|Main Street Deserves Access to Private Equity, Too
By Deputy Secretary of the U.S. Department of Labor Patrick Pizzella
July 24, 2020
“The question isn’t at what age I want to retire, it’s at what income.” So said boxing champion, Olympic gold medalist, and Job Corps alumnus George Foreman, channeling many Americans’ approach to retirement.
Private equity—the holding of stock in companies that aren’t publicly traded—has the potential to hasten the retirement day for American workers by fortifying retirement savings during both stable and unstable economic times and helping to diversify and build retirement income.
In a recent information letter, the Department of Labor made clear that defined contribution plans like 401(k)s may give participants the option of investing in professionally managed funds that include some exposure to private equity.
These funds hold a variety of asset classes, and include limited exposure to private equity as a way to diversify investment risk, potentially increase returns, and provide a hedge against downturns in the public markets.
The common-sense premise of the letter is that the professional fiduciaries responsible for managing 401(k) plans should have the same ability as other money managers to include a fund with a private-equity component as one of the investment choices. Put simply, there is no reason that a 401(k) fiduciary, charged with a strong duty of care and a mandate to act solely in plan participants’ interests, should be foreclosed from providing participants with the full range of market options—including private equity—when it’s prudent to do so.
For various reasons, many companies are opting to remain private rather than offering their securities on the public markets. As a result, if 401(k) plans were prevented from investing in private equity, America’s workers would be denied access to a significant portion of the market, unlike wealthy investors or defined-benefit pension plans that can (and do) routinely invest in private equity.
The Trump administration has made it a priority to expand investing opportunities and democratize investing. The information letter promotes this goal, while retaining the protections of fiduciary management of plan assets.
A growing number of Americans now use 401(k)s as their primary vehicle for retirement investing. Offering a fund with a private-equity component as part of the plan’s investment menu gives participants the ability to invest in companies that can potentially outperform public equities, guard against risk by further diversifying retirement assets, and possibly hedge against potential market downturns, as private equity may not move in lock step with the public market.
The president of the Committee on Capital Markets Regulation has stated that the Department of Labor’s information letter “is a major step toward providing U.S. retirees that have over $6 trillion in 401k retirement savings with access to the high returns and diversification benefits of private equity.”
So, given all this, why wasn’t private equity already available for 401(k) plans? Actually, it has been available all along.
Unfortunately, many plans have been reluctant to provide this option to participants due to the perception of legal risk with respect to private-equity investments.
That perception was potentially limiting more than 58 million workers from any exposure to the burgeoning private-equity market. America’s retirees deserve better.
Our markets are far different today than they were several decades ago. At one point, private capital markets were a tiny component of the economy, but today that is no longer the case. Main Street investors could once choose from about 7,400 different exchange-listed operating companies. Today, that number is 4,300. At the same time that public market options for Main Street investors were shrinking, many employers were shifting from professionally managed defined-benefit pension plans to participant-directed 401(k) plans.
The retirement security of America’s workers increasingly relies on the quality of the investment options offered under 401(k) plans. These Main Street investors deserve exposure to private equity as part of these investments just as participants in defined-benefit plans have. The time of wealthy investors and defined-benefit plans taking advantage of private equity while Main Street Americans are excluded must end. This is why the Trump administration and the Department of Labor are committed to doing everything within their authority to bulldoze barriers that disadvantage Main Street.
Another champion boxer and Olympic gold medalist, Muhammad Ali, said, “Don’t count the days; make the days count.” When it comes to saving for retirement, 40 years may seem like a long time, but every day matters.
Making clear that 401(k) plans can give participants the option of investing in professionally managed funds that include some exposure to private equity allows for broader diversification and helps make every day matter.
Patrick Pizzella is the deputy secretary of the U.S. Department of Labor.