR/EF, states, “Our 401(k)s should remain a source of security for workers and not act as a bailout fund for Wall Street’s riskiest bets.”