Wall Street Wants Your Retirement Savings
Private equity does badly for big investors. Now it wants to do the same for retirement savers.
By Oscar Valdés Viera
“If you’re looking to leave a worthless corporate carcass, your easier marks are retail day traders and index funds [in retirement plans] holding public shares,” said Gary Sernovitz, a 20-veteran of private equity.
People rely on their retirement savings to provide economic security later in life, but Wall Street private equity firms have launched a dangerous scheme to fleece savers who have amassed a $12.4 trillion pot of money via their 401(k) retirement accounts. As the quotation above suggests, small retirement savers who invest in private equity risk becoming not the well-cared-for clients of Wall Street but their “marks” – the unwitting victim, the poor trusting fool who forks over a life’s savings for the privilege of getting nickel-and-dimed into a less comfortable retirement.
The Trump administration is spearheading this massive ripoff by promoting new deregulation, primarily by the Securities and Exchange Commission and the Department of Labor, that would expose small retirement savers to Wall Street’s highly risky, totally opaque, and illiquid private equity investments, and the booming but dangerous market for private credit. Americans for Financial Reform has warned for years of the dangers of private markets, as these sectors are known collectively – for investors, communities, workers, and the stability of the financial system.
Private equity firms are investment companies that pool large volumes of private capital from institutional investors (like endowments and pension funds) to buy companies in debt-financed buyouts that can be profitable for the private equity firms but often catastrophic for the takeover targets, their workers, and communities. In a newer, but rapidly growing market, these same firms gather funds, known as private credit, that are used to lend to companies, without any of the protections or regulatory oversight that accompanies traditional bank lending.
Traditionally, regulations have excluded retail investors from these structures because they lack the standard disclosures of public markets in stocks and bonds. AFR led a coalition in support of an SEC rule on better disclosures for institutional investors. But Wall Street fought vigorously, and successfully, to keep them from getting the information they need to make better decisions.
Research from AFR and the American Federation of Teachers (AFT), “Lifting the Curtain on Private Equity,” found in 2021 that even large institutional investors can pay high fees, get lower returns – under very opaque conditions – than the private equity hype, and get locked into investments for years.
The reality is that the private equity industry has long oversold the upside and downplayed the risks and the costs for investors. If the big institutional investors who are the largest holders of private market investments can’t shine a light on Wall Street or change its practices, mom-and-pop investors don’t stand a chance of paying reasonable fees, or achieving promised returns.
Today, private equity firms are under tremendous pressure. They are struggling to raise additional funds. Distributions to investors have plummeted. Many funds are stuck holding assets they can’t easily sell. Funds are adding layers of leverage by Ponzi-scheme-like borrowing against the unsold (and already leveraged) assets. And while some traditional investors — tired of high fees, unsatisfying returns, opaque and risky investments, and murky disclosures — become less willing to put up capital, others like Yale and Harvard are already offloading billions in private equity stakes from their endowments. And, Wall Street’s fund managers are turning to private credit funds, which show so many signs of being opaque and unstable that regulators worldwide are warning of the dangers.
So the industry has set its sights on a smaller prey with trillions on hand: retirement savers and other retail investors. Private equity firms view these savers as fee-paying patsies to fill the gap as more sophisticated institutional investors head for the exits. Retirement savers can also act as a convenient off-ramp for private equity firms to dump underperforming or collapsing assets or to offload speculative bets at higher prices and with worse terms than institutional investors would ever accept. Retail savers lack the organization, bargaining power, information, or legal leverage to push back, making them the perfect targets in an increasingly desperate bid to keep the private equity machine humming.
To be clear, any changes that allowed Wall Street to peddle private market investments to small savers would work to the benefit of people who are already extraordinarily wealthy. Private equity, in the words of its most prominent academic scholar, is a “billionaire factory,” making executives at firms like Blackstone, Apollo Global, and KKR rich at levels previously unknown. Private credit is not far behind in the billionaire-making business.
In short, Wall Street is pushing to access retirement savings not because it’s good for workers and retirees, but because they need small retail investors and retirement savers to fill the gap left by sophisticated large investors, boost the demand for their product, and make the super-rich even richer. The tens of millions of small savers would then transfer their wealth to these rich men by absorbing Wall Street’s hard-to-sell, highly leveraged, and overvalued assets.
Biggest Dangers
The dangers of letting Wall Street prey on retirement accounts are both structural and strategic. People save for their retirement for decades, allowing them to steadily grow a nest egg that can provide economic security for years that relies on stability, transparency, low fees, and appropriate levels of investment risk.
Private funds thrive on complexity, secrecy, fees, and risk—and that’s exactly what they would inject into retirement plans. Private equity managers are incentivized to pursue high-risk strategies that benefit them even when the target companies, workers, suppliers, and communities lose. The industry promotes itself to potential investors by overstating its purported returns, a hustle that is becoming more difficult as sophisticated institutional investors abandon their private equity holdings. The private equity firms extract high fees and dividends, overburden the takeover targets with debt, provide little transparency, and operate with far fewer safeguards than public market investments. That’s a recipe for eroding retirement security.
Some of the most serious dangers to everyday savers include:
Lack of transparency and asymmetry of information: Private markets lack the rigorous disclosure requirements and antifraud protections of public markets where most retirement accounts are invested through indexes and mutual funds. Investors in private equity typically receive limited and often unreliable financial information. Unlike publicly traded companies, private equity assets don’t have clear market prices, making it easy for fund managers to inflate valuations and hide potential losses. Private markets also suffer from deep asymmetries of information—not only between fund managers and investors, but also across investor classes. Larger institutional investors may negotiate better terms and receive more detailed disclosures than smaller institutional investors—bigger endowments and pension funds get lower fees and more information than smaller ones. Retirement savers without the scale and leverage of big institutional investors won’t get a seat at the table and will be left with worse information, fewer rights, and weaker protections.
Excessive and opaque fees: Private equity fees are notoriously and intentionally complex and excessive, often layered with management fees, performance fees, transaction fees, and more. These fees eat into returns and are particularly damaging to retail investors, who lack the access and resources to negotiate to reduce the opaque fee structures that can be purposely hard to interpret. High fees can harm small retirement savers because fees quickly erode their retirement nest egg, whereas the stock funds usually available in 401(k) plans have fees that cost less than 0.5% a year, on average. In comparison, in the most basic compensation structure, private equity firms typically charge investors two types of fees for managing their money, a fixed annual management fee of 2% of invested capital and 20% percent of the investment returns.
Illiquidity and valuation games: Private equity assets aren’t traded daily and are notoriously illiquid. You can’t just cash them out—at least not without a potentially big haircut—and their true value is often impossible to verify. Many private equity investments are locked in for five or more years. Fund managers establish a bespoke (and somewhat imaginary) valuation for their own portfolios and have every incentive to overstate returns or downplay losses or volatility. That’s not just misleading—it’s dangerous for retirement accounts, where participants need to know how much money they have saved. And many people need to access retirement funds early due to personal financial hardship or to weather an economic downturn or to put a down payment for a home, but if their savings are locked up in private equity investments they may not be able to access their money in case of emergency.
Increased risk to investors—and the system: Private equity fund managers reap large rewards when bets pay off, but losses fall heavily on investors. The financial engineering behind the private equity model creates a heads-I-win-tails-you-lose situation for the firm but shifts the risks of its highly-leveraged takeover strategy almost entirely onto the investors. The carried interest tax loophole exacerbates this moral hazard dynamic because fund managers get a tax-advantaged 20 percent cut of profits when deals succeed, but suffer virtually no losses when risks backfire. That imbalance encourages private equity managers to pursue riskier investments, putting not only retirement portfolios but also workers, companies, and communities in harm’s way when these deals go bust (as they frequently do).
Opening the 401(k) system to private equity will also reduce the stability of the financial system. Retail investors tend to react cyclically, pulling money out in a downturn. If they feel forced to sell illiquid private assets in a crisis, it could exacerbate instability across financial markets. The industry’s own justification for limited regulation has long been that its investors are purportedly sophisticated and patient. But that is not the case with smaller retail investors and retirement savers. As AFR argued when the SEC sought greater transparency, private funds should have to abide by the stronger disclosure and investor protection rules if the industry wants to tap into the savings accounts of tens of millions of people.
Allowing private equity into retirement accounts would also create opportunities for insider dealing in private markets that lack basic surveillance tools to detect fraud; accelerate the expansion of shadow banking by connecting retail savings to opaque and loosely regulated funds; and distort capital formation by misallocating capital to wasteful speculation.
No One Asked for This
To be clear: no one asked for this. Opening 401(k) programs to private equity and credit isn’t some organic demand from retirement savers. Wall Street friends in government (AFR has tracked them here), industry-oriented think tanks, and deregulatory ideologues—many of them tied to the notorious Project 2025 agenda—are the drivers of this push to dismantle longstanding investor and retirement protections.
They’re seeking to weaken the definition of accredited investors (which has long kept private markets the province of sophisticated professionals), stymie critical transparency rules, and erode the fiduciary standards that brokers most apply when advising their clients, making it easier to slip risky and loosely regulated investments into retirement plans. And they’re doing it at a moment of regulatory disarray, while budget cuts, firings, and political interference weakens the very agencies charged with investor protection.
The financial media, absorbing critical views of private markets like ours and the sheer avarice at work here, is highlighting the issue. Recently, over a dozen major publications have sounded alarms about the aggressive push from the private equity industry to unlock access to the more than $12 trillion sitting in 401(k) retirement savings plans in the United States. Surprisingly, from progressive outlets to mainstream press and even financial industry-friendly outlets—The Wall Street Journal, Financial Times, Bloomberg, CNN, MarketWatch, and Politico—they are voicing the same core concern: allowing Wall Street’s most opaque and predatory actors to tap into retail investors and retirement savings is a dangerous gamble for workers, savers, and mom and pop investors—particularly while sophisticated investors are cashing out.
The retirement system is supposed to serve workers, not Wall Street. We need policies that strengthen retirement security and allow people to retire with dignity—not policies that invite hidden fees, reduced transparency, and elevated risk. Allowing predatory private equity and private credit funds to infiltrate 401(k)s would result in a massive transfer of wealth from small investors and workers to the richest men on Wall Street.
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