Your Survival Guy has been warning that private equity is the next big thing coming for you. Private equity wants to harvest the retail investor via access to their 401(k)s. The editorial board of Bloomberg makes the case against private equity in 401(k)s, writing:
Why now? The latest push to tap 401(k)s comes at a time when many private funds are struggling to exit their investments. Despite efforts to raise more cash by repackaging or borrowing against unsold assets, private equity firms returned less than ever to investors last year. Institutional clients such as sovereign wealth funds and university endowments are expressing concern and looking to get out. Cracks are showing in private credit as well. If retail investors jump in, there’s a risk they could end up stuck with assets nobody else wants.
What’s it worth? Unlike publicly traded stocks, which have market prices and relatively transparent finances, private assets are hard to value. Investors must typically rely on fund managers’ own estimates; even some big institutions find the information they receive inadequate. When they need to sell, they often can’t get full price: Recent secondary-market discounts on stakes in private equity funds have reportedly been as large as 20%.
What does private capital offer that stocks and bonds don’t? The more money that flows into private funds, the harder it becomes for them to deliver outsized returns. It’s far from clear that, after accounting for risk and for fees more than 20 times those of low-cost index funds, they’d provide any advantage over the options already available in 401(k)s. Some research suggests that, properly evaluated, they never did — at least for less sophisticated investors.
For the most part, investors should be free to make whatever mistakes they want. Yet 401(k) plans, for all their flaws, have taken on a special role. Amid the decline of old-fashioned pensions, the tax-advantaged accounts have become millions of Americans’ best shot at a comfortable retirement. Administration officials should ensure that the options within them remain as prudent as possible — not be swayed by promises of riches that may never materialize.
Action Line: When you want to learn more about a diversified portfolio of stocks, bonds, precious metals, and more, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
