There’s good news for investors who are looking to add a little spice to their retirement accounts. For the first time ever, defined contribution plans – like 401ks – have access to private equity investments.
U.S. Secretary of Labor Eugene Scalia said in a statement yesterday that this step “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”
Typically viewed as a way to outperform the stock market, the average private equity investment has actually underperformed the stock market over the last 10 years. According to a study by Bain & Company, private equity investments returned an average of 15.3% compared to 15.5% for the S&P 500. The study does mention that top-tier private equity funds did manage to outperform the market.
Scalia’s announcement went on to add, “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
You won’t be able to invest directly into private equity funds in your 401k. You’ll only have access through specific investment vehicles like target-date funds. Defined benefit plans – like pensions – have had access to private equity investments for some time now. So, as Scalia mentions, this move now levels the playing field for investors.
Securities and Exchange Commissioner Jay Clayton supports the decision to allow defined contribution plans access to private equity investments. He also mentions that the new capital coming in will increase the funding sources available to private businesses.
How It Should Be Perceived
Investors, however, shouldn’t look at the ability to invest in private equity funds as a panacea of retirement riches.
Private equity investments are often much riskier than traditional stocks. As we mentioned earlier, they don’t always provide greater returns.
In an interview with Fox Business, Ed Slott, founder of IRAHep.com, said that investment losses in February and March may have caused a sense of panic among savers who might be searching for larger returns.
“Some of those [private equity] returns are sensational but, with anything, you could lose a boatload too,” Slott said. “It doesn’t mean private equity always makes money.”
You may lose money while investing in private equity funds. When that happens, you’ll likely have no recourse against your broker or fiduciary who put you in those investments.
As part of the announcement, Slott noted that there is a “liability shield” for fiduciaries. As long as they follow the guidelines set out by the Department of Labor, they will be within their fiduciary obligations. This makes it harder for investors to sue over losses.
The ability to invest in a private equity fund is alluring. However, the best advice comes from Alano Massi, the managing director of Palm Capital Management.
“Should that investor not feel comfortable with private equity, or simply does not understand it, then he or she should not participate,” Massi said.
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