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President Trump signed an executive order Thursday 8/7 to allow 401(k) participants to invest in private assets.
The directive instructs the Department of Labor and the Securities and Exchange Commission to draft guidance for defined-contribution plans to incorporate private-market investments, including private equity, venture capital, hedge funds, real estate, and possibly gold and crypto.
Plan sponsors are not required to offer these investments-and I hope they don’t. This is a bad, short-sighted idea.
That’s all we need in 401k plans, more complexity, more choices few people understand. The idea is participants can achieve better growth on investments.
More like the other side of the coin and bigger losses.
Most plan sponsors aren’t going to go through the risks and costs to offer these offerings.
Hopefully.
If you were a private-equity house, chopping up deals into parcels to sell to investors, what sorts of deals would you offer small retail investors?
I would say you would be most likely to reserve the best deals for your wealthy private clients, who are putting up $500 million or $300 million. The junk, you can sell to retail investors, or maybe Japanese banks – somebody who will fall for any pitch.
I’m with you, Mr. Quinn. Allowing investments without reliable performance histories and full disclosures will be an invitation for bad people to get into the pension and retirement savings game, and for even good people to limit disclosures and add much broader caveats to investment agreements to protect themselves. Lowered standards will inevitably lead to bad conduct, misrepresentation and/or fraud, and maybe just a lot of bad mistakes. Ultimately, there will be many instances of great harm to individual investors. I can see the class actions now, and, unfortunately, the penniless citizens who will have no realistic avenue for relief.
Most of the investors in “private equity” will likely be fleeced by the wolves through hidden fees and mediocre performance. The issue for the rest of us is that the possibility of shortfalls in retirement saving will have to be made up by Uncle, i.e. the taxpayers.
But will shortfalls be made up by taxpayers and should it?
From a British pension blog, from across the pond, following the Executive Order:
“… Private markets – have been suffering significant liquidity shortage issues – and valuations are often highly questionable – which have resulted in a plethora of continuation vehicles (better known as extend and pretend) including most recently a spate of ‘evergreen’ funds (that is perpetual funds). Secondary funds buy PE assets at discounts ranging from around 5% to 50% or more of their published NAVs. But when sold to ‘evergreen’ funds these holdings are valued by most funds at NAV. Lovely ‘business’ for the managers of these ‘evergreen’ funds and miraculous gains for the secondary funds.
Lambs to the slaughter comes to mind in the case of 401K savers. …”
I agree with you 100%. Plan sponsors have been slow to adopt annuities that were made available several years ago.
I have always been an advocate for a brokerage window in the 401k. That allows a plan sponsor who has pushback from employees a method to take the risk the employees want without endorsing those risky products.
I agree that allowing these private asset investments in 401(k) plans is not a great idea, certainly without any investment limits.
I’m not overly concerned that many plan participants will explore these investment options. My past experience managing 401(k) plans with self-directed brokerage account portals is that less than 1% of plan participants bothered to explore that option.
I suppose modern social media mania might goad some people to blindly stumble into making bad decisions in this area, but perhaps plan participant inertia will continue to rule the day.
Oh boy, I can’t wait to move 20% of my 401(k) into Fartcoin!
I’d sure like to hear Jonathan’s thoughts on this issue.
I wonder what the late Jack Bogle would say?
He would say “don’t make it any more complicated than it is.” https://youtu.be/ETrZX5Ojx_E
Yes he would.
Fidelity added crypto to the 401k accounts of its employees in 2022 and made the option of adding it available to the retirement funds it manages. Fidelity limits crypto to 20% of asset allocations.
Fidelity allows crypto in their plan advertising their ability to offer it to other plan sponsors. “Hey look, we have crypto and you can too!” The limitation on crypto is unique to any 401k I have ever seen, and telling of how they view the risk.
Did you know that the reason is the death of pension funds?
Pension funds were huge money sources for many of these companies and with the switch to 401ks they’ve been cut out.
It is a kind of fair play, that they have the capacity to make these offerings. Not sure I’d think they’re a good idea for individuals. Just the liquidity issues (why they were good for pensions, you could plan for cash flow and know you had very long term investable assets)
(I’m against it I just can’t figure out how they would handle liquidity issues)
Morningstar published an article yesterday that mentioned the liquidity issues. The little I’ve read about this talked about including some of these investments as a small part of a Target Date Fund.
I can’t remember the people who discussed it on CNBC but they didn’t see it as an easy problem to solve.
As part of a TDF I could see it making some sense, there are still managed TDFs out there (not products I’d want) and it could be thought of as just another piece of that pie.
That’s not accurate regarding pensions. The demise of pensions was a combination of factors including all the rules and regulations from ERISA, new accounting rules regarding pension liabilities, funding requirements and the decline in the union workforce. They provide little value to a highly mobile workforce.
Pensions and their liabilities and funding requirements had a significant impact on corporate earnings and were unpredictable compared with defined contribution plans that are predictable.
You misread it. The demise of pensions is what’s caused private equity to want access to 401k cash flows.
It’s reality, the monies that once flowed towards pensions are now flowing towards 401ks. Pension funds, used ot be a large source of private equity investments.
I just thought you’d find it interesting
I did misread your post. I realized that this morning. Sorry about that.
You have never been more correct. This executive order is not in the best interest of 401K participants.
I’d see this as a niche opportunity for the financially sophisticated to get exposure to the sort of things they might be able to do outside the 401k wrapper.
It’s double edged. Do you want nanny state saving people from themselves (and therefore denying them diversification) or do you want people to face moral hazard for their own adult decisions?
Of course all sorts of shady actors will have been lobbying hard for this in order to sell products that are rigged heavily in their favour to the susceptible. Twas ever thus in financial services.
That’s the problem, the financially sophisticated are few among 401k participants- average people just trying to save for retirement. In fact, basic financial literacy is in short supply.
Nanny state? Get serious.
Anyone can invest in anything they want to, take all the risk they want, but the primary vehicle for retirement is not the place to do it and putting the communications burden on employers for this type of thing is not realistic.
It reflects a flawed ideology of individual empowerment and individual responsibility which would be nice to see, but is unrealistic and naive in the real world, never the case and never will be.
It’s probably not a major issue – employers just won’t offer the more complex propositions and whatever provider they use (if it’s a big fund platform similarly will be likely circumspect in the investments they offer – fear of a class action litigation probably outweighing any incremental mgt fees they stand to make). I can see certain populations where there is employee demand to be allowed access to gold (for the conservative) or crypto (for the tech bros) which might move the needle a bit.
But the issue of choice in 401ks and the like remains a significant issue. They are usually limited to lowest common denominator stuff and thus not a good fit for those (like many HD members) who put in the work to understand risks and opportunities and devise their own strategies for both accumulation and decumulation.
If you are financially sophisticated and want to gamble with your retirement money I believe you can do so in a self-directed IRA.
Yup, or just a brokerage account.
According to Vanguard (2023 report), the average 401(k) plan offers about 28 investment options, but most participants only invest in 3–4 funds.
90%+ of plans offer target-date funds.
Large plans may offer 20–30+ choices, while smaller plans might offer fewer than 10
Some plans offer self-directed brokerage accounts too.
That seems more than enough.