President Donald Trump plans to sign an executive order allowing defined-contribution plans like 401(k) to include private market investments, such as private equity.
The proposed policy could have significant repercussions on retirement insecurity for most American workers. The specifics of the executive order remain hazy, but it is likely to formalize a Department of Labor opinion letter from 2020 that suggests including private equity options in defined-benefit plans.
Private equity investing typically involves taking a controlling interest in a privately traded company and requires a long time horizon with limited liquidity. It also comes with high fees, opaque fee structures, and potential conflicts of interest. Critics argue that this type of investment is too risky and illiquid for workplace retirement plans.
Allowing 401(k) investors to include private equity would give them access to higher returns but also increases the risk of investment losses during economic downturns. Detractors worry that this could lead to a decline in pension plans and further increase retirement insecurity for workers.
The proposal has sparked concerns about fiduciary responsibility, ERISA lawsuits, and the potential unintended consequences on average 401(k) savings rates and balances. Critics argue that the average retirement investor does not need private equity in their 401(k), and more regulation is needed to protect investors.
As employers take on increased fiduciary responsibility for their employees’ retirement plans, experts worry about the potential risks and unintended consequences of this proposed policy.
Source: https://www.fastcompany.com/91373389/heres-why-trumps-proposed-401k-executive-order-may-be-very-bad-news-for-your-retirement