Personal Finance
Private equity wants a larger piece of workplace retirement plan assets
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The first Trump administration opened the door to allow private equity into workplace retirement plans. Now, private equity firms are working to play a bigger role in workers’ portfolios, which experts say has potential risks and rewards for investors.
“It’s a train that’s already been gearing up, and folks are starting to hop on,” said Jonathan Epstein, president of Defined Contribution Alternatives Association, an industry group that advocates for incorporating non-traditional investments into employer-sponsored retirement plans.
Private equity is part of a broad category of alternative investments can include real estate funds, credit and equity in private, not publicly-traded, firms. Pension funds, insurance companies, sovereign wealth funds and high-net-worth individuals are traditional investors in these private markets.
The argument from the private equity industry for incorporating such investments in workplace retirement plans is that these investments could give retail investors more diversification away from public markets and a shot at bigger returns. But such investments also raise concerns about liquidity and risk, experts say.
“It’s typically not easy to cash out the assets in a hurry,” said Olivia Mitchell, a professor of business economics and public policy at the University of Pennsylvania, and executive director of the Pension Research Council. “This could be a big challenge for 401(k) plan participants who either simply want to access their money or want to readjust their portfolios as they near and enter retirement.”
Private equity is less than 1% of retirement assets
Defined contribution plans include employer-sponsored retirement savings accounts such as 401(k) plans and 403(b) plans. There are an estimated $12.5 trillion in assets held in these accounts, as of the end of the third quarter in 2024, according to Investment Company Institute.
Private equity makes up less than 1% of those assets. A small number of large employer-sponsored retirement plans offer private equity investments as an alternative investment option within target-date funds or model portfolio funds.
Now, private equity firms like Apollo Global Management, Blackstone and KKR are trying to make inroads into defined contribution plans through new products. Apollo has told its investors that it sees significant opportunities for private equity in retirement and the firm is just getting started.
When private investments are added to retirement solutions, “the results are not just a little bit better, they’re 50% to 100% better,” Marc Rowan, a co-founder and CEO of Apollo, said on the private equity firm’s Feb. 4 earnings call. “Plan sponsors understand this.”
MissionSquare Investments offers private equity investments in retirement plans that it manages for public service employees.
“What we find is there’s an outflow in the public stock and bond [markets] and there’s an inflow into the private markets, but participants can’t get access to private markets,” said Douglas Cote, senior vice president and chief investment officer for MissionSquare Investments and MissionSquare Retirement.
The number of companies backed by private equity firms has grown significantly over the last 20 years as the number of publicly traded companies has declined. About 87% of companies in the U.S. with annual revenues of more than $100 million are now private, with 13% publicly traded, according to the Partners Group, a Swiss-based global private equity firm.
‘Some plan sponsors are very much against this’
I’ve got all the paperwork here
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The law covering 401(k) plans requires plan sponsors to act as fiduciaries, or in investors’ best interest, by considering the risk of loss and potential gains of investments.
During President Donald Trump’s first term, the Labor Department issued an information letter to plan fiduciaries, telling them that private equity may be part of a “prudent investment mix” in a professionally managed asset allocation fund in a 401(k) plan. The Biden administration took a more cautious approach, warning that these investments aren’t “generally appropriate for a typical 401(k) plan.”
“Some plan sponsors are very much against this initiative to make direct investments to private equity available through the defined contribution plan,” said Bridget Bearden, research and development strategist at the Employee Benefit Research Institute. “They think that it’s pretty illiquid and very risky, and don’t really see the return for it.”
There are four main factors that have plan sponsors taking a conservative approach to private equity.
1. Complexity and lack of transparency
Unlike publicly-traded assets, basic information on private equity investments — like what firms are in a fund and what their revenues and losses are — can be challenging to obtain.
“It’s even hard for institutional investors, pension funds, endowments, depending on their capital contribution, it’s hard for them to even get information about some of the books and records,” said Chris Noble, policy director at the Private Equity Stakeholder Project, a nonprofit watchdog organization. “If you want to take advantage of retirement money, you should be subject to the same regulations that public companies are.”
2. Liquidity and valuation
Private equity investments require longer-term capital commitments, so investors can’t cash out at any time, experts say. Redemptions are limited to certain times. There aren’t open markets to determine the valuation of a fund, either.
3. High fees
Fund managers also have to justify the higher and more complex fees associated with private equity. Exchange-traded and mutual funds collect management fees, while private equity firms can collect both management and performance fees.
The average ETF carries a 0.51% annual management fee, about half the 1.01% fee of the average mutual fund, according to Morningstar data. Private equity firms typically collect a 2% management fee, plus 20% of the profit.
4. Threat of lawsuits
Employers have shied away from private equity investments, in part because of fear they could be sued.
“They are concerned about the risk of exposing their employees to downfalls,” said attorney Jerry Schlichter of Schlichter, Bogard & Denton, who pioneered lawsuits on behalf of employees over excessive fees in 401(k) plans. “They’re also concerned about their own inability to fully understand the underlying investments, which they’re required to do as fiduciaries for their employees and retirees.”
But private equity supporters are starting to make an opposing argument, suggesting that plan sponsors who don’t include private assets are harming their participants with greater concentration of public assets and lower returns.
“Lawsuits could go after plan sponsors for not including alternative investments based on their performance track record,” said Epstein of DCALTA. “Even net of fees and net of benchmark returns, private markets have done extremely well over long periods of time.”
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As investors grapple with stock market volatility, it’s important to focus on financial plans and avoid emotional moves that could hurt future portfolio growth, experts say.
Stocks continued to fall early on Tuesday after President Donald Trump announced higher tariffs on Canadian steel and aluminum. At one point, the S&P 500 was down as much as 10% from an all-time high in February. The benchmark rebounded slightly by late afternoon.
The Nasdaq Composite on Monday dropped 4%, its worst day since September 2022, and the Dow Jones Industrial Average fell nearly 900 points.
Despite the recent market drops, however, long-term investors should know that “volatility is part of the game,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
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“You’re seeing the market more or less whiplash,” based on what Trump says day to day, said Boneparth, who is also a member of CNBC’s Financial Advisor Council.
Amid market uncertainty, investors should focus on what they can control, he said, including “their ability to stay the course, monitor their own feelings, revisit [portfolio] allocations and long-term investing strategies.”
Don’t let emotions ‘wreck your investments’
Panic selling during stock market dips often means missing the stock market recovery because there’s cash sitting on the sidelines, research shows. Many investors don’t realize that good market days happen close to bad ones.
For example, if you missed the 20 best days in the stock market from Jan. 1, 2003, to Dec. 30, 2022, that would have slashed total portfolio returns by more than half, according to J.P. Morgan Asset Management.
“Don’t let your emotions wreck your investments,” said CFP Ed Snyder, co-founder of Oaktree Financial Advisors in Carmel, Indiana.
Advisors build portfolios based on financial planning goals, risk-tolerance and timeline. If your goals haven’t changed, you shouldn’t react to stock market declines, he said.
Leverage your ‘margin of safety’ amid volatility
Your “cash reserves” may also quell financial anxiety amid stock market volatility, according to Boneparth.
“Nothing helps navigate rough markets like having a healthy margin of safety,” he said.
Boneparth recommends keeping six to nine months of living expenses in cash for emergencies and “opportunities,” which is higher than the three to six months rule of thumb that many other advisors recommend.
The “silver lining” to stock market dips is that you could find “quality companies or indices at discounted prices,” and use part of that cash to invest, Boneparth said.
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As the IRS faces mass layoffs, Congressional Democrats warn those staffing cuts could undermine the agency’s progress in collecting unpaid funds from “wealthy tax dodgers.”
In a letter to Acting IRS Commissioner Melanie Krause last week, more than 130 House Democrats demanded answers about the termination of an estimated 7,000 probationary agency workers, which included compliance staff.
The IRS staffing cuts started in late February and were part of broader federal spending reductions via Elon Musk’s so-called Department of Government Efficiency.
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The letter from the House Democrats said the agency’s compliance team plays a critical role in “pursuing tax evaders and securing vital revenue” for the U.S. government.
The same day last week, 18 Senate Democrats, led by Sens. Elizabeth Warren, D-Mass., and Ron Wyden, D-Ore., asked the Treasury Inspector General for Tax Administration to evaluate the IRS staffing reductions.
The recent layoffs hurt the agency’s ability to “improve collections, crack down on complex tax avoidance and evasion by high-income taxpayers and large businesses,” the lawmakers wrote.
The U.S. Department of the Treasury and the IRS did not respond to CNBC’s request for comment.
IRS cuts benefit ‘unidentified, noncompliant taxpayers’
Congress approved nearly $80 billion in IRS funding via the Inflation Reduction Act in 2022, and more than half was earmarked for enforcement. The agency has since targeted higher earners, large corporations and complex partnerships with unpaid taxes.
The enforcement plans of the IRS have been heavily scrutinized by Republicans, who have clawed back part of the Inflation Reduction Act funding and vowed to make further cuts.
The agency in September announced it recovered $1.3 billion in unpaid taxes from “high-income, high-wealth individuals,” under Inflation Reduction Act initiatives.
Former IRS Commissioner Charles Rettig, who served under Presidents Donald Trump and Joe Biden from 2018 to 2022, criticized the recent staffing cuts in a Bloomberg op-ed last week.
“For decades, IRS operations have been thoroughly depleted by underfunding and annual hiring freezes adversely impacting virtually every internal and external function,” he wrote. “To the extent taxpayer services and compliance functions existed, they were on life support.”
Through fiscal year 2023, the IRS examined 0.44% of individual returns filed for tax years 2013 through 2021, according to the latest IRS Data Book.
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