The Trump administration recently announced a new deregulation proposal to allow individuals to use their 401(k)s and IRAs to invest in private equity funds. This proposal, released by the Department of Labor, is a huge win for millions of American middle-class families and will provide them with another option to invest and grow their retirement savings.
Private equity is a type of investment fund structured as a partnership agreement between an expert investor and individuals with capital. It seeks to invest in companies with growth potential and, as a result, has the potential to deliver strong returns. According to a recent study, private equity returned 15% gains over 10 years.
This investment option is already a staple among public pension funds, but individuals with a 401(k) or IRA do not currently have the ability to use them for private equity investments.
To those with access to it, private equity is a popular and reliable investment strategy. According to one study, 165 funds representing 20 million public sector workers have invested an average of 9% of their portfolios in private equity. All told, public pension funds have invested at least $150 billion in private equity, and this investment is outperforming many of their other investments with strong returns of almost 10%, compared with the 7.45% total returns in public pension funds. There is no reason ordinary people should not have the same access to private equity investments.
Unsurprisingly, some Democrats have criticized the proposal, claiming that it will “put workers at risk of losing their pay, their benefits, their jobs, and their livelihoods.” This criticism misses the point. Under the proposal, individuals will not be forced to invest in private equity, but now simply have the option to do so. All investments contain an element of risk, and private equity is no different.
It is important to note that this deregulation is limited in scope. It does not allow retirement savers the option to invest in private equity directly. Instead, private equity can now be included as one component of a professionally managed asset allocation fund to be purchased through a defined contribution benefit plan.
Moreover, private equity investments contribute to the economy. The industry invests in businesses across the country, providing much-needed capital and directly supporting 26 million jobs.
Any effort to expand 401(k)s and IRAs is a political winner. An estimated 80 million people actively participate in one or more defined contribution benefit plans. Some 90% of investors are happy with their 401(k), according to polling by Gallup.
On the other hand, nearly half the public says it is behind in its retirement savings goals, so more needs to be done to expand 401(k)s and IRAs.
This reform is a step in the right direction, and it’s not the only step the Trump administration and Republicans have taken to strengthen retirement savings. Last year, Congress passed and the president signed into law the Setting Every Community Up for Retirement Enhancement Act, which improved retirement savings for workers and small businesses.
The SECURE Act made it easier to set up multiple-employer plans, which are commonly used by small businesses and independent workers as a pathway to retirement savings. It also encouraged small employers to set up retirement plans by increasing the employer tax credit for starting a new retirement plan from $500 to $5,000.
Further, it allowed new parents to withdraw from an IRA or 401(k) penalty-free, helped older workers by repealing the maximum age for contributions to an IRA, and increased the age when you are required to take a distribution from a retirement account.
The deregulation allowing 401(k)s and IRAs to invest in private equity builds on President Trump’s strong record of regulatory reform. Instead of using the pandemic as an excuse to consolidate more power, Trump has made deregulation the centerpiece of the administration’s coronavirus response. Thanks to Trump’s leadership, more than 600 regulations have been waived or suspended at the federal, state, and local level. This new reform can benefit millions of people by giving them more choice to grow their savings and increase their wealth.
Alexander Hendrie is a contributor to the Washington Examiner’s Beltway Confidential blog. He is tax policy director at Americans for Tax Reform.
