Tax Facts
Private Equity Investments in 401(k)s
It’s recently been reported that the Trump administration is considering issuing an executive order that would allow 401(k) plans to invest in private equity and other non-traditional investments. The order would direct the Department of Labor and the SEC to identify ways to integrate private equity investments into the 401(k) market. As of now, at least one large retirement plan provider has partnered with several investment firms to offer private equity investments within collective investment trusts.
We asked two professors and authors of ThinkAdvisor’s Tax Facts with opposing political viewpoints to share their opinions about Trump’s proposals to issue an executive ordering opening the ERISA retirement market to private equity investments.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Allowing retirement plans to invest in private equity assets without fear would essentially open up these incredibly valuable investment opportunities to ordinary Americans who otherwise would not have the opportunity to participate in the heightened gains that can be realized through private market investing. By limiting retirement plans' abilities to offer private equity investments, we do a huge disservice to ordinary, hardworking retirement investors.
Bloink: While yes, the possibility for larger returns is always there with private equity, we're talking about hugely risky investment options here—and many hardworking Americans who cannot afford to shoulder the types of losses that can accompany a non-traditional investment portfolio. Private equity investments are extremely complicated, lack transparency and at the end of the day, aren't always particularly liquid.
_________________________________
Byrnes: There's no reason hard working Americans shouldn't be offered the same opportunities to secure strong returns on investments with private equity offerings. Yes, private equity investments can be complicated—but there’s no reason why we can’t offer the education that ordinary retirement investors deserve. With sufficient information, the investor can determine whether they believe any given private equity investment is a smart idea and whether they’re willing to take the risk and potentially secure a huge payoff when an investment does deliver.
Bloink: Trump's proposal to offer private equity to any retirement investor may give the largest private equity firms a chance to rake in even larger returns—likely the impetus behind the new proposals--but at what cost? Complex and risky private equity investments generally are only suited to those investors who can afford to take the loss--and who perhaps have a more detailed understanding of what private equity investing entails and how to diversify to limit the impact of any given loss.
_________________________________
Byrnes: American retirement investors should be free to make their own investment decisions, not simply be limited to those choices that the government arbitrarily decides are "safe" enough for retirement investing. Private equity investments are already becoming more widely available. Ordinary retirement investors can, and should, be given the tools that they need to evaluate and select their own investments—regardless of what those investments entail.
Bloink: ERISA retirement plan sponsors would face huge litigation risk even if they took steps to educate investors about the risks and complexities associated with private equity investments. These simply aren't the types of sound investments that we should be encouraging everyday retirement investors to undertake. We already have a wide range of investment risk profiles available—introducing some of the riskiest investments is highly likely to cause situations where we see Americans losing their retirement nest eggs due to high-risk offerings.
We asked two professors and authors of ThinkAdvisor’s Tax Facts with opposing political viewpoints to share their opinions about Trump’s proposals to issue an executive ordering opening the ERISA retirement market to private equity investments.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Allowing retirement plans to invest in private equity assets without fear would essentially open up these incredibly valuable investment opportunities to ordinary Americans who otherwise would not have the opportunity to participate in the heightened gains that can be realized through private market investing. By limiting retirement plans' abilities to offer private equity investments, we do a huge disservice to ordinary, hardworking retirement investors.
Bloink: While yes, the possibility for larger returns is always there with private equity, we're talking about hugely risky investment options here—and many hardworking Americans who cannot afford to shoulder the types of losses that can accompany a non-traditional investment portfolio. Private equity investments are extremely complicated, lack transparency and at the end of the day, aren't always particularly liquid.
_________________________________
Byrnes: There's no reason hard working Americans shouldn't be offered the same opportunities to secure strong returns on investments with private equity offerings. Yes, private equity investments can be complicated—but there’s no reason why we can’t offer the education that ordinary retirement investors deserve. With sufficient information, the investor can determine whether they believe any given private equity investment is a smart idea and whether they’re willing to take the risk and potentially secure a huge payoff when an investment does deliver.
Bloink: Trump's proposal to offer private equity to any retirement investor may give the largest private equity firms a chance to rake in even larger returns—likely the impetus behind the new proposals--but at what cost? Complex and risky private equity investments generally are only suited to those investors who can afford to take the loss--and who perhaps have a more detailed understanding of what private equity investing entails and how to diversify to limit the impact of any given loss.
_________________________________
Byrnes: American retirement investors should be free to make their own investment decisions, not simply be limited to those choices that the government arbitrarily decides are "safe" enough for retirement investing. Private equity investments are already becoming more widely available. Ordinary retirement investors can, and should, be given the tools that they need to evaluate and select their own investments—regardless of what those investments entail.
Bloink: ERISA retirement plan sponsors would face huge litigation risk even if they took steps to educate investors about the risks and complexities associated with private equity investments. These simply aren't the types of sound investments that we should be encouraging everyday retirement investors to undertake. We already have a wide range of investment risk profiles available—introducing some of the riskiest investments is highly likely to cause situations where we see Americans losing their retirement nest eggs due to high-risk offerings.
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