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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. One day in January,

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Speaker 1: less than a week before President Trump's second inauguration, a

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Speaker 1: group of more than thirty money managers hopped onto a

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Speaker 1: Zoom call. It included representatives from Blackstone, Ubs and other

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Speaker 1: big Wall Street firms.

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Speaker 2: It was sort of a meeting of like minded individuals

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Speaker 2: to strategize about. I guess goals would be a way

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Speaker 2: of putting it that they have in common.

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Speaker 1: Alison McNeely covers the private equity industry for Bloomberg.

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Speaker 2: One key principle I think that folks were coalescing around

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Speaker 2: was the idea to get more private equity, private credit

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Speaker 2: hedge fund, that sort of thing into the retirement accounts

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Speaker 2: of everyday Americans.

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Speaker 1: They wanted a piece of the four to oh one K.

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Speaker 2: It's kind of the next gold rush.

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Speaker 1: For a long time, private equity firms have relied on

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Speaker 1: capital from pension funds, endowments, and other kinds of professional

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Speaker 1: investors to sustain their growth. But now these firms are

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Speaker 1: looking to explore new frontiers, potentially very lucrative frontiers. There's

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Speaker 1: about twelve trillion dollars in employer sponsored accounts like four

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Speaker 1: oh one K plans.

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Speaker 2: That's only expected to grow. Those funds don't generally have

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Speaker 2: private assets in them, so if they can grab even

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Speaker 2: a slice of that, that's a few trillion right there.

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Speaker 1: And when they gathered on that pre inauguration zoom call,

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Speaker 1: the industry's biggest players agreed, now is the time to

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Speaker 1: start grabbing slices. What was the vibe like?

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Speaker 2: The vibe was definitely optimistic. You know, there's a sense

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Speaker 2: in the industry that now is the moment to strike.

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Speaker 2: With President Trump back in the White House, four one

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Speaker 2: ks and the goal of getting into four o one

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Speaker 2: k's is an extension of a broader theme that really

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Speaker 2: has been taking place for the private equity industry for

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Speaker 2: many years now. The traditional sources of capital have been

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Speaker 2: tapped out, but these private equity firms are still looking

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Speaker 2: for ways to grow and so it's a market that

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Speaker 2: they haven't really tapped before regular people.

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Speaker 1: This is the big take from Bloomberg News. I'm Sarah

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Speaker 1: Holder today on the show Private Equity wants in on

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Speaker 1: Americans retirement plans. What's behind pees play for the four

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Speaker 1: oh one k how likely is it to work and

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Speaker 1: what would it mean for your savings? Let's say you're

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Speaker 1: an employee working at a company that offers four oh

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Speaker 1: one K retirement plans, you may not know exactly what

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Speaker 1: kinds of investments are in the retirement plan you choose.

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Speaker 2: I barely know it's in my furrow and k to

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Speaker 2: be quite honest with.

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Speaker 1: You, people tend to pick from a few default, pre

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Speaker 1: mixed options, and that's what makes the job of selecting

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Speaker 1: what goes into those four oh one K offerings so important.

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Speaker 2: They basically have a responsibility to you, me to other

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Speaker 2: employees under federal law, to essentially pick safe or responsible

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Speaker 2: investments for us to choose.

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Speaker 1: Traditionally, that's meant a four to oh one K is

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Speaker 1: invested in a mix of stocks and bonds.

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Speaker 2: The classic portfolio would be sixty percent stocks forty percent bonds.

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Speaker 2: A lot of people are invested in what's called a

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Speaker 2: target date fund, so basically you kind of pick the

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Speaker 2: fund with the retirement date closest to when you think

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Speaker 2: you're going to retire. I think I'm in like a

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Speaker 2: twenty fifty five fund. I'm in my late thirties, So

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Speaker 2: to give you an idea, right now, that fund is

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Speaker 2: almost entirely in stocks, and as I get closer to retirement,

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Speaker 2: that fund will shift into bonds because bonds are perceived

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Speaker 2: to be safer.

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Speaker 1: But stocks and bonds aren't the only kinds of investments

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Speaker 1: a four to oh one K could include.

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Speaker 2: There are folks who say, no, actually, like private equity

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Speaker 2: is a totally valid and legitimate option as well, that

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Speaker 2: just hasn't been offered so far. They would like to see,

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Speaker 2: essentially my twenty fifty five target date fund take a

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Speaker 2: slice out of stocks and bonds and instead put it

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Speaker 2: into private equity funds.

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Speaker 1: Can you explain how private equity firms work and why

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Speaker 1: they aren't typically offered as an option.

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Speaker 2: Yeah, so private equity we're really using a simplistic term

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Speaker 2: to sort of describe the broader industry. That's about twenty

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Speaker 2: five trillion dollars in assets of private assets, so equity, debt,

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Speaker 2: real estate. Basically, they don't trade on a stock exchange.

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Speaker 2: They're sort of bought and held for the long term. Generally,

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Speaker 2: when you invest in a private equity fund, you're handing

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Speaker 2: over a chunk of change to that firm for ten years.

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Speaker 2: You're saying, I'm going to give you a check for

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Speaker 2: one hundred million dollars to invest in your latest fund,

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Speaker 2: and you're going to go out and buy companies, turn

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Speaker 2: them around, and then hopefully ideally sell them at a

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Speaker 2: profit sometime in the next five to ten years. In

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Speaker 2: the meantime, I don't expect to get my money back.

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Speaker 1: Private equity firms typically make their money by buying a company,

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Speaker 1: usually with debt. They try to maximize profits, cut costs,

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Speaker 1: and eventually sell it for more than they bought it for.

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Speaker 1: This setup means private equity investments are less liquid. It's

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Speaker 1: harder for an investor to cash out if the firm

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Speaker 1: hasn't yet turned around a business or flipped it. And

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Speaker 1: now higher interest rates and declining asset values have meant

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Speaker 1: fewer sales, which means investors aren't getting their money back,

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Speaker 1: which chokes off that cycle of reinvestment. It's a big

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Speaker 1: motivation for this push to tap new pools of cash

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Speaker 1: like retirement savings. But for investors, being exposed to private

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Speaker 1: equity comes with risks.

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Speaker 2: There's a chance it might go bankrupt. There's a chance

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Speaker 2: this turnaround planned or this sort of value creation plan

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Speaker 2: you have might not work out. That is very different

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Speaker 2: from investing in the stock of a big, publicly traded company,

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Speaker 2: where you're a shareholder and your one tiny, tiny, tiny

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Speaker 2: little slice of all these other public shareholders where you

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Speaker 2: can go and log into your brokerage app and buy

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Speaker 2: and sell that stock whenever you want. So they're just

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Speaker 2: sort of perceived as a higher risk, higher return investment,

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Speaker 2: and so in the past they've been restricted only to

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Speaker 2: professional investors who kind of know what they're doing, you know,

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Speaker 2: pension funds, endowments, that sort of thing.

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Speaker 1: What about fees? Are PE fees higher than other investments?

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Speaker 2: Yes, private equity fees are typically what they call two

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Speaker 2: and twenty, So that basically means that the private equity

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Speaker 2: firm takes two percent of whatever you give them as

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Speaker 2: a management fee. That's just the money they make for

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Speaker 2: managing your money. And then the twenty percent is that

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Speaker 2: they take twenty percent of any profit that they make.

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Speaker 1: The average ETF fee is closer to point four four percent,

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Speaker 1: significantly lower than the average PE fee. These risks and

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Speaker 1: fees have so far turned off four oh one K managers. Today,

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Speaker 1: fewer than one in ten four oh one K plans

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Speaker 1: offer any kind of alternative investment, According to a survey

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Speaker 1: from the American Retirement Association. Of those that do, less

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Speaker 1: than one in four include private equity in the mix,

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Speaker 1: but private equity proponents argue these risks are worth it

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Speaker 1: for the potential rewards. Walk me through some of the

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Speaker 1: arguments that private equity managers use for including private equity

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Speaker 1: in four h and K offerings.

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Speaker 2: Yeah, so they say they beat the S and P

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Speaker 2: five hundred, and they might have a point there. You know,

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Speaker 2: if you want to broaden your exposure away from sort

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Speaker 2: of the biggest tech stocks, away from the volatility of

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Speaker 2: public markets, they might have an argument for that.

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Speaker 1: But there's also a counter argument.

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Speaker 2: Well, you're going into investments that are a lot more opaque,

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Speaker 2: that are not valued on a daily basis. There's a

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Speaker 2: little bit more art as to how they're valued and

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Speaker 2: how they're traded and what they might be worth. Then

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Speaker 2: who might want to buy them from you? Because you

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Speaker 2: you know, with a private equity investment, the only way

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Speaker 2: you make money if you buy a company is if

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Speaker 2: you can find someone else to sell that company to.

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Speaker 2: And that is actually a challenge that we've seen the

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Speaker 2: private equity industry go through in the last couple of years.

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Speaker 2: Higher interest rates, more expensive debt has made it harder

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Speaker 2: for private equity firms to sell a lot of these

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Speaker 2: companies that they've invested in, and so there is something

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Speaker 2: to be said about also being able to get in

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Speaker 2: and out of MetaStock knowing exactly what it's worth, knowing

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Speaker 2: that someone will buy it from you.

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Speaker 1: Still, people pushing to get private equity into four oh

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Speaker 1: one ks say that the fact that these are longer term,

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Speaker 1: less liquid investments is actually a good thing.

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Speaker 2: Pollo Global Management CEO Marcron is an example of this.

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Speaker 2: They're a large private equity firm. They say that actually

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Speaker 2: private assets because of the long term investment horizon of retirement.

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Speaker 2: It's a perfect match. Because you don't need your money

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Speaker 2: for twenty thirty, forty years. You don't actually need to

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Speaker 2: be all in stocks and bonds and things that can

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Speaker 2: be sold on demand whenever you want on a daily basis.

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Speaker 1: Right, You don't have to today, sell it tomorrow. You

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Speaker 1: have to buy today, sell it in thirty years or

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Speaker 1: forty years exactly.

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Speaker 2: And by taking you know, a smaller portion of your

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Speaker 2: portfolio some people say ten percent, some people say twenty percent.

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Speaker 2: By taking a portion of that and instead putting in

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Speaker 2: a private equity fund, that yes, is a little bit

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Speaker 2: riskier but has the potential for higher return. It's actually smart,

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Speaker 2: and if you don't do that, you're leaving money on

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Speaker 2: the table. A lot of people who are proponents of

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Speaker 2: putting private investments, such as private equity into furrowon keys,

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Speaker 2: say the best way to do it would be as

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Speaker 2: part of a diversified portfolio like a target day fund,

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Speaker 2: and so it's basically like the asset mix would change

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Speaker 2: over time. There are some people who still say, I

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Speaker 2: don't know like that. It's still it's really difficult to

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Speaker 2: determine how like the liquidity as they call it, will

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Speaker 2: really work, if people will really be able to get

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Speaker 2: out of these things if they need to, if the

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Speaker 2: asset mix is really appropriate. Like these are still live

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Speaker 2: questions that people are trying to sell.

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Speaker 1: Part of the reason we don't know the answers to

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Speaker 1: these questions yet is because private equity's share of American

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Speaker 1: four to oh one k's is still tiny. But under

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Speaker 1: a Trump presidency, the industry is hoping that could change

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Speaker 1: after the break the political shifts that could help PE

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Speaker 1: capture investments from regular people. Four oh one k's were

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Speaker 1: invented some fifty years ago to help workers avoid paying taxes.

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Speaker 1: On deferred compensation that evolved into a way for employees

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Speaker 1: to save for retirement without employers having to offer a

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Speaker 1: traditional pension. The number of people enrolled in four oh

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Speaker 1: one k's and similar retirement plans has steadily grown, and

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Speaker 1: companies are required to act in their employee's best interest

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Speaker 1: when selecting the breakdown of their four oh one K offerings.

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Speaker 2: Basically, retirement law says the fiduciar has a sort of

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Speaker 2: responsibility to pick the most prudent investment for their plan participants.

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Speaker 2: They don't really say what prudent means, and so people

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Speaker 2: have taken a really conservative interpretation of that.

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Speaker 1: Bloomberg's Alison McNeely says that requirement is one reason many

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Speaker 1: employers have shied away from including private equity in their plans.

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Speaker 2: There's a lawsuit that a lot of people in and

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Speaker 2: around the industry invoke, which is the Intel lawsuit. Intel

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Speaker 2: was sued about a decade ago after Intel put some

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Speaker 2: private equity funds in some hedge funds into its Furrow

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Speaker 2: and K plan. Some of those employees sued the company.

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Speaker 2: They said, you put our plan into these private assets

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Speaker 2: at the time that public markets were on a tear,

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Speaker 2: and we actually missed out on the market rally.

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Speaker 1: You didn't manage my money correctly by investing in private equity.

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Speaker 2: Yeah, and so that lawsuit really created a chilling effect

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Speaker 2: in the industry because other companies don't want to get sued,

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Speaker 2: and they just basically want to know that if they

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Speaker 2: were to allocate some of their fourah on k into

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Speaker 2: private investments, that they wouldn't get sued. And also even

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Speaker 2: if they do get sued and defend themselves, there's still

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Speaker 2: a lot of headline or reputational risk there that many

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Speaker 2: of these companies that are conservative by nature and want

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Speaker 2: to protect their reputations would like to avoid.

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Speaker 1: That. Intel case over its four oh one K strategy

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Speaker 1: was eventually dismissed. The plaintiffs are trying to get that

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Speaker 1: dismissal overturned on appeal, but some employers are waiting for

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Speaker 1: a more definitive sign that exposing their employees for one

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Speaker 1: ks to private equity won't get them into trouble.

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Speaker 2: I think a lot of corporate four oh one K

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Speaker 2: plan administrators are looking for a green light from the

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Speaker 2: government that they won't be sued if they put alternative

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Speaker 2: assets into their retirement plan. The way the law is

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Speaker 2: right now now is It's kind of silent technically from

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Speaker 2: a legal standpoint, there's nothing preventing a company from putting

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Speaker 2: private equity in their fore own k plan, provided they've

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Speaker 2: done their due diligence and run their process to make

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Speaker 2: an appropriate investment. It's really sort of a hearts and

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Speaker 2: minds debate or argument or fight as much as anything else.

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Speaker 1: With a new business friendly administration in the White House

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Speaker 1: and Republicans in control of Congress, private equity advocates are

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Speaker 1: hoping this is the moment they could get more clarity

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Speaker 1: from the federal government. What is it about this moment

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Speaker 1: that is telling private equity firms we might get a

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Speaker 1: green light from the government.

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Speaker 2: The first Trump Department of Labor did put out a

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Speaker 2: letter that says we think that private equity has a

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Speaker 2: role in for own cas. So that was a pretty

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Speaker 2: clear signal back in twenty twenty that you know, folks

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Speaker 2: could possibly go ahead with this.

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Speaker 1: But then the Biden administration put out its own guidance

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Speaker 1: that urged caution. So the question is will the guidance

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Speaker 1: flip once again with Trump back in charge.

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Speaker 2: The Department of Labor could put out a letter that

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Speaker 2: essentially says you can go ahead and put private equity

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Speaker 2: into a furrow and k if you've done your homework

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Speaker 2: and evaluated the investment properly. There's also the potential that

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Speaker 2: some members of Congress could try to get legislation passed.

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Speaker 2: That is definitely a harder route.

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Speaker 1: Obviously, the politics are shifting such that perhaps that could

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Speaker 1: happen more and more. But is there evidence that employees

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Speaker 1: would opt into those plans.

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Speaker 2: I don't think there's a sense at this point that

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Speaker 2: employees are clamoring for private assets, but maybe they will

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Speaker 2: in the future.

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Speaker 1: Right for some people, private equity doesn't have the best reputation.

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Speaker 1: They see headlines about its negative impact on sectors like

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Speaker 1: healthcare and housing. I guess what I'm asking is, do

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Speaker 1: you get the sense that some workers would want to

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Speaker 1: avoid having their four oh one K tied up in

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Speaker 1: private equity for ethical reasons?

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Speaker 2: It's a really good question. There are people who don't

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Speaker 2: like private equity, who don't like the impact private equity

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Speaker 2: has had on healthcare and other industries, and they might

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Speaker 2: object to having therefore one K invested in that. But

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Speaker 2: if it's part of a target date fund, it's sort

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Speaker 2: of being offered to them as part of a broad portfolio.

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Speaker 2: They might not even be able to opt out of it. Like,

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Speaker 2: at this point, we don't really know.

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Speaker 1: This is The Big Take from Bloomberg News. I'm Sarah Holder.

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Speaker 1: This episode was produced by Julia Press. It was edited

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