(Bloomberg) — The biggest US private equity firms anticipate that President-elect Donald Trump’s victory could aid their ambitions to capture some of the $11 trillion sitting in defined-contribution plans such as 401(k)s.
Alternative asset management firms are likely to push the Trump administration to welcome private, illiquid investments into everyday investors’ retirement accounts, with a key focus on target-date funds, according to people with knowledge of the matter.
Apollo Global Management Inc. Chief Executive Officer Marc Rowan and other proponents of private markets argue that the ability to withdraw money on a daily basis isn’t necessary in long-term retirement accounts. By giving up a little bit of liquidity, or ease of selling assets, investors can reallocate some of their ultra-liquid investments such as stocks into private credit and private equity in exchange for higher returns, proponents argue.
The Trump administration is expected to be far more open to loosening regulations than the Biden administration, which wouldn’t endorse placing private equity investments in 401(k) plans.
Private assets offer higher returns and better diversification than public markets, which are dominated by several large firms, proponents of private equity in 401(k)s argue.
Pension funds have given their retirees exposure to private equity and other alternatives for years, and those in favor of moving private assets into 401(k) funds say it will expand that access to a wider group of savers.
Those who argue that private equity doesn’t belong in 401(k)s contend those assets charge higher fees and pose more risk than traditional investments. These opponents assert that private equity doesn’t outperform the stock market in the long term after subtracting fees, which are typically 2% of assets and 20% of profits.
Moreover, everyday investors could get stuck in a private-markets fund longer than they initially intended. Blackstone Inc., for example, limited redemptions on its market-leading real estate investment trust for wealthy individuals in 2022 after withdrawal requests breached the limits of the fund amid a broader slowdown in real estate.
Alternative asset managers such as Blackstone, Apollo and KKR & Co. have raced to launch products for individual investors as traditional sources of capital, including pension funds and endowments, remain short on cash to allocate to alternative investments.
In recent years, these firms have been building investment funds for high-net-worth individuals who meet certain income standards as a test case for selling private markets products to non-institutional investors. All the major players now offer a suite of products across private equity, credit, real estate and other alternative assets.
“We are one administration away from illiquidity being included in 401(k)s,” Rowan said at an industry conference in May.
‘Next Frontier’
Right now, the 401(k) system is set up for mutual funds that provide daily liquidity and are invested in the stock market. Taking even a fraction of that market opens up a robust source of new capital for alternatives firms. And an aging population means that cash pile will grow.
Asset managers such as Apollo and KKR have acquired life insurance firms with a focus on annuity sales as a way of gathering cash and betting on an older population.
“The next frontier for the private equity industry is that $10 trillion to $11 trillion of retirement assets,” Dan Daneshrad, a partner in King & Spalding’s investment funds practice, said in an interview.
Prior lobbying efforts at the Securities and Exchange Commission have focused on loosening marketing standards to sell products to wealthy people, which are likely to continue alongside efforts to capture retirement assets.
“The new administration could be receptive to making less-liquid private assets more accessible to long-term retirement savers who do not necessarily need day-to-day liquidity,” said David Blass, a Simpson Thacher & Bartlett partner focused on investment fund regulation.
While there’s nothing explicit in the Employee Retirement Income Security Act of 1974, which governs 401(k)s, that prohibits any particular asset class, the industry will likely seek more guidance from the Department of Labor on private equity and other illiquid alternatives being permitted in retirement funds, said Alexander Ryan, a Willkie Farr & Gallagher partner focused on executive compensation and employee benefits.
During the first Trump administration in 2020, the Labor Department published a letter concluding that private equity investments could have a place in 401(k)s as part of a broader investment fund such as a target-date fund.
In 2021, the DOL under President Joe Biden’s administration published a supplemental letter clarifying that it didn’t endorse or recommend private equity investments in 401(k) plans, a move that was widely regarded as slowing momentum on adding private equity to retirement accounts.
“My guess is that 401(k) plan sponsor fiduciaries are going to be reluctant to offer private equity as a standalone option to their plan participants unless or until they get something more definitive from the Department of Labor, or until there’s a change in ERISA itself, or actual regulation that clarifies that private equity as a standalone option is permitted,” Ryan said.
The industry will watch closely to see who Trump appoints as Labor secretary and chair of the SEC for indications as to how easy it will be to achieve their aims. Lobbying efforts aren’t likely to kick off in earnest until those appointments are made.