Speaker 1: Bloomberg Audio Studios, podcasts, radio news. One day in January,
Speaker 1: less than a week before President Trump's second inauguration, a
Speaker 1: group of more than thirty money managers hopped onto a
Speaker 1: Zoom call. It included representatives from Blackstone, Ubs and other
Speaker 1: big Wall Street firms.
Speaker 2: It was sort of a meeting of like minded individuals
Speaker 2: to strategize about. I guess goals would be a way
Speaker 2: of putting it that they have in common.
Speaker 1: Alison McNeely covers the private equity industry for Bloomberg.
Speaker 2: One key principle I think that folks were coalescing around
Speaker 2: was the idea to get more private equity, private credit
Speaker 2: hedge fund, that sort of thing into the retirement accounts
Speaker 2: of everyday Americans.
Speaker 1: They wanted a piece of the four to oh one K.
Speaker 2: It's kind of the next gold rush.
Speaker 1: For a long time, private equity firms have relied on
Speaker 1: capital from pension funds, endowments, and other kinds of professional
Speaker 1: investors to sustain their growth. But now these firms are
Speaker 1: looking to explore new frontiers, potentially very lucrative frontiers. There's
Speaker 1: about twelve trillion dollars in employer sponsored accounts like four
Speaker 1: oh one K plans.
Speaker 2: That's only expected to grow. Those funds don't generally have
Speaker 2: private assets in them, so if they can grab even
Speaker 2: a slice of that, that's a few trillion right there.
Speaker 1: And when they gathered on that pre inauguration zoom call,
Speaker 1: the industry's biggest players agreed, now is the time to
Speaker 1: start grabbing slices. What was the vibe like?
Speaker 2: The vibe was definitely optimistic. You know, there's a sense
Speaker 2: in the industry that now is the moment to strike.
Speaker 2: With President Trump back in the White House, four one
Speaker 2: ks and the goal of getting into four o one
Speaker 2: k's is an extension of a broader theme that really
Speaker 2: has been taking place for the private equity industry for
Speaker 2: many years now. The traditional sources of capital have been
Speaker 2: tapped out, but these private equity firms are still looking
Speaker 2: for ways to grow and so it's a market that
Speaker 2: they haven't really tapped before regular people.
Speaker 1: This is the big take from Bloomberg News. I'm Sarah
Speaker 1: Holder today on the show Private Equity wants in on
Speaker 1: Americans retirement plans. What's behind pees play for the four
Speaker 1: oh one k how likely is it to work and
Speaker 1: what would it mean for your savings? Let's say you're
Speaker 1: an employee working at a company that offers four oh
Speaker 1: one K retirement plans, you may not know exactly what
Speaker 1: kinds of investments are in the retirement plan you choose.
Speaker 2: I barely know it's in my furrow and k to
Speaker 2: be quite honest with.
Speaker 1: You, people tend to pick from a few default, pre
Speaker 1: mixed options, and that's what makes the job of selecting
Speaker 1: what goes into those four oh one K offerings so important.
Speaker 2: They basically have a responsibility to you, me to other
Speaker 2: employees under federal law, to essentially pick safe or responsible
Speaker 2: investments for us to choose.
Speaker 1: Traditionally, that's meant a four to oh one K is
Speaker 1: invested in a mix of stocks and bonds.
Speaker 2: The classic portfolio would be sixty percent stocks forty percent bonds.
Speaker 2: A lot of people are invested in what's called a
Speaker 2: target date fund, so basically you kind of pick the
Speaker 2: fund with the retirement date closest to when you think
Speaker 2: you're going to retire. I think I'm in like a
Speaker 2: twenty fifty five fund. I'm in my late thirties, So
Speaker 2: to give you an idea, right now, that fund is
Speaker 2: almost entirely in stocks, and as I get closer to retirement,
Speaker 2: that fund will shift into bonds because bonds are perceived
Speaker 2: to be safer.
Speaker 1: But stocks and bonds aren't the only kinds of investments
Speaker 1: a four to oh one K could include.
Speaker 2: There are folks who say, no, actually, like private equity
Speaker 2: is a totally valid and legitimate option as well, that
Speaker 2: just hasn't been offered so far. They would like to see,
Speaker 2: essentially my twenty fifty five target date fund take a
Speaker 2: slice out of stocks and bonds and instead put it
Speaker 2: into private equity funds.
Speaker 1: Can you explain how private equity firms work and why
Speaker 1: they aren't typically offered as an option.
Speaker 2: Yeah, so private equity we're really using a simplistic term
Speaker 2: to sort of describe the broader industry. That's about twenty
Speaker 2: five trillion dollars in assets of private assets, so equity, debt,
Speaker 2: real estate. Basically, they don't trade on a stock exchange.
Speaker 2: They're sort of bought and held for the long term. Generally,
Speaker 2: when you invest in a private equity fund, you're handing
Speaker 2: over a chunk of change to that firm for ten years.
Speaker 2: You're saying, I'm going to give you a check for
Speaker 2: one hundred million dollars to invest in your latest fund,
Speaker 2: and you're going to go out and buy companies, turn
Speaker 2: them around, and then hopefully ideally sell them at a
Speaker 2: profit sometime in the next five to ten years. In
Speaker 2: the meantime, I don't expect to get my money back.
Speaker 1: Private equity firms typically make their money by buying a company,
Speaker 1: usually with debt. They try to maximize profits, cut costs,
Speaker 1: and eventually sell it for more than they bought it for.
Speaker 1: This setup means private equity investments are less liquid. It's
Speaker 1: harder for an investor to cash out if the firm
Speaker 1: hasn't yet turned around a business or flipped it. And
Speaker 1: now higher interest rates and declining asset values have meant
Speaker 1: fewer sales, which means investors aren't getting their money back,
Speaker 1: which chokes off that cycle of reinvestment. It's a big
Speaker 1: motivation for this push to tap new pools of cash
Speaker 1: like retirement savings. But for investors, being exposed to private
Speaker 1: equity comes with risks.
Speaker 2: There's a chance it might go bankrupt. There's a chance
Speaker 2: this turnaround planned or this sort of value creation plan
Speaker 2: you have might not work out. That is very different
Speaker 2: from investing in the stock of a big, publicly traded company,
Speaker 2: where you're a shareholder and your one tiny, tiny, tiny
Speaker 2: little slice of all these other public shareholders where you
Speaker 2: can go and log into your brokerage app and buy
Speaker 2: and sell that stock whenever you want. So they're just
Speaker 2: sort of perceived as a higher risk, higher return investment,
Speaker 2: and so in the past they've been restricted only to
Speaker 2: professional investors who kind of know what they're doing, you know,
Speaker 2: pension funds, endowments, that sort of thing.
Speaker 1: What about fees? Are PE fees higher than other investments?
Speaker 2: Yes, private equity fees are typically what they call two
Speaker 2: and twenty, So that basically means that the private equity
Speaker 2: firm takes two percent of whatever you give them as
Speaker 2: a management fee. That's just the money they make for
Speaker 2: managing your money. And then the twenty percent is that
Speaker 2: they take twenty percent of any profit that they make.
Speaker 1: The average ETF fee is closer to point four four percent,
Speaker 1: significantly lower than the average PE fee. These risks and
Speaker 1: fees have so far turned off four oh one K managers. Today,
Speaker 1: fewer than one in ten four oh one K plans
Speaker 1: offer any kind of alternative investment, According to a survey
Speaker 1: from the American Retirement Association. Of those that do, less
Speaker 1: than one in four include private equity in the mix,
Speaker 1: but private equity proponents argue these risks are worth it
Speaker 1: for the potential rewards. Walk me through some of the
Speaker 1: arguments that private equity managers use for including private equity
Speaker 1: in four h and K offerings.
Speaker 2: Yeah, so they say they beat the S and P
Speaker 2: five hundred, and they might have a point there. You know,
Speaker 2: if you want to broaden your exposure away from sort
Speaker 2: of the biggest tech stocks, away from the volatility of
Speaker 2: public markets, they might have an argument for that.
Speaker 1: But there's also a counter argument.
Speaker 2: Well, you're going into investments that are a lot more opaque,
Speaker 2: that are not valued on a daily basis. There's a
Speaker 2: little bit more art as to how they're valued and
Speaker 2: how they're traded and what they might be worth. Then
Speaker 2: who might want to buy them from you? Because you
Speaker 2: you know, with a private equity investment, the only way
Speaker 2: you make money if you buy a company is if
Speaker 2: you can find someone else to sell that company to.
Speaker 2: And that is actually a challenge that we've seen the
Speaker 2: private equity industry go through in the last couple of years.
Speaker 2: Higher interest rates, more expensive debt has made it harder
Speaker 2: for private equity firms to sell a lot of these
Speaker 2: companies that they've invested in, and so there is something
Speaker 2: to be said about also being able to get in
Speaker 2: and out of MetaStock knowing exactly what it's worth, knowing
Speaker 2: that someone will buy it from you.
Speaker 1: Still, people pushing to get private equity into four oh
Speaker 1: one ks say that the fact that these are longer term,
Speaker 1: less liquid investments is actually a good thing.
Speaker 2: Pollo Global Management CEO Marcron is an example of this.
Speaker 2: They're a large private equity firm. They say that actually
Speaker 2: private assets because of the long term investment horizon of retirement.
Speaker 2: It's a perfect match. Because you don't need your money
Speaker 2: for twenty thirty, forty years. You don't actually need to
Speaker 2: be all in stocks and bonds and things that can
Speaker 2: be sold on demand whenever you want on a daily basis.
Speaker 1: Right, You don't have to today, sell it tomorrow. You
Speaker 1: have to buy today, sell it in thirty years or
Speaker 1: forty years exactly.
Speaker 2: And by taking you know, a smaller portion of your
Speaker 2: portfolio some people say ten percent, some people say twenty percent.
Speaker 2: By taking a portion of that and instead putting in
Speaker 2: a private equity fund, that yes, is a little bit
Speaker 2: riskier but has the potential for higher return. It's actually smart,
Speaker 2: and if you don't do that, you're leaving money on
Speaker 2: the table. A lot of people who are proponents of
Speaker 2: putting private investments, such as private equity into furrowon keys,
Speaker 2: say the best way to do it would be as
Speaker 2: part of a diversified portfolio like a target day fund,
Speaker 2: and so it's basically like the asset mix would change
Speaker 2: over time. There are some people who still say, I
Speaker 2: don't know like that. It's still it's really difficult to
Speaker 2: determine how like the liquidity as they call it, will
Speaker 2: really work, if people will really be able to get
Speaker 2: out of these things if they need to, if the
Speaker 2: asset mix is really appropriate. Like these are still live
Speaker 2: questions that people are trying to sell.
Speaker 1: Part of the reason we don't know the answers to
Speaker 1: these questions yet is because private equity's share of American
Speaker 1: four to oh one k's is still tiny. But under
Speaker 1: a Trump presidency, the industry is hoping that could change
Speaker 1: after the break the political shifts that could help PE
Speaker 1: capture investments from regular people. Four oh one k's were
Speaker 1: invented some fifty years ago to help workers avoid paying taxes.
Speaker 1: On deferred compensation that evolved into a way for employees
Speaker 1: to save for retirement without employers having to offer a
Speaker 1: traditional pension. The number of people enrolled in four oh
Speaker 1: one k's and similar retirement plans has steadily grown, and
Speaker 1: companies are required to act in their employee's best interest
Speaker 1: when selecting the breakdown of their four oh one K offerings.
Speaker 2: Basically, retirement law says the fiduciar has a sort of
Speaker 2: responsibility to pick the most prudent investment for their plan participants.
Speaker 2: They don't really say what prudent means, and so people
Speaker 2: have taken a really conservative interpretation of that.
Speaker 1: Bloomberg's Alison McNeely says that requirement is one reason many
Speaker 1: employers have shied away from including private equity in their plans.
Speaker 2: There's a lawsuit that a lot of people in and
Speaker 2: around the industry invoke, which is the Intel lawsuit. Intel
Speaker 2: was sued about a decade ago after Intel put some
Speaker 2: private equity funds in some hedge funds into its Furrow
Speaker 2: and K plan. Some of those employees sued the company.
Speaker 2: They said, you put our plan into these private assets
Speaker 2: at the time that public markets were on a tear,
Speaker 2: and we actually missed out on the market rally.
Speaker 1: You didn't manage my money correctly by investing in private equity.
Speaker 2: Yeah, and so that lawsuit really created a chilling effect
Speaker 2: in the industry because other companies don't want to get sued,
Speaker 2: and they just basically want to know that if they
Speaker 2: were to allocate some of their fourah on k into
Speaker 2: private investments, that they wouldn't get sued. And also even
Speaker 2: if they do get sued and defend themselves, there's still
Speaker 2: a lot of headline or reputational risk there that many
Speaker 2: of these companies that are conservative by nature and want
Speaker 2: to protect their reputations would like to avoid.
Speaker 1: That. Intel case over its four oh one K strategy
Speaker 1: was eventually dismissed. The plaintiffs are trying to get that
Speaker 1: dismissal overturned on appeal, but some employers are waiting for
Speaker 1: a more definitive sign that exposing their employees for one
Speaker 1: ks to private equity won't get them into trouble.
Speaker 2: I think a lot of corporate four oh one K
Speaker 2: plan administrators are looking for a green light from the
Speaker 2: government that they won't be sued if they put alternative
Speaker 2: assets into their retirement plan. The way the law is
Speaker 2: right now now is It's kind of silent technically from
Speaker 2: a legal standpoint, there's nothing preventing a company from putting
Speaker 2: private equity in their fore own k plan, provided they've
Speaker 2: done their due diligence and run their process to make
Speaker 2: an appropriate investment. It's really sort of a hearts and
Speaker 2: minds debate or argument or fight as much as anything else.
Speaker 1: With a new business friendly administration in the White House
Speaker 1: and Republicans in control of Congress, private equity advocates are
Speaker 1: hoping this is the moment they could get more clarity
Speaker 1: from the federal government. What is it about this moment
Speaker 1: that is telling private equity firms we might get a
Speaker 1: green light from the government.
Speaker 2: The first Trump Department of Labor did put out a
Speaker 2: letter that says we think that private equity has a
Speaker 2: role in for own cas. So that was a pretty
Speaker 2: clear signal back in twenty twenty that you know, folks
Speaker 2: could possibly go ahead with this.
Speaker 1: But then the Biden administration put out its own guidance
Speaker 1: that urged caution. So the question is will the guidance
Speaker 1: flip once again with Trump back in charge.
Speaker 2: The Department of Labor could put out a letter that
Speaker 2: essentially says you can go ahead and put private equity
Speaker 2: into a furrow and k if you've done your homework
Speaker 2: and evaluated the investment properly. There's also the potential that
Speaker 2: some members of Congress could try to get legislation passed.
Speaker 2: That is definitely a harder route.
Speaker 1: Obviously, the politics are shifting such that perhaps that could
Speaker 1: happen more and more. But is there evidence that employees
Speaker 1: would opt into those plans.
Speaker 2: I don't think there's a sense at this point that
Speaker 2: employees are clamoring for private assets, but maybe they will
Speaker 2: in the future.
Speaker 1: Right for some people, private equity doesn't have the best reputation.
Speaker 1: They see headlines about its negative impact on sectors like
Speaker 1: healthcare and housing. I guess what I'm asking is, do
Speaker 1: you get the sense that some workers would want to
Speaker 1: avoid having their four oh one K tied up in
Speaker 1: private equity for ethical reasons?
Speaker 2: It's a really good question. There are people who don't
Speaker 2: like private equity, who don't like the impact private equity
Speaker 2: has had on healthcare and other industries, and they might
Speaker 2: object to having therefore one K invested in that. But
Speaker 2: if it's part of a target date fund, it's sort
Speaker 2: of being offered to them as part of a broad portfolio.
Speaker 2: They might not even be able to opt out of it. Like,
Speaker 2: at this point, we don't really know.
Speaker 1: This is The Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 1: This episode was produced by Julia Press. It was edited
Speaker 1: by Tracy Samuelson and Amanda Cantrell. It was fact checked
Speaker 1: by Audreyannatapia and mixed and sound designed by Alex Sugiura.
Speaker 1: Special thanks to Don limm Our senior producer is Naomi Shaven.
Speaker 1: Our senior editor is Elizabeth Ponso. Our executive producer is
Speaker 1: Nicole beemsterbor Sage Bauman is Bloomberg's head of podcasts. If
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