The Trump administration on Wednesday announced new guidance pertaining to defined contribution plans – like 401(k) accounts – and what investments the funds are able to access.
Retirement savers will now have access to private equity investments through defined contribution plans, the Department of Labor said in an information letter.
“This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns,” U.S. Secretary of Labor Eugene Scalia said in a statement. “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
However, private equity investments will not be accessible as a standalone option, the agency said, but rather through vehicles like target-date funds.
The goal is to increase the range of investment options available to defined contribution plans. Defined benefit plans, like pensions, have been able to include private equity investments as part of their portfolios.
Securities and Exchange Commissioner Jay Clayton has been an outspoken proponent of opening up defined contribution plans to private equity investments, which also expands funding sources for budding companies and business owners.
Private equity investments are viewed as riskier – which means they offer the opportunity for more reward but also for greater losses.
Ed Slott, founder of IRAHep.com, told FOX Business that coronavirus-related investment losses may have caused a sense of panic among savers who might be searching for larger returns.
“Some of those [private equity] returns are sensational but, with anything, you could lose a boatload too,” Slott said. “It doesn’t mean private equity always makes money.”
Critics of the policy note that because private equity firms are not required to disclose results in public filings, estimated industry returns could be skewed toward the better-performing of the bunch, which are more likely to be forthcoming about their results.
Billionaire investor Warren Buffett has even been critical of private equity reporting, saying at his company’s annual meeting in 2019 that if he were running a pension fund he would be very careful about what was being offered.
The letter does provide a sort of liability shield to fiduciaries, Slott noted. So long as they follow the guidance set forth by the Department of Labor, they will likely be deemed to be within their fiduciary obligation. For the investor, that means if you lose a ton of money it will be harder to sue.
However, Palm Capital Management managing director Alano Massi told FOX Business he believes the policy will overall be a good thing for investors, so long as they do their due diligence.
“Should that investor not feel comfortable with private equity, or simply does not understand it, then he or she should not participate,” Massi said.
