Private Equity and Defined Contributions: A ‘Quasi Inevitability’

At a time in the US when the White House is changing some of the rules of the game on Wall Street and suggesting new schemes on tax rates, it’s probably worthwhile to take a look at the swirl around Americans tax-deferred defined contributions plans such as 401(k)s and the push from private-equity firms to grab a piece of a highly valuable prize.

The story has been around for a while, especially during President Trump’s first term, in what we may call an introductory move by the Department of Labor in June 2020 when it issued an information letter that allowed private equity investments to be a part of retirement-oriented holdings such as target date and balanced funds.

But momentum is now building at the start of Trump’s second term – or the very least from lobbyists – that the time has arrived for the massive retirement industry to invest in PE funds through these plans from a massive pool by some estimates as large as $15 trillion.

“It’s a quasi-inevitability,” said one industry executive about prospects for this happening sooner rather than later.

A little more background. The Employment Retirement Income Security Act has blocked retirement savers from accessing these plans because they are often viewed as highly leveraged, less transparent and carry higher fees than public-market investments. What’s more, plan administrators are not all gung-ho either because of fiduciary concerns as well as potential legal liability. But the proponent voice is growing louder.

In an oft-quoted quote on the subject, Marc Rowan, chief executive officer of Apollo Global Management, at a firm conference, said, “I jokingly say sometimes, we levered the entire retirement of America to Nvidia’s performance. It just doesn’t seem smart. We’re going to fix this, and we are in the process of fixing it.”

Retirement accounts are not strangers to private markets. Pension funds have been investing in PE firms for some time, attracted by the higher returns and diversification. And in a recent poll from the Kent A. Center for Global Markets, 41 percent said that a properly diversified 401k account should include private equity and private credit assets, suggesting the pendulum is swinging in favor of inclusion.

Add to that sentiment, firms such as Apollo and Partners Group are already growing AUD in the DC channel so to some extent the move has already started.

So no matter the temperature in Washington or Wall Street, a key constituent will be the plan administrator who shoulders much of the responsibility. No doubt they will look for more guidance from the Department of Labor on the issue. Opportunities for higher returns and diversification are a big plus. But protection is paramount.

Demographics, however, are on the side of participation. An aging population that will need a bigger pile of cash no doubt will trump some decisions. Perhaps the big question becomes: Do the issues of transparency and liquidity outweigh opportunities to invest in a massive asset class with traction and track record, moving this whole issue from quasi to full inevitability.

Mark Kollar
Partner, Prosek Partners

Mark Kollar’s monthly Letter from America can be read at The Alternative Investor.