Key Takeaways
- • The Department of Labor has proposed rules that would explicitly permit alternative investments in 401(k) plans, provided fiduciaries document their assessment of six factors: performance, fees, liquidity, valuation, performance benchmark, and complexity.
- • Morningstar analysts argue that private markets complicate all six factors because of difficulties evaluating performance, fees, liquidity, and valuations.
- • Law professor Renée M. Jones, a former SEC Division of Corporate Finance director (2021 to 2023), calls adding private markets to 401(k)s "a horrible idea" and says an approaching liquidity crisis in private markets is driving the push.
- • Jones says the number of unicorns (private companies valued at $1 billion or more) grew from about 400 to more than 1,500, and that private market assets under management ballooned from about $200 billion around 1996 to more than $17 trillion.
- • Morningstar reports that retail semiliquid funds investing in private assets are more expensive and less liquid than public stock and bond funds.
Summary
Retail access to private markets is off to a rocky start, according to Morningstar. Retail investors can now reach private assets through semiliquid funds that carry higher fees and less liquidity than funds investing in public stocks and bonds, and these vehicles are difficult to assess. The next potential channel is the 401(k) market. A Department of Labor proposal would explicitly permit alternative investments in retirement plans, provided fiduciaries document their assessment of six factors: performance, fees, liquidity, valuation, performance benchmark, and complexity. Morningstar's multi-asset and alternative strategies analysts say private markets complicate all six, given the difficulty of evaluating performance, fees, liquidity, and valuations. Alexander Davis, editor of Morningstar and PitchBook's Public Meets Private newsletter, questioned whether money managers are pushing too hard and too fast to pair everyday investors with hard-to-value, hard-to-trade assets.
Law professor Renée M. Jones, author of Untamed Unicorns: Why Startup Finance Is Broken and How to Fix It, argues that deregulation has eroded safeguards dating to securities laws passed after the 1929 crash. She cites the growth in unicorns from about 400 to more than 1,500 and says private companies now avoid the regulatory and public scrutiny that promotes good behavior. Jones attributes the growth of private markets to the National Securities Markets Improvement Act of 1996, which removed the cap on investors in private funds, and to the 2012 JOBS Act, which relaxed the Section 12(g) shareholder threshold that had required many companies to pursue IPOs. She says private market assets under management grew from about $200 billion around 1996 to more than $17 trillion.
Jones contends that the 401(k) proposal reflects an approaching liquidity crisis. She says limited partners, university endowments and pension funds want their money back, and that trillions of dollars in 401(k) plans offer private asset managers a route to the exits their investors demand. She criticized placing such assets in target-date funds, describing those investors as the most passive and least informed. She also argued that the growth-at-any-cost culture of venture-backed startups has contributed to compliance problems that persist after IPOs, citing DoorDash, Uber, Airbnb and Meta.
In a Morningstar magazine interview, Jones also criticized a proposal to let public companies report semiannually rather than quarterly, calling it "a disastrous proposal" that would widen information asymmetries. She further argued that venture capital has lost its control-based model, and that more than 80% of VC funding goes to all-male teams while 0.4% went to Black teams last year.
Law professor Renée M. Jones, author of Untamed Unicorns: Why Startup Finance Is Broken and How to Fix It, argues that deregulation has eroded safeguards dating to securities laws passed after the 1929 crash. She cites the growth in unicorns from about 400 to more than 1,500 and says private companies now avoid the regulatory and public scrutiny that promotes good behavior. Jones attributes the growth of private markets to the National Securities Markets Improvement Act of 1996, which removed the cap on investors in private funds, and to the 2012 JOBS Act, which relaxed the Section 12(g) shareholder threshold that had required many companies to pursue IPOs. She says private market assets under management grew from about $200 billion around 1996 to more than $17 trillion.
Jones contends that the 401(k) proposal reflects an approaching liquidity crisis. She says limited partners, university endowments and pension funds want their money back, and that trillions of dollars in 401(k) plans offer private asset managers a route to the exits their investors demand. She criticized placing such assets in target-date funds, describing those investors as the most passive and least informed. She also argued that the growth-at-any-cost culture of venture-backed startups has contributed to compliance problems that persist after IPOs, citing DoorDash, Uber, Airbnb and Meta.
In a Morningstar magazine interview, Jones also criticized a proposal to let public companies report semiannually rather than quarterly, calling it "a disastrous proposal" that would widen information asymmetries. She further argued that venture capital has lost its control-based model, and that more than 80% of VC funding goes to all-male teams while 0.4% went to Black teams last year.
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