Private Equity (PE) firms have had their eye on workers’ retirement nest eggs ― 401(k) and IRA accounts ― since late 2013 when rules on advertising to individuals were relaxed. Obama’s labor department stymied private equity’s efforts to expose ordinary people to high levels of financial risk.
Yesterday, under cover of pandemic and protests, Labor Secretary Scalia set those concerns aside and issued a letter to allow private equity investments to be included in workers’ retirement accounts. Scalia claims he was acting on President Trump’s instructions to “remove barriers … to economic prosperity.”
But PE is certainly not constrained by a lack of dollars for acquiring Main Street companies. It is not held back by barriers. On the contrary, PE firms are sitting on well over a trillion dollars of dry powder waiting to be put to use buying up companies beaten down by the coronavirus. Whether it is wise to allow this is clearly debatable. Other countries are protecting their businesses from being acquired by private equity firms at fire-sale prices by halting mergers and acquisitions until the pandemic is past and companies have recovered from the economic shock of the lockdown.
Investing retirement savings in private equity exposes ordinary retirees to high risk. In the letter, Scalia himself acknowledges the “potential cost, complexity, [lack of] disclosures, and liquidity issues” these investments pose. Unsophisticated investors, self-interested financial advisors, and opaque private equity firms ― what could go wrong?
Scalia hedges on the payoff to workers from this higher risk, noting that investing in PE “often provide[s] strong returns,” meaning workers can’t count on these returns, no matter what the industry hype suggests. In fact, returns for the typical PE fund launched since 2006, properly measured, have tended to match the stock market’s returns with little to no added premium for the added risk. About half the funds launched in each year since then have underperformed the stock market. The high-performing funds of PE firms are oversubscribed ― ordinary individuals will likely have difficulty accessing them.
Workers have socked away $6.2 trillion in 401(k) accounts and another $2.5 trillion in IRA accounts. PE has been lobbying for years to get its hands on even a fraction of these funds. If just 5 percent of the money in these retirement funds were available to private equity, it would be a windfall of $435 billion ― real money even to private equity millionaires and billionaires. The value proposition for workers, whose retirement income will likely be eaten up by fees for returns that may not materialize, is much less clear.
Scalia has rolled back rules that protected workers’ retirement security. This should be seen as a gift to private equity firms, not a favor to workers who are unlikely to cash in on mythical high PE returns.