Key Takeaways
- • Alicia H. Munnell, senior advisor at the Center for Retirement Research at Boston College, urges the Department of Labor to revisit its June 3, 2020 information letter that opened the door to private equity in 401(k) plans.
- • The DOL letter addresses private equity only within target date, target risk, or balanced funds and does not expressly authorize standalone private equity options in 401(k) plans.
- • Munnell cites the Center's study of 160 public pension plans, which found that a 10 percent allocation to alternatives reduced after-fee returns by 30-45 basis points relative to equities and did not reduce volatility.
- • Munnell argues private equity is incomprehensible to most participants and that its fees, though not transparently disclosed, must be large, given that Pantheon Ventures (US) L.P. and Partners Group (USA), Inc. petitioned the DOL for access to the market.
Summary
Alicia H. Munnell, a MarketWatch columnist and senior advisor at the Center for Retirement Research at Boston College, argues that the Department of Labor should revisit its June 3, 2020 information letter permitting private equity investments in 401(k) plans. According to Munnell, the letter applies only to private equity held within target date, target risk, or balanced funds and does not specifically authorize standalone private equity offerings. She nonetheless characterizes the move as imprudent on several grounds.
First, Munnell contends there is no clear evidence that alternative investments improve performance. She points to the Center's earlier study of 160 public pension plans, which followed the post-financial-crisis shift by public pensions into assets beyond traditional equities, bonds, and cash. The study used regression analysis and found that holding an additional 10 percent of a portfolio in alternatives reduced after-fee returns by between 30 and 45 basis points compared with equities. Among private equity, hedge funds, real estate, and commodities, none had a statistically significant positive effect on returns, and alternatives did not reduce volatility.
Second, Munnell warns that permitting private equity in target date funds could pave the way for standalone private equity options within 401(k) plans. She describes private equity as a totally inappropriate investment for the average participant, who she says should hold low-fee, understandable instruments such as stocks and bonds. She argues that private equity fees are generally well hidden and are likely substantial, noting that Pantheon Ventures (US) L.P. and Partners Group (USA), Inc. petitioned the DOL to open this market. In her view, non-transparent, high-fee investments do not belong in tax-supported retirement savings plans.
Munnell concludes that the incoming administration should closely examine the June 3, 2020 letter and reconsider allowing private equity in 401(k) plans.
First, Munnell contends there is no clear evidence that alternative investments improve performance. She points to the Center's earlier study of 160 public pension plans, which followed the post-financial-crisis shift by public pensions into assets beyond traditional equities, bonds, and cash. The study used regression analysis and found that holding an additional 10 percent of a portfolio in alternatives reduced after-fee returns by between 30 and 45 basis points compared with equities. Among private equity, hedge funds, real estate, and commodities, none had a statistically significant positive effect on returns, and alternatives did not reduce volatility.
Second, Munnell warns that permitting private equity in target date funds could pave the way for standalone private equity options within 401(k) plans. She describes private equity as a totally inappropriate investment for the average participant, who she says should hold low-fee, understandable instruments such as stocks and bonds. She argues that private equity fees are generally well hidden and are likely substantial, noting that Pantheon Ventures (US) L.P. and Partners Group (USA), Inc. petitioned the DOL to open this market. In her view, non-transparent, high-fee investments do not belong in tax-supported retirement savings plans.
Munnell concludes that the incoming administration should closely examine the June 3, 2020 letter and reconsider allowing private equity in 401(k) plans.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.