The private equity sector is actively lobbying the Trump administration to permit the inclusion of private equity funds in 401(k) accounts—and perhaps in IRAs and other tax-advantaged accounts as well. You’ve got $11 trillion stashed away in retirement savings across America, so it’s no wonder this industry wants to tap into some of that wealth.
Honestly, I’m of two minds about this.
On one side, I stand by the free market principles, supporting the notion that adults should have the freedom to make their own choices, provided those decisions don’t impede on others’ rights.
However, despite the solid performance records of these funds, they might not be the most suitable investments for the majority of people.
Here’s why.
Private equity typically deals in investments like startups, real estate projects, loans, and other specialized ventures that often necessitate long holding periods before realizing any gains. These are usually designed for affluent, savvy investors who have the luxury of time and resources to let these investments mature.
True, these investments come with higher risks, but private equity investors usually have the financial heft to weather any deals that don’t pan out favorably.
Plus, these investment vehicles are often quite intricate, and your average investor might not fully grasp what they’re getting into. Just consider the number of people who purchase annuities without fully understanding their complexities. Private equity can be similarly puzzling for most.
That said, private equity boasts an impressive long-term performance. It has outperformed the S&P 500 in five, ten, fifteen, and even twenty-year spans. Over the last ten years, the Pitchbook North American Private Equity Index showed a robust 17.3% annual return, compared to the S&P 500’s 11.9%.
However, private equity suffers from illiquidity. At a certain age, investors must begin liquidating their 401(k) and IRA investments due to mandatory withdrawal rules, and they might need to make additional withdrawals as well. Unfortunately, private equity doesn’t adhere to a specific payout schedule, potentially restricting retirees’ financial flexibility.
Moreover, the fees for private equity funds can be steep—typically charging around 2% of the assets managed plus 20% of any profits exceeding a benchmark. Contrast this with mutual funds in retirement accounts, which usually hover around 1%, or index funds that often dip below 0.2%.
And let’s not overlook how tricky valuing private equity can be. With mutual funds, you’re in the know—your fund’s value is clear at the end of each day. Stocks, bonds, and ETFs offer real-time valuation.
But private equity? Trying to pin down its value can be a challenge. How can you tell if you’re buying or selling at a fair price? Or even know its worth on any given day? This uncertainty complicates retirement planning when you can’t be sure of your account’s current value.
I suspect we’ll soon see private equity funds in retirement accounts in the coming years. But unless you’re well-versed in these funds or can handle a much higher risk, my advice is to steer clear.
