Putting Private Assets in 401(k)s Risks Long-Term Investor Harm

Private asset managers appear to have maxed out on the capital available from their traditional stable of institutional investors. They can’t maintain their current growth rates without plowing some new fields, so the roughly $14 trillion in assets sitting in US 401(k)s and similar retirement plans could be their best hope for achieving future growth.

Such a push by private asset managers to access our 401(k)s seems like a blatant effort to transfer the risk of owning overvalued assets to unsophisticated investors ahead of an expected market collapse.
 
But despite these troubling risks, the Trump administration is pushing policies to open our 401(k) plan investments to opaque, illiquid assets, including private equity, private credit, and even cryptocurrency. The recent Department of Labor proposal, which aims to shield employers from liability for losses if they include alternative assets in employees’ 401(k) plans, represents the latest step in this ongoing effort. Retirement savers should pay close attention to what is happening and urge policymakers to protect their investments before it’s too late.

We’ve been hearing a lot lately about the need to “democratize” investing by providing regular folks with access to the same investment products available to the moneyed elite. This sounds like a benevolent effort by America’s wealthiest asset managers to share their investment prowess with all of us regular Joes.

In reality, private asset managers likely are seeking access to ordinary investors’ funds to solve the problem created by their shrinking client base. 
 
Private asset managers, including private equity and venture capital funds, are having trouble exiting their investments. Nearly 40% of private equity-backed companies have been held in fund portfolios for at least five years, the highest percentage in more than a decade.

If private asset managers can’t exit their investments, they can’t return funds to their clients on the expected schedule. This makes it difficult for asset managers to raise new funds from their traditional stable of clients, who are awaiting return of capital from their prior investments.

The crisis of investor confidence impacting private credit demonstrates the dangers of this misguided project to expose the average 401(k) investor to volatile, unregulated, and hard to value assets. Last fall’s bankruptcies of two companies financed with private credit raised concerns about the quality of private credit loans and the reliability of valuations. As a result, private credit investors have begun racing for the exits .

These investors face an unpleasant reality. Under the terms of their investments, funds can deny their redemption requests and hold on to their money. And some of the largest private credit managers, including Apollo Global Management Inc., Morgan Stanley, Blue Owl Capital Inc., and Cliffwater, are doing just that.

For example, last month, investors in Blue Owl’s Technology Income fund requested the return of 40.7% of fund assets, but Blue Owl restricted redemptions to just 5% of the fund. The obstacles impeding private credit investors’ access to their money provide a preview of the challenges investors likely will face if the Trump administration follows through on its plans to provide private asset managers unfettered access to everyday investors’ funds.

If we open 401(k) plans to private market investments, we could be trapping the least savvy investors in opaque, illiquid assets. Retirement savers risk paying inflated prices for these investments and then may find they can’t withdraw their funds in case of a job change, retirement, or financial emergency.
 
More troubling, many retirement savers won’t be investing in alternative assets by choice. This is because fund managers plan to embed alternative assets in target date funds , the most common default choice for workers automatically enrolled by their employers in a 401(k) plan.

Target date funds adjust the balance of stocks and bonds as an investor approaches retirement, a kind of “set it and forget it plan” that appeals to people who don’t want to spend too much time thinking about what’s in their 401(k)s. The workers most likely to end up with investments in alternative assets may be those least likely to understand their many risks.
 
If valuations crater, as market experts ranging from JPMorganChase & Co.’s  Jamie Dimon and Goldman Sachs Group Inc.’s former CEO Lloyd Blankfein fear, we could face demands for a bailout of private funds to stave off investor panic and protect our 401(k)s, similar to the bailout of Silicon Valley Bank in 2023 or the rescue of money market mutual funds during the 2008 financial crisis.
 
Further complicating matters, investment managers are planning to use lightly regulated collective investment trusts to introduce private assets into our 401(k)s. CITs, a once-obscure type of investment fund, are replacing mutual funds as a vehicle of choice for 401(k) plans.

Due to a quirk in the law, CITs aren’t subject to the same disclosure, liquidity, and oversight rules that apply to mutual funds. They are overseen by bank regulators, not the SEC. Embedding opaque private assets within opaque CITs will make it even more difficult for investors to understand what’s in their 401(k)s, along with the associated fees.
 
Policymakers should press pause on the Trump administration’s plan to facilitate fund managers’ efforts to dump overvalued assets on vulnerable workers saving for retirement through their 401(k) plans. If private asset managers want to sell their products to everyday investors, they should provide full disclosures. This would ensure investors and their advisers have information about asset valuation, fees, conflicts of interest, and expected returns necessary to make sensible investment choices.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Renée M. Jones is a professor at Boston College Law School and former director of the Securities and Exchange Commission’s Division of Corporation Finance, and author of the forthcoming book “Untamed Unicorns: Why Startup Finance is Broken and How to Fix It”

Interested in writing? Review our author guidelines, and submit pitches to Insights@bloombergindustry.com.