Private equity firms have been eyeing U.S. retirement savings plans for years, hoping to tap into the $12 trillion in defined contribution plans. With Trump back in the White House, these firms now see an opportunity to expand their presence in 401(k) plans.
In 2020, the Trump administration allowed limited access to private equity in 401(k) plans, but the Biden administration quickly reversed this decision. Now, private equity firms are pushing once again for broader access, aiming for clearer guidance from the Department of Labor.
The Issues at Play
For plan participants, the risks and trade-offs are significant:
- Fees
Private equity firms typically charge a 2% fee on assets plus 20% of profits. These fees can significantly reduce long-term returns, especially for savers with smaller balances. In contrast, traditional equity ETFs charge only a fraction of a percent in fees. - Liquidity
Private equity investments lock up capital for 5 to 10 years, which can be problematic for savers near retirement who need flexibility to access their funds. While retirement savings are generally long-term, the challenge lies in managing liquidity for those closer to retirement. - Legal Risks
Past lawsuits, like Sulyma v. Intel, have shown that private equity exposure can lead to legal issues if the investments underperform or add unnecessary risk. Plan sponsors are hesitant to adopt private equity options without clear legal protections, fearing litigation. - Complexity and Valuation
Private equity investments are harder to value, less transparent, and more complex than traditional options. This increases the risk for savers who may not have the time or knowledge to fully understand what they're investing in.
Why the Push for Private Equity in 401(k)s?
Private equity leaders, such as Marc Rowan, CEO of Apollo, view U.S. retirement savings as “the single biggest opportunity for the industry.” While private equity returns have historically outperformed public markets, these returns depend on factors like fund selection, timing, and management skill.
Private equity firms are also targeting the consistent flow of funds from automatic 401(k) contributions, seeking a share of that market.
What’s Next?
If regulatory barriers are removed, more 401(k) plans may start offering private equity options. However, key questions about fees, liquidity, legal liability, and risk remain unresolved. Until these issues are addressed, adoption will likely be limited to large, sophisticated plans willing to take on the associated risks.
Final Thought: Is Fee Compression Enough?
- Fee Compression: Fee reductions are expected, but it’s unclear how quickly they’ll happen or if they’ll make private equity a viable option for most retirement plans. Additionally, many private equity funds have underperformed compared to passive investments like the S&P 500.
- Fund Selection: Deciding between different private equity firms (e.g., Apollo, KKR) adds another layer of complexity for savers, making it harder to make informed choices.
- Education: While educational resources are increasingly available, understanding complex investment strategies requires time and effort. Expecting the average worker to learn nuanced strategies like leveraged buyouts or internal rates of return might not be reasonable.
Conclusion
The key question is whether the benefits of private equity will ultimately flow to everyday workers or primarily benefit fund managers. Until there is greater clarity and fee compression, savers should approach these options with caution.
