Private Equity Could Be Coming to Your 401(k) Program
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What is the main topic discussed in this episode?
Here's your money briefing for Thursday, June 25th. I'm J.R. Whalen for The Wall Street Journal. 401k retirement plans typically give you a list of what kind of investments you want to include in your account. The Labor Department recently indicated you could see another, riskier option soon, private equity.
Private equity generally, I mean, they're illiquid investments. They're not publicly traded.
What recent Labor Department guidance allows private equity in 401(k) plans?
So if you want to go and sell your private equity, you can't necessarily do that. You might actually face long what they call lockup periods of several years where you can't cash in your investment. So they have a higher risk level than publicly traded equities do. And, you know, in theory, they have a higher return.
So what does private equity invest in, and who decides whether it'll be offered by a 401k? Our reporter Ann Tergesen will be here with some answers after the break.
Private equity funds have been a mainstay of pension programs for decades. Soon they'll be an investment to consider in your 401k plan. But is private equity right for everyone? And how do 401k administrators feel about it? Let's bring in retirement reporter Ann Tergesen for some answers.
Why haven't 401(k) plans included private equity until now?
So Ann, how did this come about? You know, private equity funds potentially able to be a part of 401k programs?
In early June, the Labor Department issued a letter in response to two private equity firms that were basically asking for guidance. You know, they were basically saying, like, Labor Department, is it okay if 401k plans offer private equity? And the response from the Labor Department was yes, but it should be included in a professionally managed fund, like a target date fund. So the guidance from the Labor Department was that 401ks need to do kind of what pension funds have done, which is professionally manage a portfolio for people that might include a small amount of private equity.
Now, why hasn't private equity been available for investment by 401ks up to this point?
Well, generally 401ks have stuck to stocks and bonds, sort of plain vanilla investments. And it's not really clear. I mean, it's just a relatively new area versus pension funds that have been more established over time.
How does private equity differ from publicly traded stocks in liquidity and risk?
Also, 401k plans, they're offered by employers, but historically, the employees have gotten to choose the investments that they want. And Employers are always very worried about giving employees choices that may blow up on them. And if an employer were to offer an employee sort of a standalone private equity fund, you know, that could be like a very risky thing to put all your money in. So I think employers have been sensitive to that.
Now, what's the risk reward profile associated with private equity?
Private equity generally, I mean, they're illiquid investments. They're not publicly traded. So if you want to go and sell your private equity, you can't necessarily do that. You might actually face long what they call lockup periods of several years where you can't cash in your investment. So they have a higher risk level than publicly traded equities do. And, you know, in theory, they have a higher return.
And what do private equity funds invest in?
They invest in private companies.
What do private equity funds actually invest in and why does that matter for investors?
So you look at Amazon or Apple or whatever, Google, and you can buy and sell those shares daily on the stock exchange. But there's a large percentage of US companies that are privately held. They're owned by the people who started them, maybe. You know, these can even be some very large companies. They're just not traded publicly. And in the last 20 years, the number of companies that have listed on the public exchanges has actually declined. So part of the argument for adding private equity is that a greater percentage of the U.S. economy is composed of privately held companies. And so average investors should be given the opportunity to have exposure to that rather than just like the wealthy.
So are the biggest 401k plan administrators on board with including private equity as an investment option?
Well, the three biggest target date fund managers are Fidelity, Vanguard and T. Rowe Price.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:26
2
What recent Labor Department guidance allows private equity in 401(k) plans?
0:26–1:17
3
Why haven't 401(k) plans included private equity until now?
1:17–2:18
4
How does private equity differ from publicly traded stocks in liquidity and risk?
2:18–3:13
5
What do private equity funds actually invest in and why does that matter for investors?
3:13–4:08
6
Are major target-date fund managers like Vanguard and Fidelity planning to add private equity?
4:08–6:09
7
How would private equity be offered inside a 401(k) and can participants opt out?
6:09–7:05
8
What fees, legal risks, and due-diligence should 401(k) investors watch for with private equity?
7:05–7:07
Speakers
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