CNN
–
President Donald Trump is expected to sign an executive order on Thursday that could make 401(k) and other workplace retirement plans easier to provide employees with options to invest in some savings, including private equity, including areas for institutions and “recognized” high-network value investors.
The order requires the Labor Department and the Securities and Exchange Commission to give guidance to employers to provide access to these alternative investments in retirement accounts, according to senior White House officials.
The private equity and credit industry has been steadily pushing in recent months to access the more than $12 trillion market in workplace savings plans that define limits.
Although there is no law prohibiting plan sponsors from offering private market investments to employees, they have traditionally avoided them because they have a fiduciary responsibility to provide a prudent, affordable investment menu to plan participants.
Private equity and private credit options have so far been riskier, more expensive, less transparent and less liquid than publicly traded stock and bond funds.
The president's executive order will not change policy, but it will articulate his position in other governments.
This is one of the reasons why Seiberg does not expect to change it immediately. “This still requires agencies to set new rules. This could involve 2026,” he said.
Once these new rules are drafted, employers as plan sponsors of workplace programs will need to conduct due diligence on new investment products.
Lisa Gomez, who served as Assistant Secretary of Labor for the Department of Labor from October 2022 to January this year, said the plan sponsors will have to comply with their core trust obligations as always to review new online options so that online decision-making is in the best interests of program participants and their beneficiaries.
“It will become more complicated,” Gomez said, who worked in the private sector for 30 years before the government, and was a lawyer representing the sponsors of the program.
She recommends sponsoring recruitment of attorneys and trustee counsel with experience in dealing with private equity to help them review new options. They will need to ask detailed speeches on the expenses, investment strategies and performance of multiple companies that market new private market products.
Sponsors should investigate the performance of new private investment options with similar products that have so far been available only to institutional and wealthy individual investors. So if the new product is designed to address the cost, transparency and liquidity issues of workplace program participants managed by the Employer Retirement Income Safety Act (ERISA), “will affect the returns?” Gomez asked.
What the plan promoters shouldn't do is reject the idea of private equity due to higher costs or other factors. “This may help with the right circumstances, with the right support and education.”
But, Gomez added, for sponsors, considering what the potential drawbacks might be. “If someone says there is no, I will question it.” “Be careful not to get hyped. But we shouldn't be afraid either. We should learn.”
Those who believe retired savers can benefit from at least indirect exposure to private markets, for example, through funds such as target date funds or as part of a collective investment trust fund for the program account account – given that in recent years it will provide greater diversity for all markets globally relative to private markets, which will provide more diversity for all markets.
Hal Ratner, head of research at Morningstar Investment Management LLC, noted that individual companies in the private equity market are about 25 times more than those in publicly traded companies.
“Businesses are privatizing and entering the IPO market is bigger and more mature. As a result, the growth opportunities available to investors in public markets have become more limited.”
Given that all due diligence must be done, it is impossible for most workplace plan retirement savers to be elected to invest in private market options.
Meanwhile, there are many discussions about how people expect to structure the average retail investors to acquire private equity and private debt with the same type of safeguards required by ERISA.
For example, Senator Elizabeth Warren is very verbal about her suspicion and concern. The top-ranked Democrats on the Senate Banking Committee are seeking more information, one of the largest record labels, planning to offer private equity options to its 401(k) clients as early as the next quarter.
More broadly, she also fears the systemic risks that private credit markets may pose to the U.S. financial system and the U.S. economy. In mid-July, she wrote to Finance Secretary Scott Bessent, noting that the amount of bank loans to private debt funds increased by 145%. She asked the Financial Stability Oversight Committee to analyze “the increasing involvement of non-bank financial companies in private credit markets and their growing entanglement with the core banking system poses a threat to U.S. financial stability.”
These non-bank companies include private equity and private credit funds.
She also asked the FSOC to work with the Office of Financial Research to “design and conduct exploratory stress tests to conduct exploratory stress tests for non-bank financial institutions engaged in private credit activities.”