401(K) Plan Holders Can Now Invest in Private Equity Sponsored by:Penny McCall

The US economy has never been more vulnerable since the Wall Street Crash in 1929. The unemployment rate has peaked, and those still employed have been facing an uncertain situation since the inception of COVID-19. In April, 20 million people became unemployed, and on May 8, millions more joined them.

But, now the situation is gradually getting better, as the Trump Administration’s plan of providing their people with a relief package of $2 trillion dollars. In June, 2.5 million jobs are expected from the Federal government, and these jobs will reduce the unemployment rate by 1.4% from a total of 13.4% of the unemployment rate.

On the other hand, employers responsible for participating in the 401(K) plan for their employees are now less willing to pay their share in their employees’ retirement savings. As such, the Federal Government has said that private employees will now be able to invest in private equity funds.

Apart from this, only accredited investors and institutional investors were allowed to be part of the private equity fund. According to the letter from the Department of Labor, Companies with a 401(K) plan can safely offer their employees a private equity fund.

Retirement Savers Will Now Come to Private Equity Fund:

In the first week of June, the Trump Administration defined new guidelines for defined contribution plans. According to these guidelines, retirement savers will now be eligible for investing in private equity funds. 

According to the U.S. Secretary of Labor Eugene Scalia; 

“This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns. The letter helps level the playing field for ordinary investors. It is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”  

Reason Behind This Move:

Amid the crises created due to COVID -19, it’s been a massive blow to the retirement savings of employees, as employers have conveyed that they cannot participate in the 401(K) plan of their employees. Understanding the sensitivity of the matter, the Trump Administration, in collaboration with the Department of Labor, decided to mainstream the 401(K) plan in a private equity fund. Although both are different things, now 401(K) plan holders can invest in a private equity fund. 

It’s also conveyed that this option is not available for a single person, only a company can do this on behalf of their employees. The goal is to put diverse investment options before employees, with possibilities that could provide employees with better savings at the time of their retirement. 

On the other hand, the Securities and Exchange Commissioner, Jay Clayton, is a first-line opponent of this policy. In his view, this move will bear more losses than benefits for employees, as private equity funds are much more volatile. Albeit, the benefits are more significant, but losses are also much more considerable in the private equity fund. 

In the view of Ed Slott, founder of IRAhep.com, the moves that have been taken to cope with the economic menace in the wake of COVID 19 will sack the growth of an employee’s retirement, as these are timely moves with timely benefits. Still, their after-effects are much more prominent and chaotic. 

Hand in hand, he expressed his views in the following words;

“Some of those [private equity] returns are sensational, but, with anything, you could lose a boatload too. It doesn’t mean private equity always makes money.”

Legal Protection for the Companies Offering Private Equity Funds:

After the letter from the Department of Labor, the companies that are going to take this move have gained legal protection. This legal protection came forward after Verizon and Intel employees registered a lawsuit against their respective companies. To minimize the effect, the DOL, with the employers of companies, decided to open a private equity fund for employees holding a 401(K) plan earlier. 

Meanwhile, according to the acting assistant of the Employees Benefits Security Administration (EBSA);

“This [DOL information] letter should assure a defined contribution plan fiduciary that private equity may be part of a prudent investment mix and a way to enhance retirement savings and investment security for American workers.”

Final Words

Since the CARES Act was introduced to minimize the economic effect of COVID-19, people and businesses have gained relief, as this had something for everyone. Now, after the CARES Act, another Act was about to be mainstreamed but could not due to the apprehensions from the ruling party’s benches. The Act was named the HEROES Act that had to be passed in the month of June. 

So, after the cancelation of the HEROES Act, people were quite concerned about their savings, especially those close to retirement, as their 401(K) plans were put behind by their employees. So, to provide employees with relief, the Department of Labor issued a letter in which private companies were allowed to invest in private equity funds on behalf of the employees. 

Therefore, it was the only way to save the retirement savings of employees. Although some of the experts are against this move, it has become mainstream.