Editorial: Avoiding Retirement Investment Errors

President Trump risks being remembered as an enabler of fraud if he approves an executive order instructing the Securities and Exchange Commission and the Labor Department to provide employers with “guidance” on incorporating private assets into their 401(k) plans. Wealthy individuals associated with major firms such as Blackrock, Blackstone, Apollo, and others have been lobbying in Washington to gain access to the $12.4 trillion stored in these private sector retirement savings accounts. According to the Wall Street Journal, Trump is expected to support their efforts.

Private equity funds and public pensions like Ohio’s face a pressing challenge, as the pensions that back these private equity funds own 29,000 businesses that are difficult to sell without incurring significant losses. To meet their obligations, these pensions require funds from private equity sources. However, liquidating these investments at a loss would highlight the imprudence of paying hefty fees to fund managers for investments that disregard the fiduciary responsibilities of pension funds.

Relying on private equity to rescue financially strained public pensions offers only temporary relief. Ultimately, this strategy may shortchange 401(k) contributors who will realize they’ve been misled when they need their retirement savings in the future. In the meantime, private equity firms will continue to receive annual fees and profit shares based on inflated valuations provided by fund managers.

Existing clients of private equity firms have scaled back on new investments due to the underperformance of their current investments, which have failed to deliver expected returns. Without fresh investments to sustain the illusion of investment success, both private equity firms and public pensions face a looming crisis. Given the limited ability of private equity firms to attract new capital from their existing clientele, the Trump Administration should take steps to safeguard the retirement savings of American workers from inappropriate investments.

Individuals saving for retirement in a 401(k) plan should be informed of the rationale behind restricting private equity investments in their plans. They should steer clear of any investments that lack transparency regarding holdings and management expenses. The Employee Retirement Income Security Act (ERISA) of 1974 was enacted to ensure full disclosure of corporate retirement holdings in the private sector and to enforce fiduciary standards through federal law.

The use of private equity in the portfolios of state pensions shielded by sovereign immunity from transparency and suitability requirements violates the principles of effective retirement protection that have been in place for decades. President Trump’s move to dismantle these safeguards disrupts a legacy of half a century devoted to safeguarding retirement security.