Blog
It’s Time to Start a Discussion About Private Equity in Retirement Plans
By: Tim Hill, International Association of Fire Fighters (IAFF) Pension Resources Department
As other alternative investments become mainstream, the piece makes the point that it might be worth asking whether private equity (PE) — with proper safeguards and labor-conscious design — could responsibly serve as a diversification tool in 401(k) and 457 plans. With broad growing interest in investment democratization, now is the time to start a serious conversation about how to give working Americans fair access to the same opportunities as wealthier investors.
Private equity (PE) and other alternative investment strategies are too complex, illiquid, and risky for casual investors. That's the conventional wisdom used to explain why these types of investments are not offered to working Americans in their 401(k) and 457 retirement plans. But the broader democratization of private market investments and innovations in wealth management suggest we should now take a closer look at whether or not it makes sense for American workers and retirees to access these asset classes if they choose.
Retirement savers face a dilemma. Amid changing monetary policy and rising prices, bonds feel more volatile. And the stock market, after years of outsized gains, is forecast to deliver more subdued returns. Meanwhile, alternatives have been gaining ground. Infrastructure investments, once only for institutions, are now accessible via mutual funds and ETFs. Private credit, once an insider's asset class, has attracted billions from retail investors in recent years. Commercial real estate has seen a similar change. These widely accepted alternatives were long considered off-limits to ordinary investors but are now commonplace. Yet PE has not followed suit.
As policymakers, regulators, and labor organizations consider whether PE may be suitable for retirement plans, these questions can help frame the debate:
- Could private equity help investors diversify? PE should not be a retirement plan's centerpiece, but it can serve as a diversifier alongside public equities, bonds, and other private market alternatives to smooth volatility and increase long-term return potential. For context, in 2023, institutional investors held about 20% of their portfolios in alternatives, with just 5.4% allocated to PE, according to Prequin. A carefully sized allocation could give savers modest exposure to companies and strategies unavailable through public markets — a benefit that only the wealthiest investors enjoy today.
- Can PE funds embrace new liquidity provisions? Illiquidity is a common criticism of PE, with some funds having lockups of up to 12 years. But that calculus is changing, thanks to innovations like interval funds, which allow investors to buy and sell shares periodically (typically quarterly) and continuation vehicles, which facilitate early investors exiting for newer investors, extending the life of successful investments while keeping capital flowing.
- Can PE access help level the playing field? Individual investors own 50% of global capital, according to Bain & Company, but hold just 16% of alternative investments. Accredited investor rules restrict PE holdings to those with a net worth of greater than $1 million (excluding primary residence). Access to PE via retirement plans could help level the playing field, giving hardworking American investors and retirees access to the same investment choices as their wealthy bosses.
- Can the financial industry find a way to address labor concerns head-on? Private equity has a checkered history with labor; the industry has been accused of prioritizing profits at the expense of labor. The past cannot be ignored, but we can perhaps learn from it by designing PE products that are intentionally labor-friendly. Imagine infrastructure-focused funds built around labor agreements that guarantee union jobs. Or funds that create and transparently report on labor standards, as some now do for sustainability. If PE leaders want to tap a huge pool of potential investors among working Americans, they should be ready and willing to address these concerns to craft a path forward.
- How can we ensure appropriate focus on safeguards? Sensible guardrails could limit allocation size, offer diversification via funds-of-fund, establish transparent fee structures, and implement robust oversight for plan sponsors and fiduciaries. Investor education and advisory services would be crucial to ensuring that plan participants understand the potential risks and rewards.
Let's start the conversation
PE firms are already pushing to expand their offerings into retail channels. As the industry moves toward investment democratization, retirement plans should consider whether it's time to join the conversation and give workers a seat at the table. Together, can we ensure that the terms of entry for PE investments in retirement accounts are fair, transparent, and labor-conscious?
Whether Americans should have access to private equity in 401(k)s and 457s is not a simple yes-or-no question. But open-ended queries such as those above may reveal that objections are becoming less absolute. With innovations in asset liquidity, diversification, labor protections, and fund design, the barriers to a mutually beneficial system are not insurmountable. The most fitting question may be: Should we start building a model of PE investment that works for everyone — including the workers whose retirements are at stake?
Bio: Tim Hill is president of the Alliance for Prosperity and a Secure Retirement and a former director of the International Association of Fire Fighters (IAFF) Pension Resources Department.
Comments
There have been no comments made on this article. Why not be the first and add your own comment using the form below.
Leave a comment
Please complete the form below to submit a comment on this article. A valid email address is required to submit a comment though it will not be displayed on the site.
HTML has been disabled but if you wish to add any hyperlinks or text formatting you can use any of the following codes: [B]bold text[/B], [I]italic text[/I], [U]underlined text[/U], [S]
strike through text[/S], [URL]http://www.yourlink.com[/URL], [URL=http//www.yourlink.com]your text[/URL]